Public debt is expected to hit 200 percent of GDP next year as Japan tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its aging population.
“Japan’s revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010. Its debt to budget ratio is more than 50 percent" says Hideo Kumano, chief economist at Dai-ichi Life Research Institute. Without issuing more government bonds, Japan “would go bankrupt by 2011″, he added.
Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops.
Its huge public debt is a legacy of massive stimulus spending during the economic “lost decade” of the 1990s, as well as a series of pump-priming packages to tackle the recession which began in 2008.
Standard & Poor’s in January warned that it might cut its rating on Japanese government bonds, which could raise Japan’s borrowing costs amid the faltering efforts of Prime Minister Yukio Hatoyama’s government to curb debt.
Japan’s risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt.
“There is no problem as long as there are flows of money in the bond market,” said Kumano.
“It’s hard to predict when the bond market might collapse, but it would happen when the market judges that Japan’s ability to finance its debt is not sustainable anymore.”
“And when that happens, the yen will plummet and a capital flight from Japan’s government bonds to foreign bonds will occur,” he said.