http://the-diplomat.com/2010/07/08/could-japan-collapse/
Very interesting article that could affect a lot of aspects of gaming. Here are some key pieces of the article:
And when it comes to debt, Tokyo has plenty of it. In fact, Japan has the highest proportion of outstanding debt in relation to GDP among major economies. The Ministry of Finance officially calculates Japan’s gross national debt in 2010 at 181 percent of GDP (though the latest figures suggest it’s closer to 200 percent), far in excess of the Eurostat figure for Greek national debt of 115 percent (2009).
Another important feature of Japan’s national debt is that it is almost entirely held by Japanese.
‘The situation is different in Japan because here domestic investors hold 95 percent of government bonds,’ Akihiko Inoue, chief strategist at Mizuho Investors Securities said. ‘This makes Japan a difficult country for hedge funds around the world to attack.’
While Greece is reliant on foreign investors buying a significant part of their debt issues, Japan enjoys plenty of domestic demand for its bonds, keeping prices buoyant and yields low.
Ministry of Finance statistics from December 2008 give a breakdown of Japan’s bond ownership: Japanese banks hold 41 percent, Japanese life and non-life insurers have 19 percent, Japanese public pension funds hold 12 percent, and the Bank of Japan has 8 percent.
‘About 60 percent of Japan’s government bonds are held by Japanese financial institutions, including the postal life and postal savings [companies],’ Ogawa says, adding that the problem with Japanese investors is that they’re risk averse. ‘They’re not lazy, but they don’t take risks. If they were to take calculated risks they would be like professional investors. But most of the institutional investors, maybe because of company policy or because of agreements with certain customers or clients…invest in almost nothing but traditional bonds and equities. Basically risk taking or new activities in the financial sector are weak points.’
Japan’s financial institutions, it seems, are flush with cash, aided by the Bank of Japan’s accommodative monetary policy. Without sufficient corporate demand for loans and given the risk-averse nature of Japanese investors described by Ogawa, there’s an apparently never-ending demand for government bonds—a cushy environment for a government spending beyond its means.
‘If you look at the yen, with the US dollar trading at less than 90 yen, the Japanese currency is not showing any weakness at this juncture. Also the yield on Japanese government bonds is quite close to its six-year low. So for the near future at least, investors in general don’t seem all that worried about the Japanese government’s ability to repay its debt,’ Ogawa says. ‘But right now the Japanese general government is producing the equivalent of 10 percent of GDP in new debt. That’s clearly not sustainable. So at some point the market will start to think that it will be very difficult to absorb this amount. Japan probably still has more time. But the longer it takes for a medium-term solution, the more nervous the market will become about future increases in new lines to finance the government.’
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Akio Makabe, professor of economics at Shinshu University, says that understanding government finances just requires you to think of yourself in a similar position.
‘Imagine you’re earning 20 million yen a year, and you borrow 20 million,’ Makabe says. ‘I earn 5 million and I borrow 2 million, but I already have a 30 million housing loan. Who’s in the worse situation, you or me? It’s me with the housing loan.’
Someone at the Ministry of Finance appears to share Makabe’s approach, since Japan’s national debt situation has been set out with a household analogy on the ministry’s website. The site indicates that if Japan were a household with a monthly income of 400,000 yen, it would need to borrow an additional 370,000 yen every month to pay for everything and would have accumulated debts of 63.7 million yen.
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On June 22, the Cabinet unveiled a medium term plan for bringing the nation’s finances under control. The plan calls for halving the budget deficit by 2015 (2 years later than agreed by the other G20 nations in Toronto last month), and putting the government’s primary balance (essentially the budget deficit excluding debt servicing) into the black by 2020.
To achieve this, Kan has called for nonpartisan debate on raising the consumption tax, with the LDP’s proposal of 10 percent to be used as a reference figure. A report in the Asahi Shimbun on July 3 said that a provisional calculation by the Cabinet Office indicated that a rate of 15 percent would be needed to achieve Kan’s 2020 primary balance goal. But in opting to mention the main opposition party’s figure, Kan appears to have entered the debate with an astute opening gambit, even if his later attempts to allay the fears of the sales tax’s regressive nature have been less adept.
So would a hike in the consumption tax to 10 percent be enough to tackle the problem, or would it just be a first step?
Analysts and economists suggest that whatever level the sales tax is raised to, it will need to be done as part of a package of measures to deal with the issue of Japan’s debt. Japan needs a growth strategy and it needs to make better use of its spending by slashing waste. Other ideas include greater deregulation, and an overhaul of the tax system.
‘A GDP growth strategy is needed to boost the economy and get a natural increase in tax receipts from corporation and income tax, because it’s difficult to realistically expect to fill the gap with just the consumption tax,’ Inoue says.
‘At the moment there’s no demand for money, figures for investment in plants and equipment are not improving and banks can’t find borrowers. These are the biggest problems.
‘The latest strategy announced by the Bank of Japan—giving private banks money so that they can go out and find people to lend to in growth industries—is a step in the right direction, but whether it works or not remains to be seen. Maybe private banks need to try a bit harder.
Discuss
