Readers Question: How
is Japan able to run a national debt of nearly 240% of GDP? (from: List of National debt by Country)
In 2013, Japanese
public sector debt rose to one quadrillion yen ($10.28 trillion). In 2013, this
was 227% of GDP. This is significantly more than several European countries
like Greece (150% of GDP, Italy 112% of GDP, UK 77% of GDP). In the most recent
budget deficit, Japanese government borrowing accounted for 7% of GDP.
Despite the record
debt levels, bond yields on Japanese debt are very low. Why is Japan able to
borrow so much? Why have interest rates on Japanese bonds fallen?
Why Japan is able to borrow?
Why Japan is not
Greece: Source Beacon Reports on Japan Current account
surplus. Japan is running a current account surplus – attracting capital
inflows into Japan; these can be used by the private sector to buy
government bonds. Japan doesn’t rely on external financing of its public sector
debt. A high percentage of Japanese public sector debt is held domestically.
70% is held by the Bank of Japan, most of the rest is held by Japanese trust
and investment funds. Despite a temporary inflow after the Euro debt crisis,
foreign sector holdings of of medium- and long-term Japanese government
securities remained below 7%. (Vox).
By contrast European
periphery countries like Spain, Greece and Italy were also running current
account deficits and had a greater reliance on external financing of domestic
debt.
The Japanese private
sector (both household and corporate) have a large appetite for buying
government bonds. This is because domestic savings are relatively high. People
and firms have spare cash to buy bonds and lend the government money. In a
country with a very low saving rate, there would be less people willing / able
to buy government debt. One concern that Japan has is that the domestic savings
ratio is expected to continue to fall due to demographic changes. (See: Japan savings ratio) the Japanese save 15%; the US dropped from 7% to under 2%.
Cost of debt
servicing. Interest rates and bond yields in Japan are very low. (10 year bond
yield is 0.5%) Therefore, the interest payments on the debt are relatively low.
If interest rates in Japan were to rise, the cost of servicing the national
debt would be much higher. Still debt interest payments account for a
substantial amount of government spending. (15% of GDP, according to World Bank)
Japan has very low
inflation and interest rates. The Bank of Japan is able to monetise part of the
debt without causing inflation because of the depressed state of the economy.
70% of government debt is held by the Bank of Japan, which in theory doesn’t
need repaying in the same way as to domestic savers. Adjusting for effects of
tax, the nationwide core consumer-price index rose 1.0% in September, 2014 (WSJ).
Analysts fear inflation could fall to 0.5% in 2015. A higher inflation rate
would help the Japanese economic recovery.
Japan is still
vulnerable – if the current account surplus falls, the external surplus will
diminish reducing domestic purchase of government bonds.
If interest rates
rise, the cost of financing the deficit will rise – though if interest rates do
rise, this will hopefully be a reflection of an improving economic cycle,
leading to higher growth.
In recent years, the
Japanese government has been caught between trying to increase tax rates and
increase the rate of economic growth. Unfortunately, they conflict. But, if
Japan is to see a fall in debt to GDP ratio, then strong economic growth is a
necessity.
Comments
The US is more like Japan than Greece. Japan’s standard
of living is much lower for those who are working part-time. http://alphanow.thomsonreuters.com/2014/09/news-charts-japans-hidden-unemployment-problem/
Norb Leahy, Dunwoody GA Tea Party Leader
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