• Japan in Depth / Reform needed to escape debt

    Community, Communication Design


    Takanori Yamamoto and Miho Kibiki / Yomiuri Shimbun Staff Writers

    With swelling social security costs and slow growth in tax revenues pushing the nation's total debts to a record high, the government must introduce painful measures such as tax hikes and social security system reform to free the nation from its long-standing fiscal dependence on debt.

    Whether the government will be able to take concrete steps toward such reform is the key to rectifying the situation.

    According to a quarterly report announced Friday by the Finance Ministry, the nation's debts as of the end of June were about 1.01 quadrillion yen. It is the first time the combined total of three types of debt went beyond 1 quadrillion yen. The debt per capita was about 7.92 million yen.

    The debts announced every three months by the ministry consist of outstanding government bonds, borrowing and financing bills, issued to finance the national treasury on a short-term basis. It indicates the entire picture of the government’s procurement of funds.

    This figure is calculated in a different manner from outstanding long-term debts of the central and local governments, which are expected to total about 977 trillion yen as of the end of fiscal 2013, used for international comparison. This figure excludes fiscal investment and loan program bonds and financing bills.

    Mounting JGBs

    For about two decades in the postwar period, the government could maintain fiscal management with practically no debt--meaning without issuance of new government bonds--thanks to massive natural increases in tax revenues caused by rapid economic growth.

    The first Cabinet of Prime Minister Eisaku Sato in fiscal 1965 issued deficit-financing government bonds for the first time after the war. The Tokyo Olympics were held in 1964 and afterward a tight money policy was adopted, resulting in a business slump.

    Deficit-covering bonds were issued to fill the gap between the budget and lower tax revenues. Construction bonds were also issued in fiscal 1966.

    Government bonds came to be issued every year to improve the social security system, including health care and welfare programs, as well as to finance public works projects.

    The fiscal situation rapidly deteriorated during the period dubbed the “two lost decades”--about 20 years from March 1991--after the burst of the economic bubble.

    The nation's debts stood at 216.7 trillion yen at the end of fiscal 1990, when tax revenues were at a peak. However, the debts snowballed due to the aging of the nation and economic stimulus measures, including those for public works projects.

    Comparison of initial budgets in fiscal 1990 and fiscal 2013 shows that social security costs, including those for health care and welfare programs, jumped from 11.6 trillion yen to 29.1 trillion yen, a figure 2.5 times higher.

    Meanwhile, tax revenues dropped 25 percent from 58.0 trillion yen to 43.1 trillion yen, due partly to tax cuts meant to serve as economic stimulus. As a result, new government bond issuance, or new debt, jumped from 5.6 trillion yen to 42.9 trillion yen during the same period.

    Debt to GDP ratio at 200%

    The nation’s 1 quadrillion yen debts are equivalent to 200 percent of its gross domestic product, the highest ratio among advanced nations. If 1 quadrillion yen’s worth of 10,000 yen bank notes were stacked on top of each other, the pile would be about 10,000 kilometers high, the distance from Tokyo to London.

    The United States’ debts were $16.74 trillion, or about 1.6 quadrillion yen, as of July, far exceeding this nation in terms of amount. Due to its large economy, however, the U.S. debts equal only about 100 percent of its GDP. Even Greece, which has been struck by a debt crisis, has a ratio lower than Japan’s at 160 percent.

    In Europe, which has been shaken by a fiscal crisis, ratings on the government bonds of such nations as Greece and Italy have been sharply downgraded. As a result, overseas investors sold these bonds, causing sharp rises in long-term interest rates.

    But only a few experts predict Japan’s government bonds are on the way toward sharp declines. This is because Japan is considered to be able to write off debts, if necessary, because it is the world’s largest creditor nation.

    Another factor that should be taken into account is that 90 percent of Japan’s government bonds are held by domestic investors, such as private banks. As of the end of fiscal 2012, financial institutions such as banks, insurance companies and Japan Post Bank accounted for 65.3 percent of overall government bond holders, followed by the Bank of Japan with 13.2 percent and public financial institutions with 8.6 percent.

    The Bank of Japan, which has introduced monetary easing, has purchased a massive amount of government bonds. Financial institutions are buying them with their depositors’ money, so even individuals who do not own government bonds are indirectly purchasing them through financial institutions. The nation is able to have 1 quadrillion yen in debts due to the 1.5 quadrillion yen in household financial assets such as bank deposits.

    Govt yet to present measures

    The government faces the daunting task of reducing the budget deficit through fiscal reconstruction, but it has yet to come up with concrete plans for restoring the nation’s fiscal health.

    The government on Thursday agreed on guidelines for budgetary requests for fiscal 2014 and its medium-term fiscal reform plan at the Cabinet meeting.

    The government maintained its goals of fiscal reconstruction for fiscal 2015 and fiscal 2020 in the plan. However, the program does not include a spending limit, as the government “cannot obtain clear prospects about tax revenue in fiscal 2014” before it makes a final decision in autumn on whether to raise the consumption tax in April as planned, a senior official of the Finance Ministry said.

    Many executives of the ruling parties have said that if the government raises the consumption tax as scheduled, it needs to compile a supplementary budget to prevent the nation’s economy from slowing down. If it comes to that, the government will have to issue bonds to secure resources.

    The biggest issue in the budget compilation process for fiscal reconstruction is how to curb social security spending. The government’s National Council on Social Security System Reform compiled a final report Monday calling on high-income elderly people to shoulder a greater burden of medical expense and taxes. However, the government has yet to come up with concrete measures.

    The medium-term reform plan is based on the premise that as a result of Prime Minister Shinzo Abe’s Abenomics economic policies, high rates of economic growth will be maintained, with gross domestic product increasing by about 3 percent in nominal terms not adjusted for inflation and about 2 percent in real terms.

    Finance Minister Taro Aso said at a press conference after the Cabinet meeting Thursday that the government was not pursuing fiscal balance at the cost of economic growth. However, there is concern that if the government fails to achieve high rates of growth, tax revenues will not increase, resulting in even more debt.

    If the prices of government bonds plunge due to sell-offs of the bonds, some adverse effects are likely to occur. Financial institutions holding government bonds are believed to hold vast latent losses that would aggravate their financial situations, thereby they would likely hold off on lending money.

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