Japan's Own Growing Debt Crisis

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Over the last 30 years, Japan’s real GDP has hovered around 2% per year.

“This growth rate is not high enough for them to grow their way out of their spending – the spending accumulates debt and the debt becomes a greater and greater percentage of their overall output,” said
Timothy Courtney, chief investment officer at Burns Advisory Group in Oklahoma City.

“Currently, Japan ranks second in estimated debt/GDP ratio at roughly 190% [the largest such figure among wealthy, industrialized nations], behind only Zimbabwe. Eventually there will be one of three outcomes: growth must accelerate to pay for spending, spending must be reduced, or debt must be defaulted on.”

Gerald Buetow, Jr. chief investment officer of Innealta Capital in Charlottesville, Va. opined that “what Mr. Kan said is basically true, but it's nothing new. Japan has been playing an irresponsible fiscal game for at least the past 15 years. The amount of public debt has been absurdly high for too long.”

Buetow explains that Japan was able to sustain its enormous debt because there was high domestic demand for these instruments.
“The Japanese investor is a big saver and highly disciplined,” he said. “But now as those investors age and become retirees, they're likely to become net-spenders. Plus, there is little new demand from foreign investors for Japanese debt because of the low yields they provide. Where is the new demand coming from?”

Indeed, Japan’s relatively high savings rate has allowed their debt to be purchased by domestic savers who have accepted relatively low interest rates.

“This has kept their debt from exploding like it did in Greece, but the risk is still there,” Courtney noted. “Rates are low because economic growth is anemic. If growth continues to be anemic, how can the country service its debt? It likely can’t without raising taxes, which will further stunt future growth.”

Thus, The Japanese face the urgency of restructuring their debt and finding new ways to generate revenue – one politically unpopular way, raising the sales tax, has already been hinted at by Mr. Kan.

Japan's problems are indeed daunting – but are their finances really as bad as Greece's (prior to the IMF/EU bailout)?

Probably not. For one thing, Japan enjoys a large trade surplus and it is a creditor nation.

The distressing sovereign debt crisis in Europe has apparently made governments around the world take a long, hard look at their own financial conditions, leading, perhaps, to some over-the-top doomsday comments from senior officials. Still, Japan needs to reduce spending and impose some kind of austerity program, whether they are welcomed by the populace or not. Otherwise, given their demographic issues, the nation may find itself in a kind of death spiral.