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Next in line after the euro debt crisis: Japan
10/29/2012 6:48 pm EST
How about right now?
It sure doesn't make much sense that investors have been treating Japan, the world’s most indebted country, as a safe haven during the global financial crisis and the subsequent euro debt crisis. For example, today, October 29, Japan’s currency traded at 79.61 to the dollar in London after climbing 0.8% on October 26, its biggest jump since August 22. Last week the yen climbed 0.2% against the euro.
What’s extraordinary about this latest short-term move is that it is taking place in the midst of a budget crisis in Tokyo that has thrust worries about Japan’s ability to pay its bills to the front burner among bond dealers. At the end of last week the Japanese finance ministry announced that it would meet with bond dealers worried about a political stand off in Tokyo over the country’s debt ceiling.
The specific issue is the government’s ability to borrow the 38.3 trillion yen ($479 billion) needed to finance the government’s budget deficit this year. Japan’s government debt hit 976 trillion yen at the end of June. That’s $12.2 trillion. Please remember that at $4.5 trillion Japan’s GDP is considerable smaller than U.S. GDP at $15.1 trillion. Japan’s government debt amounted to 235% of GDP in June 2012.
But the size of the government’s debt isn’t the immediate cause of the problem. In each of the last four years the government has borrowed more in the bond market than it has raised in taxes. This year’s borrowing would yield about 40% of the budget for the year than ends in March 2013.
That is, such borrowings would fill the budget gap, if opposition parties weren’t holding debt legislation hostage until Prime Minister Yoshihiko Noda agrees to call a general election. Noda is said to fear that his Democratic Party would be slaughtered in a general election. In recent polls the Democratic Party of Japan has seen its approval rating drop to just 11%.
The government says that Japan needs to see new borrowing authorization by the end of November or the country won’t be able to pay its bills. In all likelihood some compromise will be worked out that lets Japan cover its bills for another year.
But the current crisis is a very vivid reminder that even a very wealthy country like Japan with what was once an immense pool of domestic savings can’t keep borrowing 40% of its national budget every year. The composition of Japan’s debt has begun changing in recent year as the country has borrowed more from non-Japanese investors. Foreign investors now hold about 10% of Japan’s government debt.
While the euro crisis has raged and while investors have been happy to buy yen-denominated assets, the unsustainability of Japan’s finances haven’t mattered all that much. But the current crisis suggests exactly how vulnerable Japan is to the end of those cash flows. If the world can solve the euro debt crisis, it may all too soon thereafter find itself confronting an even bigger debt problem in Japan.
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