Japan's debt mountain: How could it be sustainable?
10 June, 2020
Already the global leader in accumulating debt, Japan is adding almost US$2 trillion to its mountain this fiscal year with record stimulus packages to cushion the impact of coronavirus.
With debt levels around two . 5 times the size of its economy, Japan manages to hold government bond yields ultra low and investor confidence large that it could avoid default.
HOW DID WE GET HERE?
Whichever way you consider it, Japan's debt is unfathomably large. In line with the Bank of Japan (BoJ), at the end of 2019, it stood at 1,328,000,000,000,000 yen.
This is equal to around US$12.2 trillion, just over half the quantity of US debt in absolute conditions but by far the biggest pile when measured against how big is even Japan's mighty economy (around 240 % of gross domestic product).
Japan's debt commenced to swell in the 1990s when its finance and real estate bubble burst to disastrous effect.
With stimulus packages and a rapidly ageing population that pushes up healthcare and social security costs, Japan's debt first breached the 100-percent-of-GDP mark at the end of the 1990s.
It hit 200 % in 2010 2010 and is currently around 240 per cent of GDP, based on the International Monetary Fund.
On Wednesday, Japan's parliament agreed anti-coronavirus measures worth 117 trillion yen - which is likely to push the GDP ratio well above 250 %.
ISN'T THIS A good PROBLEM?
To finance this debt, japan government issues bonds referred to as JGBs.
These are purchased in enormous volumes by the BoJ, the country's central bank that's officially independent but in practice closely co-ordinates economical policy with the federal government.
As part of anti-virus measures, the bank has removed its self-imposed ceiling on investing in JGBs, giving itself unlimited getting firepower. It holds more than half of all JGBs.
These purchases support the cost of the JGBs in the debt market and keep carefully the yield on the bonds low (prices and yields move around in opposite directions).
This means that in effect, the government has been financed by the central bank at an ultra-low (and even negative) interest rate, which makes it more sustainable.
"The ultra-low rate conditions created by very much accommodative monetary policy by BoJ could be among the reasons" that Japan's mountain is less problematic than for other high-debt countries all over the world, said Takashi Miwa, an economist at Nomura bank.
WHO ELSE BUYS JAPAN'S DEBT?
Risk-averse private and institutional investors likewise have a wholesome appetite for JGBs because they see them as a safe destination to put their money, burned by a brief history of currency markets bubbles.
"A large part of wealth is held by seniors who lack financial literacy and prioritise stability rather than return," explained Shigeto Nagai, from Oxford Economics.
"With limited investment and lending opportunities domestically, banks, insurance firms and pension money still require the JGB to put their vast amount of excess savings," Nagai told AFP.
The bonds are denominated in yen, still seen as a safe haven in troubled financial times and the proportion held by foreign institutions is quite low - building Japan less vulnerable to external pressure.
In fact, 90 % of your debt is kept by Japanese investors.
One more thing that keeps market confidence excessive: Japan may be the world's biggest creditor, holding more than US$3 trillion in net assets in foreign currency reserves and direct investment abroad.
HOW HIGH IS IT POSSIBLE TO GO?
The growing mountain of debt implies that, even with ultra-low interest rates, the total amount Japan's government will pay for repayments is its second-largest budget line.
The only way in order to avoid adding to the pile is to lessen budget deficits by boosting taxes or cutting public spending - but this threatens to throttle growth in Japan's already recession-hit economy.
One drastic step is to write off your debt held by the BoJ - a step that might be an "accounting trick" with "no consequence" on the true economy, said Frederic Burguiere, an economist specialising in Asia.
"But this will not take into account the moral dimension of economical mechanisms ... if we let states not to repay their debts, what becomes the guidelines for private investors and the state itself?" asked Burguiere.
Source: www.channelnewsasia.com
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