Prime Minister Yoshihiko Noda said containing Japan?s public debt load, the world?s largest, is critical after Standard & Poor?s downgraded credit ratings on France, Austria and seven other European nations.No Winning Play for Japan
Europe?s fiscal situation ?isn?t a house burning on the other side of the river,? Noda said on TV Tokyo Holdings Corp.?s program on Jan. 14. ?We must have a great sense of crisis.?
Noda reshuffled his cabinet last week, aiming to win support for doubling Japan?s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda?s administration hadn?t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation?s sovereign grade.
Japan?s government, which has enjoyed borrowing costs that are around 1 percent, wouldn?t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.
?Worse and Worse?
Japan?s finances are ?getting worse and worse every day, every second,? Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he?s closer to lowering Japan?s credit rating, he said it ?may be right in saying that we?re closer to a downgrade.?
S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a ?comprehensive approach? to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March?s record earthquake.
The International Monetary Fund has said a gradual increase of Japan?s sales tax to 15 percent ?could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.?
If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.
On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.
Massive Debt Rollover Problem
|Country||2012 Bond, Bill Redemptions ($)||Coupon Payments|
|Japan||3000 billion||117 billion|
|U.S.||2783 billion||212 billion|
|Italy||428 billion||72 billion|
|France||367 billion||54 billion|
|Germany||285 billion||45 billion|
|Canada||221 billion||14 billion|
|Brazil||169 billion||31 billion|
|U.K.||165 billion||67 billion|
|China||121 billion||41 billion|
|India||57 billion||39 billion|
|Russia||13 billion||9 billion|
For a discussion of the global debt rollover problem, please see World?s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
Mike "Mish" Shedlock
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