Japan's soaring public debt

[Carl Remick]

[From today's NY Times.  Amazing -- why hasn't the Japanese economy
gotten more stimulus from all this debt?]

Japan as No.1? In Debt, Maybe, at the Rate Things Have Been Going 

By Sheryl WuDunn and Nicholas D. Kristof

Tokyo -- One of the striking paradoxes of Japan is that this is a
country with the greatest savers in the industrialized world, and yet
everywhere one looks there is debt. 

Japanese savers are famous for their ability to salt away money for the
future, but as a nation, this country has some of the worst accounts in
the industrialized world, and its debt trajectory increasingly looks
like that of a third world country like Tanzania. 

Much of the public debt, which totals about $5.4 trillion, was taken on
at the urging of the United States to stimulate growth. 

But Japan's debt situation is now so precarious that as talk of new
stimulus plans heats up this fall, there are growing doubts about how
long Prime Minister Keizo Obuchi can continue to spend furiously in
hopes of reviving the economy. 

"It's like trying to adjust the fire carefully so that you don't ruin
the fish," said Sadakazu Tanigaki, a Vice Minister of Finance. "The
weight of the debt is extremely large. It is obvious that we can't leave
the current situation as it is." 

The dangers are difficult to gauge, and if Japan's incipient recovery
gains momentum, profits may flow in around the country and the nation's
debt problems could diminish. Indeed, despite gloom-and-doom talk from
some economists in the 1980's, the United States has transformed a
budget deficit in those days into a surplus today, while enjoying
spectacular economic growth now. 

So the Clinton Administration, while concerned about Tokyo's debt, has
urged Japan to keep spending on the bet that doing so may revive the
economy and generate the cash to pay back later. 

Still, Japan's debt is not only tarnishing the Government's reputation
as prudent proprietor of the world's second-largest economy. It is also
raising troubling questions that extend far beyond Japan. 

"There is no end in sight to the buildup of debt," said Vincent J.
Truglia, managing director at Moody's Investors Service, which has
downgraded Japan's formerly pristine credit rating, an important sign of
diminished foreign confidence in its financial stamina. 

"We're just concerned that Japan has already entered the highest levels
of debt of an industrialized country," Truglia said, "and soon will be
entering unprecedented levels." 

Perhaps more important, rising debt levels will tend to lead to higher
long-term interest rates in Japan. The effects of those higher rates may
nudge up lending rates around the world, possibly threatening the
economies of Asia that are trying to climb out of a financial crisis
that is now two years old. 

Higher lending rates could also ripple across the Pacific to raise
business costs in California and mortgage rates in Florida, undermining
the American economy. 

"If Japan goes through a period of fiscal paralysis or outright crisis,
then it's going to have a very negative impact on global financial
stability," said David L. Asher, a specialist on Japan at the
Massachusetts Institute of Technology. "They've already broken a lot of
world records for debt management in postwar history." 

The risk of a default by the Japanese Government is remote, but there
are anxieties here that rising debt levels could lead to a confidence
crisis, provoking a flight of capital and currency turmoil. 

Although Japan's troubles have not hurt America so far, a sudden shift
to safe assets in the United States could send the dollar soaring in
value against the yen and hurt American exports by making them more
expensive. 

The debt is an astonishing contrast to Japan's reputation for
thriftiness. Japanese citizens have amassed a pool of $6.4 trillion in
household savings, which appears at least on the surface to be more than
enough to pay off the debt. 

One major problem is that the domestic savings and foreign assets held
by private citizens are exactly that: private. The debt, by contrast, is
held mostly by the Government, and the Government can hardly seize the
savings of private citizens to pay it off. 

The deterioration in Japan's finances has been amazingly rapid, a result
of tax cuts and spending increases that have resulted in annual budget
deficits that now amount to 10 percent of its economy -- or 13 percent,
if nationalized railroad debts are included. Even the lower figure is
the highest among the industrialized countries. 

As recently as 1992 the Japanese Government's gross debt amounted to
just 70 percent of its gross domestic product, a ratio only a bit higher
than that of the United States. This year, Finance Ministry figures
show, the debt will reach 120 percent, exceeding that of Italy, which
for many years has been by far the worst among the Group of Seven
industrialized countries. 

The International Monetary Fund estimates that in 2003 the Japanese
ratio will rise to 138 percent. 

Moreover, Moody's estimates that the Government may also have to absorb
additional debts equivalent to between 30 and 40 percent of gross
domestic product from the banking system, postal system loans and other
areas. 

That would take Japan's debt to around 170 or 180 percent of GDP, a
figure about three times the level of the United States debt in the
1980's, when American budget deficits and mounting public debt were the
talk of the world. 

These days in Japan, the central Government's tax money cannot even
cover the bills for debt service and entitlements like pensions, let
alone payrolls. 

Its debt-to-revenue ratio, which measures potential fiscal problems by
comparing a nation's debt burden to its annual cash intake, is quickly
approaching 1,400 percent, far worse than that of other industrial
powers. That means that Japan must repay 14 yen for every yen it takes
in from taxpayers. 

All this puts Prime Minister Obuchi in a bind. He has managed to restore
growth to the Japanese economy this year, but only by huge stimulus
measures that add to the debt. And there is widespread apprehension that
the economy will run out of momentum when the extra Government spending
fades this fall. 

Already, after raising about $1.4 trillion since 1992 to boost the
economy, the scorecard shows a massive pile of debt on one side and on
the other seven years of minuscule annual growth that may not be
self-sustaining. 

At some point, officials worry, the debt will get so high that the
benefit of any further stimulus will be outweighed by rising long-term
interest rates. Already, long-term rates are nearly 60 times the level
of short-term rates. 

Ichizo Ohara, an influential member of Parliament, said he had warned
the Prime Minister against bowing to pressure from President Clinton for
a new supplementary budget to stimulate the economy. 

"That would raise interest rates and knock stock prices down," Ohara
said. 

But Obuchi is moving to introduce, probably by autumn, yet another giant
supplementary stimulus package that could reach $45 billion or more,
adding to the mountain of debt. 

It is not just Japan's central Government that is vastly overextended.
Debts are emerging everywhere else as well. 

The local governments of Japan's top four most populous regions,
including Tokyo, have declared a fiscal emergency, and to stabilize
themselves they must lay off large numbers of workers or get a central
Government bailout. Already, local governments around Japan have amassed
$1.6 trillion in debt, a staggering sum that is greater than the assets
of any bank in the world. 

In the corporate sector, the bad debt problems of the banks are well
publicized and by some estimates may still amount to hundreds of
billions of dollars. 

But Japan's insurance companies invested in many of the same foolish
property ventures as the banks, yet the insurance companies so far have
barely faced up to their problems. 

Countless other companies, engaging in construction, real estate and
even in autos and technology, also are mired in bad debts because
Japanese companies historically have financed themselves through bank
loans. Many of the companies have used permissive accounting rules to
hide the obligations. 

Mikuni & Company, Japan's only independent credit rating agency,
assesses the risks of Japan's top 1,000 bond issuers -- the country's
corporate equivalent of prime real estate. Even looking at just those
elite companies, Mikuni rates about two-thirds of them BB -- junk status
-- or below. 

"What's happening is very scary," said Akio Mikuni, who runs the rating
agency and expects many corporate defaults to come. "So far in Japan,
the Government has avoided bankruptcies. But this system cannot be
continued. It is impossible. So the probability of bankruptcies is quite
significant." 

Ultimately, Mikuni expects those bankruptcies to help strengthen Japan's
economic efficiency by clearing away weak, money-losing businesses. But
a more immediate result may be that defaults will ripple through the
economic system, adding to unemployment and exacerbating the sense of
economic despair. 

Some officials deny that the problem is so serious. They note that
Japan's "net debt" figures, which take into account the country's social
security assets, look much better than the gross figures usually cited. 

But economists are nearly united in agreeing that the net figures are
misleading, because social security accounts are themselves in
disastrous shape. While there is a surplus today, the social security
system is projected to run out of money by 2010. 

Indeed, economists estimate that the public pension system may be
severely underfunded. Corporations are in the same position, and Goldman
Sachs (Japan) Ltd. has estimated that pension plans at major
corporations are underfunded by about $727 billion -- making the
corporate problem one of roughly the same scale as the banking system
debts that have hobbled the Japanese economy in recent years. 

Then there is the question of what has been done with the funds that
come from deposits at the Government-run postal savings system. Japanese
post offices accept cash deposits in a system that if it were counted as
a bank would be the biggest one in the world -- and perhaps one of the
worst-run. 

The Government has used those funds, a total of about $3.8 trillion, for
pumping up the economy by lending to small businesses or for building
bridges and tunnels. The Government has also used public pension
contributions and postal life insurance premiums on similar projects. 

Many people worry that much of the money has been squandered, though the
Government denies it. The upshot is that when losses in these areas are
finally acknowledged, the Government will have to absorb them and its
debt levels will rocket even higher. 

Even though many politicians and officials acknowledge that Japan's
finances are spinning out of control, they say it will be difficult for
the political process to correct the problem any time soon. 

"That gap essentially must be bridged with taxes," Kaoru Yosano, the
Minister of International Trade and Industry and a senior member of the
governing Liberal Democratic Party, said in a somber interview in his
spacious office. "But the Liberal Democratic Party and all other
political parties are enormously wary, even frightened, of raising
taxes. Accordingly, politically speaking, it has become a taboo." 

Yosano paused and added, "I think that this can be characterized as a
lack of courage among the political parties." 

[end]

Carl