Japan's debt dilemma: How bad is it?
TOKYO: How long will it take and how much will it hurt for Japan to dig
itself out from under a mountain of debt almost unprecedented in the
industrial world? Economists agree that's the key question thrown into sharp
focus by credit rating agency Moody's move to put Japan's government debt
issued in yen on review for a possible downgrade.
Some private pundits seconded Moody's warning that years of public stimulus
and the resulting massive public debt will require a damaging fiscal
tightening before reforms have gone far enough to generate sustainable
private sector growth. Others say an emerging "New Economy" will bail out
policy-makers sooner than pessimists think.
"Moody's is looking at snapshots in history, not the dynamism of where it
(Japan) is heading," said Darrel Whitten, head of research at ABN AMRO
Securities.
"This whole Internet phenomenon is penetrating the Japanese economy a lot
faster than people realise. A lot is happening beneath the surface," he
added.
Moody's said on Thursday it was putting Japanese government debt issued in
yen on review for a possible downgrade out of concern that reforms would not
be enough to propel Japan's economy into the high growth path vital to
prevent its already huge public debt from ballooning. Fiscal tightening,
however, would itself put the nation's recovery in danger, it said.
Prime Minister Keizo Obuchi is already on the horns of a political dilemma
due to a bulging public debt -- set to hit a whopping 130 percent of gross
domestic product (GDP) in this fiscal year ending next month -- and a
fragile recovery.
The government says it will stay in an expansionary mode in the year from
April -- a statement economists say implies an extra budget down the road --
and hopes to shift to neutral for two or three years before embarking on
fiscal reform. But Obuchi, who has made clear fiscal reform must take a back
seat to growth, faces mounting attacks from the
opposition and rivals in his Liberal Democratic Party for piling up debt
without producing a sustainable private sector-led recovery.
Voters -- who will get a chance to deliver their verdict on Obuchi in a
Lower House election to be held no later than October -- are meanwhile
growing anxious over the near-certainty that a decade of free-spending aimed
at ending Japan's worst post-war recession spells higher taxes sometime
soon.
Authorities argue that despite the probability that Japan's economy slipped
back into a technical recession in the final three months of 1999, the
recovery is still on track.
Private economists agree growth is improving again in the new year and could
reach one percent in the next fiscal year. But some fear the need to tackle
the public debt will act as a drag on growth for at least a decade.
"I think going forward that things are getting a bit better, it's hard to
imagine them getting worse. But the fact remains that this is a country
which has an explosive debt and needs probably 10 years of fiscal
consolidation," said Russell Jones, chief economist at Lehman Brothers in
Tokyo.
"That will be a persistent headwind and I'm not sure that the rest of the
economy is strong enough to deal with that... or that structural reform is
enough to animate the private sector so that it can deal with public sector
restraint," Jones added.
Some economists, however, questioned why the credit agency was considering a
downgrade when Japan's economic outlook was better, not worse, than it was
in November 1998 when Moody's took away Tokyo's top-notch Triple-A rating.
"From a static point of view, the are plenty of things to worry about
concerning the debt and structural reform, but from a dynamic point of view,
it's very difficult to find new negatives and very easy to find new
positive," said Richard Jerram, chief economist at ING Baring Securities in
Tokyo.
AMB AMRO's Whitten went further, forecasting Japan would benefit from the
same "New Economy" dynamic that rescued the United States from its own
fiscal deficits. "Once upon a time, the United States had twin
deficits...and they should have been falling off the edge of the cliff by
now," he said.
"Something happened along the way," he said. "I think when the Japanese
economy gets back to its potential growth curve and the Internet kicks in,
Japan's problem will start to solve
itself as well, irrespective of government mismanagement."(Reuters)
For reprint rights: Times Syndication Service
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