The debt time bomb that could explode in Japan's face
TOKYO, Jan 28 (AFP) -
The complacency of Japan's foreign partners about the massive debts of the world's second-biggest economy rests on a dangerous assumption -- that its assets are worth as much as the government says.
For their part, observers say the state debt now surpassing a record 130 percent of gross domestic product (GDP) is dangerously undervalued, and the assets equally overvalued.
The upshot is a time bomb ticking under Japan's, and the world's, hopes for the future health of the Asian powerhouse.
"We believe that fundamentally, Japan is a rich and solid country," French Finance Minister Laurent Fabius said during a visit to Tokyo this month.
Japan is rich certainly, but solid? In support of the Fabius line, the same figures are routinely wheeled out: 11.5 trillion dollars in private savings (the world's largest pool), 1.5 trillion dollars in overseas assets.
But evidence is mounting that such estimates could be seriously awry.
The stricken life insurance industry is home to a quarter of Japanese savings, with banks accounting for much of the rest in the absence of more liquid outlets.
Two life insurers collapsed last October to become the biggest corporate failures in Japan since World War II, victims of the economic slump that has been Japan's bane since the "bubble economy" burst in the early 1990s.
Policyholders are supposed to be protected by an industry safety net, but they always lose out in the event of a failure, according to an executive with a major international bank operating in Tokyo.
Japanese who put their life savings in the failed Daihyaku Mutual Insurance Co., whose policies are being transferred to Manulife Century Insurance Co. of Canada, will see their guaranteed yield reduced from 4.5 percent to just 1.0 percent.
Moreover, they will no longer be eligible to cash in their policies at the retirement age of 65. They will have to wait until they are 68, or incur hefty penalties for an early withdrawal.
"It's theft, pure and simple," the banker said.
The travails of the insurance industry are not the only way that Japanese savers are losing out.
Households have seen their underlying assets including property lose a third of their value since the 1980s. Residential property prices have fallen continually since the bubble burst.
The government's asset picture is even more worrying.
According to the first-ever consolidated national accounts published by the finance ministry last October, bamboo forests and art collections have a monetary value which counts towards the government's balance-sheet income.
Analysts dispute that, seeing as those are never likely to be sold, and also dispute the value the government attaches to state property such as bridges and roads -- whose numbers have splurged through a decade of public-works spending designed to prop up the economy.
The true sale value of white elephants like the Honshu-Shikoku Bridge Authority, whose bridges are crossed by just a handful of cars every day rather than the hundreds that was targeted, is certainly less than the 3.5 billion dollars that the finance ministry reckons.
"The tollgates don't even earn enough to pay for painting the bridges every two years," says Kenneth Courtis, vice president of Goldman Sachs Asia.
In the same way, the Japanese government is responsible for the huge debts of dozens of public and semi-public corporations.
Goldman Sachs predicts the government's "on-balance sheet" gross debt will surpass 151 percent next year, compared to 91 percent 10 years ago, the result of the more than 850 billion dollars that the government has spent during the "lost decade."
"Off-balance sheet claims on the state, excluding the government's unfunded portion of the pension system, are approximately 115 percent of GDP," adds Courtis.
The pension system represents another time bomb ticking as Japan's population ages more rapidly than any other in the world.
Taking its own valuation of unfunded pension liabilities rather than the government's, Goldman Sacks reckons that Japan's total public debt is more than four times GDP. And the true extent of Japan's financial crisis is even more scary once the vast bad debts of the banks are included.
Rich Japan? No one denies that someone, some day, will have to foot the bill. ----------------------------------------------------------------------------------------------------------- -