Tick! Tick! Tick!(Japanese public debt market)

• Author: NAKAMAE, TADASHI

It's only a matter of time before the Japanese public debt market blows up, causing a financial calamity.

The Japanese public debt market is still a time bomb. Public debt now exceeds 135 percent of Japan's gross domestic product. If state pension liabilities are included, the ratio rises to over 240 percent. There is worse to come.

The central government budget for FY2000, prior to any supplementary budgets, calls for 84 trillion yen in spending, against 48 trillion yen in revenues. This leaves a gap of 36 trillion yen to be financed with new debt. Of the 84 trillion yen in planned spending, debt servicing accounts for 22 trillion yen, legally required transfers to local governments for 15 trillion yen, and central government civil service salaries for 11 trillion yen. These mandatory expenditures amount to 48 trillion yen, which means that all other spending must be financed with debt. If we add the local government deficit and the deficits of government-backed organizations to the central government deficit, the general government deficit approaches 10 percent of GDP in FY2000. Sadly, there is no sign of improvement going forward.

To date, this deficit has been financed surprisingly smoothly, and the currency and bond markets have remained stable. Adding to the false sense of security, Japan's economy has posted recent rises not only in industrial production and exports, but also in capital expenditures and corporate profits. To the casual observer, the Japanese economy, having grown by 0.5 percent in FY1999 in real terms, appears to be on the mend.

In Japan's present deflationary circumstances, however, these "real" figures have little meaning. What is more significant is that the Japanese economy actually declined by 0.7 percent in FY1999 in nominal terms. Including Q2 2000, the Japanese economy has declined year-on-year in nominal terms on a quarterly basis for eight of the past ten quarters. Financial stability has not come as a result of the Japanese economy being strong or sound. On the contrary, Japan remains mired in a deflationary recession. Ironically, the Japanese Government Bond (JGB) market has remained stable only because the Japanese financial sector is still so weak.

Japanese savers, risk averse as ever, are still keeping the bulk of their money in the bank deposits and life insurance products which make up Japan's traditional "indirect financing" system. At the same time, Japan's current account surplus continues to...