Japan faces mountain of public debt, some say it's "false" (Feature)

By Takehiko Kambayashi Apr 20, 2010, 6:07 GMT

Tokyo - It's probably hard for most Japanese to be optimistic these days, with newspapers, magazines and TV programs screaming - 'financial crisis' and 'huge public debt.'

Trying to meet election promises, the Democratic Party of Japan (DPJ)-led government put together a 92.3-trillion-yen (996.7-billion- dollar) fiscal 2010 budget, a record.

But that has to be financed, in turn, by a record 44 trillion yen in government bonds, dwarving the nation's tax revenues of 37 trillion yen.

Indeed, with debt equaling 189.3 per cent of gross domestic product (GDP) in 2009, the Finance Ministry notes that its debt-to- GDP ratio is bigger than that of any other industrial countries.

And, the ratio is expected to rise to 197.2 per cent in 2010. It is an enormous challenge for a country that is facing an ageing population and falling birthrates.

Some experts, however, said the government and the media stirred up fear in order to raise taxes.

Japan's public debt is 'false,' Hidehiro Kikuchi, an economist who once served as president of the Bank of Tokyo in Australia, said. 'The government and the media highlighted the public debt so much while downplaying its financial assets.'

But government officials note those 'assets' include pension savings that will be consumed in the future and need to be set aside now.

Kikuchi also claims that financial assets should be deducted from gross liabilities. Moreover, he argues that categories such as 'fiscal investment and loan programme bonds' and 'financing bills' should not be regarded as public debt.

Most of the latter is used to purchase US Treasury bonds. Such money is moved and invested under a de facto government bank, said Kikuchi, who has also served as a professor of finance at Bunkyo Gakuin University in Tokyo.

Finance Ministry officials agree with Kikuchi, but only to a degree, noting the purchased bonds need to stay listed as liabilities because there is the chance they could become nonperforming loans.

Critics say the media coverage of public debt is not fair.

When Kikuchi visited New York several years ago, a journalist who covered the US for a major Japanese newspaper told him that the paper's headquarters asked for comments from American experts on Japan's fiscal crisis. But the reporter told his Tokyo-based boss that he could not find any experts who thought Japan was in fiscal crisis.

The paper opted not to report his findings.

But Kikuchi is far from optimistic about the world's second largest economy. The most serious problems include a deflationary spiral, declining tax revenues and negative economic growth.

The administration of former Prime Minister Junichiro Koizumi continued austere fiscal policy while Japan was stuck in a deflationary spiral for years.

That's why, he says, Japanese people's income has been depressed and employment has been unstable, especially among young people.

'If they had more money and more people had a stable job, they would spend more, which could generate more tax revenues,' Kikuchi said. The government also needs to focus on job creation, he said.

He says many outsiders ask him why Japan - with its net external asset balance of 225.5 trillion yen - does not spend more money to support its people.

But that would require 200 trillion yen of fiscal stimulus, Kikuchi adds.

Kikuchi attributes some of the problems to a half century of rule by the Liberal Democratic Party (LDP), which was only broken by the DPJ's win last summer. That shift showed voters want a change.

'That means the Japanese public totally denied structural reforms and austere fiscal policy that Koizumi had started,' Kikuchi said. The DPJ-led government 'needs to bring about a historic transformation in monetary and fiscal policies.'

Koizumi was in office from April 2001 to September 2006.

But, like previous LDP administrations - and indeed most Japanese - DPJ leaders seem to be reluctant to take a drastic approach.

Indeed, Finance Minister Naoto Kan, who is also deputy prime minister, told a news conference in mid April that a tax hike could help the country counter deflation if the money is spent wisely.

'The media, political leaders and the Finance Ministry reiterate public debt and raise a chorus of tax hike,' Minoru Morita, a political analyst, said. 'But a tax hike could lead to economic meltdown.'

'Certainly, financial problems have become very serious. That is because the country has failed to build up wealth,' Morita said.

To avoid a major economic disaster, Japan must focus on how to achieve positive economic growth, Morita said. 'Japan has not been able to get the economy growing for two decades. I don't think we could call this a capitalist economy. Japan has destroyed capitalism.'