During economic crisis, the perceptions and assumptions that governments, as long as they are able to borrow money to stimulate the economy through fiscal and monetary measures, are unsinkable are always in the minds of the people.
However, the flaw in thinking along this line has been proven otherwise during the European debt crisis where governments of the financially troubled euro-zone countries had fallen.
For slightly more than two decades since Japan’s asset bubble burst, Japan has been experiencing a prolonged period of economic stagnation that has a long-lasting effects on growth, public debt and savings.
Japan’s Debt
From 1973 to 1991, Japan had been enjoying an average annual growth rate of more than 4%. Growth, however, came to an abrupt stop when the asset bubble burst in 1991. Private demands collapsed, leading to repeated stimulus over a period of more than ten years to sustain overall demand.
However, despite steadily widening fiscal deficits and the official discount rates that were brought down to near zero, production output remained highly unresponsive, growing at an annual average of 1.1% from 1991 to 2001. Growth improved modestly from 2002 to 2007, averaging annually at 1.8% before the global financial crisis and recession of 2008 caused output to contract severely.
Due to its low growth during this period, Japan’s net debt ratio started to increase steadily from an average of 12% of GDP in 1991 to 81% of GDP in 2007. The deep recession and the fiscal response that followed the global financial crisis of 2008 pushed public debt to an unprecedented levels, which also reflected the combination of a steep decline in output, a drop in revenue, fiscal stimulus and automatic stabilizers. The 2008 financial crisis resulted in the net debt escalated sharply to 117% in 2010.
Recovery from the financial crisis was hampered by the March 2011 earthquake which brought further pressure on fiscal balances. Reconstruction efforts is expected to add fiscal costs burden of between 3% to 4% of GDP over the next several years.
In August 2011, credit ratings agency Moody’s criticised the instability at the top of Japanese politics on Tuesday as it slashed the country’s credit rating and warned that its mountain of debt needed to be tackled and slashed Japan’s rating by one notch to Aa3, reflecting a deficit reduction was urgently needed.
The move came just hours before Japan took fresh steps to help corporations cope with the strength of the yen, including a $100bn fund to help fund overseas acquisitions.
Moody’s said the rapid turnover of Japanese prime ministers – five different men have held the job since the credit crunch began in August 2007 – had prevented the government from turning “long-term economic and fiscal strategies into effective and durable policies”.
Despite an escalating net debt, Japan has yet to face any real pressure to reduce its yawning budget. The IMF has predict that the decline in GDP and earthquake reconstruction will push net public debt to 160% by 2015. Private savings, which is an important source of financing for the government, has declined sharply, to only 3 percent in 2009, as Japan‘s aging population began to eat away at savings built up during their working lives. At the same time social security spending has ballooned, and now stands at about half of all government expenditures.
Andrew Michael Teo 