EXECUTIVE SUMMARY: CONSOLIDATED PUBLIC DEBT IN JAPAN


August 2003



Japanese public debt was JPY811.2tr at end-March 1999 or 157.7 GDP percent and JPY992.7tr at end-March 2003 or 198.8 GDP percent, when consolidated according to corporate accounting principles including central government, FILP agencies and local government. The current JPY200tr portion partly secured on FILP agency user charges is declining sharply, the balance is secured on general taxation.

Applying reasonable and benign assumptions based on data from MoF, the FILP Reform timetable, local authority realities, academic and other opinion, debt has been projected from 2004, JPY1,049.5tr or 209.9 GDP percent, to 2008, JPY1,223.6tr or 244.7 GDP percent, at the end of the FILP Reform programme. There is no immediate prospect of action to stabilise debt on a nominal GDP percent basis.

The projection employs MoF's 2.0 percent interest rate flat assumption. Taking new issues, refinancings and roll-overs at a range of interest rates 1.0, 5.0, 7.5 and 10.0 flat gives against the 2008 figure the corresponding approximate and indicative (JPYtr/GDP percentage points) variances: from a negative (40.2/8.0) to the positive (120.6/24.1), (221.9/44.4) and (323.1/64.6). Clearly debt trap danger does exist.

For FILP there is the reform programme, but for public debt there is just the monthly MoF study group. A dysfunctional and responsibility-atomised bureaucracy is yet again in paralysis. The political class does not want to know. MoF's banking crisis NPL roll-forward from 1992 has resulted in debt deflation so raising the stabilisation hurdle: by increasing the fiscal deficit and restraining nominal GDP levels.

Post-War there has been a structural gap between tax revenue and public goods expenditure. This has been filled by raiding the FILP Fund piggy bank and the issue of construction and the now permanently "temporary" deficit bonds. Post-1970, public debt growth has been a long- festering problem kept off-stage by single entry cash basis accounting obscurities. The symptoms have recently taken an acute turn.

There is a legitimacy problem at the heart of modern Japanese society: the Meiji Restoration and post-War liberalisation were imposed from above. Civil society remains undeveloped. There is popular suspicion of those in any position of authority. There is a strong disconnect between the public and private spheres. Attitudes towards tax are clearly pre-modern. Tax is an exacted tribute to be resisted.

The National Income percent tax burden is at the US not the German level. The Japan/Germany gap reflects an unresolved conflict between the desire for public goods and the resistance to further tax. For medium-term debt stabilisation, the burden must rise by 11.3 NI points from 36.9 to 48.2 points, the current UK level, and Germanwards. Presently this is an impossibility given the debt deflationary state.

The 11.3 NI points would mean Consumption Tax raised by 20 points to 25 percent: a major political leadership challenge. The acceptability limit is thought to be 20 percent and the balance of 2.5 NI points would come from higher income tax and social welfare contributions. The total tax burden limit is 50 NI percent: without immigration long-term stabilisation would demand a sharply higher retirement age.

The highly relevant Hyman Minsky Financial Instability Hypothesis (1993) states, ".....governments with their large floating debts have liability structures which the performance of the economy either validates or invalidates....." and a Ponzi Unit is clearly defined as where ".....the cash flows from the operations are not sufficient to fulfill either the repayment of principal or the interest due on outstanding debts....."

The projection assumes a stress-free environment. NPL roll-forward complications, savings rate trends, external shock etc could provide unwelcome stress: any interest rate level much over 5.0 percent flat implies a Ponzi debt trap. By default, the Establishment has chosen the inflationary solution. With inflation as force majeure, responsibility would be obfuscated in a classic "yamu o enai" kabuki routine.


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