Japan’s postwar clout has come mainly from its economic power. We all know that it has slipped from being the second-largest to the third-largest economy in the world, but having the world’s third-largest economy is still very significant clout.
At the same time, Japan’s economic power has not grown significantly since the early 1990s. And that’s the problem. Japan has significant economic clout but it is not growing. Other neighbors, like China, have had robust growth, even though its per-capita income is a fraction of Japan’s. Likewise, in contrast to Japan, South Korea has taken serious steps to internationalize its economy by signing a historic free-trade pact with the United States. So Japan’s economic clout, while formidable, is not expanding when compared to its neighbors.
For years, the world's third-largest economy has been unapologetically living on borrowed cash, more so than any other country in the world. In recent decades, Japanese governments have piled up debts worth some €11 trillion ($14.6 trillion). This corresponds to 230 percent of annual gross domestic product, a debt level that is far higher than Greece's 165 percent.
Such profligate spending has turned Japan into a ticking time bomb -- and an example that Europe can learn from as it seeks to tackle its own sovereign debt crisis. Japan, the postwar economic miracle, has never managed to recover from the stock market crash and real estate crisis that convulsed the country in the 1990s. The government had to bail out banks; insurance companies went bust. Since then, annual growth rates have often been paltry and tax revenues don't even cover half of government expenditures. Indeed, the country has gotten trapped in an inescapable spiral of deficit spending.
The fact that this tragedy has been playing out in relative obscurity can be attributed to a bizarre phenomenon: In contrast to the debt-ridden economies in the euro zone, Japan continues to pay hardly any interest on what it borrows. While Greece has recently had to cough up interest at double-digit rates, for example, the comparable figure for Japan has been a mere 0.75 percent.
The reason is simple: Unlike countries in the euro zone, Japan borrows most of its money from its own people. Domestic banks and insurers have purchased 95 percent of the country's sovereign debt using the savings deposits of the general population. What's more, the Japanese are apparently so convinced that their country will be able to pay off its debts one day that they continue to lend their government a seemingly endless amount of money.
A 20 trillion yen ($224 billion) stimulus package announced today by Japan's new prime minister Shinzo Abe will likely give the recession-struck economy a quick boost.
But it also risks adding to the country's huge debts without fostering sustainable, long-term growth.
The "Abenomics" strategy of "ultra" monetary easing and hefty government spending is bound to give the sagging economy a lift in coming months.
Abe said the measures are intended to spur a 2% point rise in real economic growth and create some 600,000 jobs. "We will break away from the chronically shrinking economy and aim to create an economy that can produce innovation and new demand that subsequently expand jobs and income," Abe said.
With luck, the policy could help get the economy back on track for the short-term, analysts said, especially if recoveries in the US and China and a weakening of the Japanese yen against the US dollar provide extra help. But the impact in the medium and longer-term remains to be seen.
The 20 trillion yen stimulus package includes 10.3 trillion yen ($117 billion) in central government spending, about half of which will go to public works. Abe denied that his party was relying on time-worn spending strategies that fostered corruption and waste during the Liberal Democrats' more than half-century in power after World War II.
Predicting the potential effects of the Japanese debt crisis is extremely difficult. But economists are convinced that there won't be any "major crash." Out of self-preservation, it is unlikely that large holders of Japanese bonds, such as domestic banks, would shed those bonds very quickly. Such a move would severely damage faith in Japanese debt and, by extension, in the banks that hold that debt. Instead, they predict "many small crises" in the coming years. Economists further believe that there is plenty of room to raise taxes as a countermeasure; taxes in Japan remain relatively low.
Nevertheless, one shouldn't give short shrift to the potential dangers of the Japanese debt crisis. The psychological effect could be the most dangerous one. What would happen, for example, were investors to suddenly lose faith in other heavily indebted countries such as the US.
Japan remains one of the world's biggest industrial nations, and the yen is an important currency for international monetary transactions. If everything were to spin out of control, then the world would have a real problem.
By Guylain Gustave Moke
Photo-Credit: Reuters. Japan's Prime Minister S. Abe.