Japan: The Greece of the East?

Japan is flirting with becoming the Greece of the East. It’s legendary household and corporate savings are on a downward trend [and, while current] domestic savers have always been forgiving of the government’s overspending, when [their] savings become inadequate to fund the government’s drain, other investors will be much less sympathetic. Words: 508

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited excerpts from Martin Hutchinson’s (www.reuters.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Hutchinson goes on to say:

Japan’s public debt was 201 percent of GDP in December 2009, and its borrowing in the year ended March 2011 is slated to be more than 9 per cent of GDP. [That has proven not to be a problem in the past as ] around 95 per cent of government debt is held domestically [and] the country’s large savings pool and traditionally high savings rate — together with captive debt buyers such as the postal savings bank — have long led observers to believe the nation can fund budget deficits domestically with little difficulty.

The game may gradually be changing, however. Japan’s legendary household and corporate savings are on a downward trend [and, while current] domestic savers have always been forgiving of the government’s overspending, when [their] savings become inadequate to fund the government’s drain, other investors will be much less sympathetic.

In the year to March 2008, corporate and private savings, at ¥59.5 trillion, were ample to fund government bond issuance but in the following year, corporate savings fell to ¥15.1 trillion and household savings to ¥7.7 trillion. The latter measure, in secular decline because of the aging of Japan’s workforce, is now running at around 3 percent of GDP, or ¥14 trillion annually. This means that unless corporate profits soar beyond historical levels and companies put the extra cash into government bonds rather than investing it in their businesses, savings at home will no longer be adequate to meet the government’s borrowing needs.

At that point, Japan could do one of four things:
1. finance the budget deficit by printing money – but that would risk turning mild deflation into rapid inflation
2. raise interest rates to divert savings into the government’s coffers — but that could choke off private sector capital investment
3. venture into international capital markets to satisfy Japan’s needs – but that could well precipitate a crisis of confidence of the kind seen with Greece OR
4. with Japan now showing solid growth, the best option would be to bite the fiscal bullet and cut both spending and borrowing.

*http://www.business-standard.com/india/brv_storypage.php?autono=394648

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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