What Happens when Japan’s Debt Monolith Implodes

Depending on who is in charge of the numbers, Japan’s national debt ranges from 230 percent to 250 percent of its gross domestic product or GDP. To compare, the United States is around 105 percent, so Japan’s numbers are significant. If Japan’s debt monolith implodes, it could have far-reaching consequences.

Japan Avoids a Debt Implosion by Money Printing

To avoid a debt implosion, Japan is overworking its money printing presses. Without this option, the country’s debt load would have already crushed it because Japan is unable to handle the interest rates that investors would need to buy up its worthless debt. Since the nation is operating in a free market, Japan has been able to keep the economy up and running.

According to Wolf Street, the only investor of the country’s debt is the Bank of Japan or BOJ. The financial institution is using primary dealers to purchase every Japanese Government Bond available. This aggressive buying strategy along with the bank’s recent negative interest rate policy is driving yields for the majority of the country’s debt down into negative territory.

Not What Prime Minister Shinzo Intended

Prior to 1990, Japan’s fiscal policies were conventionally cautious. The country experienced surpluses while spending was lower than 30 percent of its GDP. In addition, during these earlier years, Japan’s debt was low. However, the ‘90s brought a lengthy recession to the country. Also, the nation’s Keynesian bureaucrats exacerbated the situation with wasteful spending that caused the economy to soar to about 43 percent of the GDP. Simultaneously, deficits climbed to around 8 percent causing Japan’s debt burden to begin its long ascent to more than 200 percent of the GDP. Japan’s Prime Minister from 2001 to 2006, Junichiro Koizumi, tried to offset the debt problems by cutting spending and decreasing the deficit, but the 2008 to 2009 recession canceled out these earlier efforts.

In 2012, the Wall Street Journal published an article about Japan’s economic struggles and its recent changing of the guard. In the article, the publication pointed out that the country’s new leader, Prime Minister Shinzo Abe, was hopeful about a number of policy ideas that were intended to get Japan’s economy back on track. He said, “I want to produce results as soon as possible, so we can win back the confidence of the people.” The yen dropped to a 27-month low following his speech. After the election, Abe went right to work. He told his new cabinet to compile a budget allocating trillions of yen for stimulus purposes. Despite his best efforts, the country’s economy has yet to improve.

The Most Indebted Country in the World

With the BOJ printing about ¥80 trillion, which is $716 billion in U.S. currency, a year to stay on top of the debt load, Japan is now considered the most indebted developed country in the world. In fact, the nation now has one of Standard & Poor’s worst credit ratings.

While the BOJ is holding off the country’s debt implosion for now, experts are pointing out that the country’s stimulus policies have created major distortions. They’ve ruined economic fundamentals like the pricing of risk, and they’re robbing citizens of income from the money that they’ve saved. Pension funds are being stolen while the bank is offering negative rates to some investors on certain loans. In Japan, businesses and consumers are reacting to the country’s economy by cutting back on spending and investing.

What are the Experts Saying About a Debt Implosion?

An economist for Columbia’s School of International and Public Affairs, Takatoshi Ito, said, “Unless the Japanese government can raise its sales tax to north of 15 percent from its current 8 percent, Japan’s economy will suffer a fiscal crisis sometime between 2021 and 2023. Bloomberg printed comments made by Takeshi Fujimaki, a former consultant to investor George Soros, predicting that Prime Minister Shinzo Abe’s recent stimulus measures could cause Japan’s debt mountain to collapse. Unlike Ito, he thinks that this could happen in 2016.

Experts also predict that Japan will be forced to enact an oppressive tax burden on its people because it isn’t possible for the nation to grow out of the massive fiscal mess it is facing. Nominal and actual growth will likely remain unchanged while escalating retirement costs and a diminishing tax base will continue to plague the country. Because Japan is a factor when it comes to global investing, the country’s debt troubles could impact the world economy. If you want to learn more about the economic troubles in Japan, visit the PersonalMoneyStore.com.

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