Japan's economy overheated after rapid global expansion in the 1980s. Hyperbolic growth created a 'bubble' that burst in the 1990s decade. Japan carried large budget deficits (about 5 percent GDP) through 1997-1999. Japan's budget deficits of 9-10 percent from 2008 to present show large deficits aren't helping the Japanese government to stimulate the stagnant economy.
The April 2013 OECD Economic Surveys Japan presents a challenge to everyone. Those advocating high budget deficits see that Japan's long-term debt affair has failed to return Japan's economy to anything close to the 1980s bubble economy. Advocates for smaller deficits see that Japan's net debt (approaching 150 percent of GDP) has not yet caused financial calamity in Japan.
The OECD's official position states that Japan's debt level requires trimming and says that Japan's top policy challenge concerns how to reduce national debt. However, the OECD concurrently argues that the implementation of any policy to cut debt may fail to stimulate, or even worsen Japan's struggling economy. The OECD says that Japan must install flexible fiscal policy. The report shows that Japan's public debt ratio has increased for 20 years and now rests at more than 200 percent GDP. Obviously, financial sustainability is essential.
To stabilize Japan's public debt ratio requires an improvement of fiscal balance, with goals of a budget surplus of +4 percent in the next 8 years. Expense controls for Japan's social programs is key to tackling the public debt monster. The OECD says that budget cuts must occur in tandem with social programs cuts, despite the rapidly aging population's increasing demands for those same social programs. These events will negatively affect Japan's economic growth. Fiscal consolidation, higher taxes and reduced social services will push interest rates higher and stress the Japanese banks and financial markets. Of course, Japan's government will be hard-pressed to achieve these goals in less than a decade.
U.S. debt-GDP ratio vs. Japan debt-GDP ratio
The U.S. debt scenario is different from Japan's. The U.S. debt-GDP ratio is of course smaller. However, Japan is a nation of savers. The Japanese savings rate is large enough for the country to finance government borrowing from within. By comparison, the U.S. still depends on foreign investors to finance mounting debt. It's possible that Japanese investors will decide to loan their money to debtors outside of Japan in search of higher returns. Conversely, the U.S. government's low Treasury yields make the U.S. dollar's primary currency stability less certain.
Author Bio: Saskatchewan Financial's founder, Horace Brunet, is an investment manager who is strongly interested in international finance.