National Debt That's 245% of GDP? No Worries, Japan

Relaaaaax; it's not as bad as it looks for Japan?

Economics Professor Masazumi Wakatabe at Waseda University was prompted to write commentary on Japan's fiscal situation by a recent FT article calculating Japan's national debt to be a world-leading 245% of GDP. In Greece, it's a puny 176% by comparison. 245%! Why haven't financial yellow journalists been proven right in predicting Japan will be crushed by hyperinflation and other laughable nonsense? As the good professor explains, the fiscal situation in Japan is not nearly as bad as it looks.

First, consider the usual explanations concerning how the assets held by the Japanese government significantly offset its paper liabilities:

The key to understand Japan’s fiscal situation is the net debt as opposed to gross debt. First, the Japanese government holds large amount of assets, therefore the net debt relative to GDP ratio goes down to 132 percent as of June 2014.

Second, the Bank of Japan holds a large amount of Japanese government bonds. “Since the central bank could, in principle, forever hold its current stock of JGBs, the government need not worry about how it is going to repay these bonds,” [Columbia Professor David] Weinstein wrote. Then the net debt relative to GDP ratio goes even further down to 80 percent as of June 2014.

There is some sleight of hand here that won't pass muster with international standards regarding national-level bookkeeping, of course, but thankfully he doesn't reiterate the old chestnut that most Japanese government bonds (JGBs) are held by Japanese since their exceedingly low yields make them unattractive to international investors. So, Japan is not really vulnerable to a crisis of confidence among foreign holders of its debt since, well, most debt is held at home.

But wait, there's more. Updated figures suggest the situation is note even as dire as the "adjusted" figures indicate:

The Ministry of Finance has been compiling the balance sheets of the government from 2003. According to the recent figure (in Japanese. Curiously, the English version is not updated since 2003), the Japanese government owes debt of 1,269.1 trillion yen, and owns assets of 822.2 trillion yen, therefore the net debt is 447 trillion yen at the end of March, 2013. The net debt relative to GDP ratio is about 90 percent, which is lower than the Weinstein estimate.

The statistics for 2014 fiscal year is not yet released, but assuming that the net debt has increased by 5 trillion yen from 2013 to 2014, the net debt would be 452 trillion yen. As of December 31, 2014, the BOJ holds JGBs worth 254 trillion yen. If we subtract this from the net debt, the net debt relative to GDP ratio becomes 41 percent.

However, even more caution should be exercised in "magicking" Japan's debt from 245% down to 41%. For, some of the assets identified are already set aside for servicing future obligations--chiefly pensions. That said, he is still more sanguine about Japan's fiscal situation than most:

Now some might argue that the assets which the Japanese government owns are earmarked, and thus not salable. This is true for funds reserved for the pension fund worth 130 trillion yen, but the Japanese government has 41 trillion yen of cash, and 272 trillion yen of securities. The government also owns real properties in good locations. They may not be sold, but could certainly be leased to the private developers. As the real estate market in Tokyo is picking up, a lease of government properties could generate a considerable amount of revenue to the government’s coffer.

I am not saying that fiscal consolidation is not necessary. But right now, Japan faces an output gap, a difference between potential and actual GDP, of 2.8 percent. Japan faces a shortage of demand. Against this background, the budget for the 2015 fiscal year is not expansionary enough. What the public should worry about is not the fiscal situation, but the dwindling economy.

Again, I am not so sure if Japan can spend its way to prosperity and much recommend opening the country up to significantly increased migration for both increasing the pool of working-age persons and generating consumer demand. To me that is the tonic for a dwindling economy that the Japanese remain so very reluctant to address but the most likely to work since almost everything else has already been tried to little effect.