Japanese economists say government debt is not an immediate threat to economy

Over the past two decades, Japan has accumulated enormous government debt and taken on significant budget deficits.

Japan’s central government has been running government deficits since the early 1990s. The central government’s debt stood at a record ¥1,070 trillion (Dh35.02tn) at the end of fiscal 2016, the country’s ministry of finance reported last May.

As a result, the general government’s (central and local) gross debt-to-GDP ratio stands at 240.3 per cent, the highest among developed countries, figures from the market research and business intelligence portal Statista show.

Yet Japan economists do not express a sense of crisis over their government’s debt. Raising government debt is not in itself a negative thing for the economy, Tohru Sasaki, the head of Japan markets research at JP Morgan Chase Bank, says. 

The issue is whether expenditures are made efficiently or not. “If you can make them efficiently, you should naturally reduce debt without trying to cut expenditures,” Mr Sasaki says.

It is widely believed that the fiscal debt does not pose an immediate threat to the economy, according to Akira Ariyoshi, who currently teaches at the Graduate School of International Relations at the International University of Japan in Minamiuonuma, Niigata Prefecture.

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Rather, longer-term risks, and the fact that it is impossible to reduce deficits if there is a crisis, have been the sources of concern, Mr Ariyoshi says. “So it is prudent to attempt to reduce the debt burden when we can,” he says.

Moreover, inevitable required fiscal tightening in the future will affect future generations, so that from an inter-generational equity perspective, one should restrain expenditures now, Mr Ariyoshi says.

“[The prime minister Shinzo Abe] seems to have listened to traditional Keynesian economists who emphasize short-term demand management in order to maintain growth, and this has resulted in an expansionary bias in fiscal policy,” he says.

Stronger tax receipts are being used for social policy rather than for deficit reduction, despite output being above potential. Mr Abe should postpone a proposed consumption tax hike at any sign of weakness in the economy (which is quite possible given the likely cyclical phase of the economy 12 to 18 months from now), Mr Ariyoshi says.

Debt reduction, he says, is not feasible, however; the best that can be hoped for is stabilising the debt-to-GDP ratio in order to reduce the probability and magnitude of a future crisis, according to Mr Ariyoshi.

“To do this, we need in particular to restrain pension, health and care related expenditures, and gradually increase taxes.”

At this stage, the Japanese do not feel that there are debt problems since Japan has not defaulted and interest rates have been so low, says Sayuri Shirai, a professor of economics at Keio University in Tokyo. “Ironically, the Bank of Japan [BoJ] contributed to the lack of urgency about debt problems,” Ms Shirai says.

As the BoJ will eventually have to reduce asset purchases and raise its 10-year bond yield target, the true problems will emerge sooner or later. With the ageing of the population, there will be limited savings and financial assets in the future, so the government will have to depend on foreign borrowings, Ms Shirai says. “Then the problems will become more evident.”