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Greece’s implications for Japan: the need to clarify the public debt

by Teruhiko Mano

The storm that is the Greek debt problem continues to rage through the global markets. In an emergency meeting May 2, the finance ministers of the European Union agreed to work with the International Monetary Fund to provide 110 billion euro in loans to Greece over three years. The first batch was provided just a day before a heap of Greek bonds reached maturity on May 19.

In return, Greek Prime Minister George Papandreou announced plans to improve his government’s fiscal balance by an additional 30 billion euro over the same period through spending cuts and tax increases. But he will face several hurdles in executing these belt-tightening measures, and riots and public-sector strikes have already taken place in protest.

The decision by Germany alone to temporarily ban short-selling in euro-zone government bonds and credit default swaps magnified the uncertainty surrounding the crisis by creating the perception that the European Union was incapable of taking coordinated action.

Share prices fell sharply, sending the Nikkei index below the 10,000 line and foreign-exchange rates gyrating across Europe and the rest of the world.

At the G20 meeting held April 24, Washington confirmed that recovery trends in many parts of the world were more robust than previously thought. Japan said in preliminary GDP figures released May 20 that the economy expanded at an annualized rate of 4.9 percent in real terms in the January-March quarter, putting together four consecutive quarters of growth. That share prices are plunging in the face of growing signs of recovery seems to confirm that the capital flight being caused by Greece’s debt problem is having a bigger impact on the market than the recovery is.

On the currency front, yen-buying caused by uncertainty over the euro has bolstered the now safe-haven currency to around 90 to the dollar and 110 against the euro.

The Greek debt problem has serious implications for Japan, which is saddled with a public debt nearly double the size of its GDP. Some credit-rating agencies have already hinted that Japanese government bonds could be downgraded in the future. Here are a few of the lessons we should heed from the Greek crisis.

The first thing to note is that the challenges posed by excessive dependence on government bonds can be divided into two issues.

One issue is risk — the risk posed by massive volumes of government bonds reaching redemption. There is also the question of whether the debt can actually be reduced. The Greek crisis shows us that the latter is more important.

The ruling coalition is scheduled to come up with a medium-term assessment of Japan’s fiscal condition — including its primary balance estimates, concrete steps for cutting public expenditures and tax policies — in June. In the fiscal 2010 budget, the government said it expects to issue ¥44 trillion in bonds — an amount that exceeds its tax revenue. We need to be aware that the public debt is growing at an accelerated pace.

The second issue is that, although public attention tends to focus on Japan’s gross debt, which has risen to nearly ¥1 quadrillion, the public sector owns about ¥700 trillion in assets. This means that Japan’s net debt is about ¥300 trillion, or less than 60 percent of its nominal GDP, which is over ¥500 trillion.

The ¥700 trillion in assets comprises roughly ¥180 trillion in real assets, such as public office buildings, and ¥520 trillion in financial assets, including stakes in “special corporations.” If the government can sell these assets and redeem the bonds using the revenue, concerns about the public debt will ease and debt-servicing costs will be reduced.

When the Japanese banking sector was mired in the bad-loan crisis following the implosion of the late ’80s bubble economy, some of the banks sold their headquarters buildings and leased them back. In order to prevent Japan from becoming a global risk factor like Greece, efforts need to be made to reduce both the debt and assets of the public sector, thereby presenting a clearer picture of the public debt.

Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.