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A first: Nation’s debt tops ¥1 quadrillion

Bloomberg

The national debt exceeded ¥1 quadrillion for the first time, underscoring the case for Prime Minister Shinzo Abe to proceed with a sales tax increase to shore up government finances.

The country’s outstanding public debt, including borrowings, reached a record ¥1.08 quadrillion ($10.4 trillion) as of June 30, up 1.7 percent from three months earlier, the Finance Ministry announced Friday. Larger than the economies of Germany, France and the U.K. combined, the amount includes ¥830.5 trillion in government bonds.

The world’s heaviest debt burden will weigh on Abe when he has to decide next month whether to start the two-step plan to double the 5 percent tax on consumers in a nation with ballooning welfare costs. While boosting the levy will create a drag on growth, Moody’s Investors Service warned Thursday that a worsening of government finances will “erode confidence in” JGBs.

“Ballooning public debt underlines the need for Abe to push for a sales-tax increase,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group PLC in Tokyo. “This is a minimum policy requirement for his government.”

The consumption levy is due to be raised to 8 percent in April and to 10 percent in October 2015. Abe said he will make a final call on the plan after the release of revised second-quarter gross domestic product data on Sept. 9.

The sales tax law enacted last year gives Abe the power to postpone the rise should he conclude that the economy is unable to weather the austerity measure.

On Thursday, Abe ordered the creation of a panel of experts to analyze the impact of a tax hike on the economy. Advocates of the increase, including Bank of Japan Gov. Haruhiko Kuroda and Finance Minister Taro Aso, will sit on the committee.

Etsuro Honda, one of Abe’s economic advisers, this week called for a shallower path of increases to help ease the burden on households. Another adviser, retired Yale University professor Koichi Hamada, said the BOJ should be prepared to add stimulus if the sales tax rise hurts the economy.

The country’s debt is more than twice the size of the economy, and its fiscal deficit will expand to 10.3 percent of GDP this year from 9.9 percent in 2012, according to OECD data compiled by Bloomberg.

Japan will still run a primary budget balance deficit equivalent to 2 percent of the economy in the fiscal year starting April 2020 even if it raises the tax as planned, a Cabinet Office estimate showed Thursday.

Overall social welfare benefits rose to ¥103 trillion in 2010 from ¥47 trillion in 1990, according to data compiled by the National Institute of Population and Social Security Research.

“Tax reform and containment of social security expenditure would further reduce the government’s budget deficit and enhance its debt-servicing capacity,” Thomas Byrne, senior vice president at Moody’s, wrote in a report.