Raymond Regalado’s Dec. 18 letter, “Misleading criticism of debt,” doesn’t mention several factors that are important to this topic. The ratio of Japanese government debt to gross domestic product is around 200 percent. This is among the highest of any developed country. It is sustainable only due to the low interest rate the government is paying on its debt. The low rate occurs because over 90 percent of debt is held within Japan and there is no market pressure to raise it. Culture, legislation and the absence of a vibrant domestic financial services industry have brought this about.
But the percentage of debt held within Japan has been slowly declining and will continue to decline. As the percentage of debt held outside Japan increases, there will be increasing pressure for the interest rate to rise. This will increase the cost of servicing the debt and exert pressure on other items in the budget.
Japan’s population is aging and declining. As people retire, they will withdraw their savings, forcing financial institutions to sell government debt. In addition, the government’s expenditures for pensions and medical services for the elderly will increase.
Japanese banks are under significant pressure to increase their return on assets. They will be reluctant to purchase the debt being sold due to the withdrawal of savings. As will individuals. Japan’s working population is decreasing, and there is little incentive for the financial services industry to absorb it. Large companies will not pick it up either. Japan’s exporting companies are faced with significant investment decisions due to the global economy. Most of those investments will be made outside of Japan.
So, the debt will increasingly have to be absorbed outside of Japan. At some point, these investors will start demanding a higher interest rate, and that will be a significant problem for Japan. In my mind, it’s not a matter of “if,” but rather “when”.
The opinions expressed in this letter to the editor are the writer’s own and do not necessarily reflect the policies of The Japan Times.
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