Japan: The Next Big Debt Crisis?
Less than a fortnight ago, with eurozone credit concerns reaching fever pitch, we believed it was necessary to remind readers of Japan’s perilous sovereign debt outlook (see Business Monitor Online, ‘Charting The Public Debt Time-Bomb’, November 18, 2011). A quick comparison of gross debt metrics, repayment schedules, and economic growth prospects would suggest that Japan is in a much worse position in terms of sovereign creditworthiness. While this is mitigated somewhat by the country’s healthy external balance sheet and domestic ownership (95%) of outstanding sovereign debt, yields of less than 1.0% on the benchmark 10-year Japanese government bond (JGB) looked extremely unattractive.
Since then, we have seen an important uptick in Japanese bond yields, with the 10-year paper piercing through eight-month trendline support at 1.05%. From a fundamental perspective, Japan’s fragile sovereign debt position is built upon the unstable foundations of low yields. If these start to rise across all tenors, the impact on the government’s repayment capacity would be severe, triggering a vicious cycle of deteriorating creditworthiness and higher yields. As the eurozone crisis has shown, confidence underpinning sovereign bonds can evaporate very quickly.
The whole world is talking about the eurozone debt crisis. But Japan’s public debt stock is comparable in size to that of the entire eurozone. People keep asking, who will save the eurozone. We ask, who will save Japan?
Postscript: Rumble In Osaka
One of Japan’s biggest problems since the bursting of the bubble economy in 1989 has been the lack of strong leadership to tackle the country’s woes. The exception was Junichiro Koizumi, who served as prime minister in 2001-2006. Even the defeat of the long-ruling Liberal Democratic Party in 2009 failed to end Japan’s cycle of weak, revolving door premiers. In this respect, last Sunday’s mayoral and gubernatorial elections in Osaka could be a harbinger of change. The continued ascent of Toru Hashimoto as Osaka’s mayor appears to reflect growing support for younger, populist leaders who are unaffiliated with the two main political parties. Hashimoto campaigned on administrative reform in the Greater Osaka region, which he sees as essential to boosting the local economy. If he is successful, he could use Osaka as a platform to enter national politics.