By: Mike Campbell
All eyes have been on the debt crisis in Greece and the possibility for Spain and Portugal to become bogged down in their own debt mires. However, the world’s second largest economy has a massive debt problem of its own. The IMF has called on Japan asking them to take steps to cut their debt burden starting from next year.
The absolute debt in Japan dwarfs the Greek crisis. Japan has the highest debt burden of any developed nation and it is currently estimated to be 230% of GDP (the Greek figure is “just” 115% and the size of their economy is a tiny fraction of Japan’s). No doubt, when this sinks in, speculators will start to short-sell the Yen which is at an 8 year high against the Euro. Then of course, tackling the budget deficit and balancing the books was one of those changes that Mr Obama kept on about when running for the Presidency, so the Dollar is looking substantially overvalued too, against the yardstick of sovereign debt.
The IMF suggested that Japan should raise its consumer taxes as a mechanism to reduce the national debt. It also advised Japan to curb current government spending. IMF forecasts predict that the Japanese economy will grow by 2% in both the current year and the next, giving scope for Japan to make some savings. The entire industrialised world had to dig deep into the public coffers and fund financial stimulus measures to prevent the global financial system from imploding and to attempt to mitigate the worst recession seen since the Great Depression of the 1920s. These measures did not come cheap. It seems that the piper is asking to be paid now.