Japan’s New PM Warns Of Yen Debt Crisis

By: Dr. Mike Campbell

Japan has recently seen a change of prime minister with the resignation of Yukio Hatoyama last week, over his inability to honour an election pledge to move a USAF base off Okinawa Island. His position has been taken up by former finance minister Naoto Kan.

Mr Kan has made some stark comments over the difficulties his country faces because of its own national debt which vastly outstrips those of economic minnow Greece. The world’s second largest economy is at risk of collapse, he warned, because of its debt burden and requires financial restructuring to avoid a Greek-style crisis. Such an event would be catastrophic in global economic terms.

"Our country's outstanding public debt is huge... our public finances have become the worst of any developed country," he said. "It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds," the Japanese debt is approximately twice the country’s GDP. Mr Kan said that a wide ranging reform of the Japanese tax system was unavoidable if the challenges of the debt problem were to be met.

In a comment that could be regarded as deeply honest and frank or financially suicidal, depending upon your degree of cynicism, he remarked: "Like the confusion in the Eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets". This comment almost begs the ratings agencies to review their positions on the risk of a Japanese bond default and if they do so, Japan may find herself paying more to service her debts. Should financial markets take his comments to heart, a marked devaluation of the Yen is clearly likely. However, the USA and Europe have debt problems of their own making it difficult to find a “safe haven” currency, a real quandary for the Forex titans.