By: Dr. Mike Campbell
The devastating earthquake and tsunami that struck north eastern coastal regions of Japan claimed more than 20000 lives and devastated many homes and businesses and smashed the local infrastructure. The estimate for the costs of the reconstruction efforts have been placed at approximately ¥25 trillion (approximately $310 billion – roughly the same size as the Greek public debt).
The Japanese public debt is the obvious elephant in the room that nobody has the stomach to discuss. Estimates put Japanese debt at twice the size of its GDP; something like $8.6 trillion – nearly 25 times the Greek debt. Fortunately for Japan, the world’s third largest economy, market sentiment is firmly behind them and the yield on Japanese ten-year bonds stands at 0.99% - contrast that with the Greek figure of 23.6%.
If the yields on Japanese bonds climb, the nation is going to have substantial problems serving its debt – particularly as it has returned to recession and is having to deal with a currency at near record levels against the US dollar. Under normal circumstances, the Japanese could have been expected to turn to the bond markets to fund reconstruction costs, but right now, that straw would break the camel’s back.
The Japanese government has announced temporary tax increases which are intended to raise $120 billion over their lifetime. Tax hikes are planned on income (from January); corporate tax (from April), property, and tobacco sales (from October 2012). The measures need parliamentary approval to come into force. The government also plans to raise about $25 billion through a sale of government held assets.
The Japanese Yen is regarded as a safe haven currency, but even a cursory glance at the economic facts of life for the country show that position to be little more than wishful thinking.