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Japan’s Fiscal Crisis Comes of Age

The only reason that Japan has been able to sustain its fiscal position is that 93% of its debt is domestically held. But the large number of households formed by pensioners is growing larger still – and is increasingly drawing down savings that were mostly used to purchase government bonds.

TOKYO – Has Japan’s political paralysis finally lifted? The recent agreement, after a long debate, between the government and leading opposition parties to double the consumption tax – from 5% to 8% in 2014, and then to 10% in 2015 – suggests that it has. But there is a real risk that the government will mistake this measure for the end of the reform process. In fact, it is – or should be – only the beginning.

By virtually any measure, official Japanese debt is the highest in the world. The total outstanding volume of Japanese Government Bonds (JGBs) is an almost unfathomable $9 trillion, only just below the $10.5 trillion in outstanding debt for the full 17-country eurozone, which has more than triple the population.

So grim has Japan’s fiscal position become that bond issuance has exceeded tax revenue since 2009. Taxes cover less than half of government spending. And last year’s earthquake, tsunami, and nuclear disaster only made a grim fiscal picture worse by requiring huge new spending on reconstruction. Japan issued a record ¥55.8 trillion ($693.5 billion), or 12% of nominal GDP, in government bonds during the last fiscal year.

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