JEIRbanner

No. 2 — January 14, 2000

 

Feature Article

GOVERNMENT DEFICITS AND DEBT: TOKYO'S DILEMMA

Douglas Ostrom

Summary

Tokyo, which maintained a policy of balanced budgets through most of the postwar period, took a dramatically different course in the 1990s. Measured as a share of gross domestic product, Japan's overall government deficit now is the biggest of any major industrialized nation. Moreover, its accumulated debt is huge and growing rapidly. Left unchecked, the rise in the debt burden could accelerate sharply in the early years of this century, partly as a result of rising interest costs but also due to demographic changes that are expanding the ranks of public pension recipients.

Japan's increasing public-sector deficit and debt could have several important effects on the United States. If large enough, the government deficit might lead to a drop in Japan's current account surplus through the interaction of interest rates, currency values and international capital flows. Tokyo assigns considerable weight — too much, according to not a few foreign analysts — to future debt burdens in its formulation of economic policy. Moreover, the existence of a sizable public-sector debt could encourage domestic and foreign savers alike to alter the composition of their holdings, giving Japanese government bonds a more prominent position in financial markets worldwide.

The arithmetic of the debt implies that policymakers can deviate from the long-term goal of stabilizing public indebtedness for years and still incur little cost in terms of the achievement of that objective. This seemingly surprising conclusion arises in part because the scope of the required policy adjustments is great enough to overwhelm the long-run negative impact of short-term policies. Whether the powers-that-be — whose frequent talk about the nature of the debt problem has not always been matched with action — have the will to push through the necessary restructuring remains to be seen, especially since the centers of political power in Tokyo are in flux.

Previous Issue aaaa Next Issue aaaaIndex of Summaries aaaa Publications aaaa Home


Weekly Review

COALITION POLITICIANS DELAY DEPOSIT INSURANCE PROGRAM
--- by Douglas Ostrom

April 1, 2001 no longer is such a critical day for the Japanese financial world or for the Deposit Insurance Corp. A 1996 amendment to Japan's Deposit Insurance Law had guaranteed the safety of deposits, regardless of size, at virtually all banking-type institutions through the end of FY 2000, after which government protection in the event of a bank failure would be limited to ¥10 million ($83,300 at ¥120=$1.00) per depositor per institution. On December 29, however, senior policymakers of the Liberal Democratic Party, the Liberal Party and the New Komeito agreed to delay implementation of the cap by a year. Prime Minister Keizo Obuchi's cabinet confirmed the move January 7. The decision, which came in for some stiff criticism at home and abroad, represented a victory for politicians who must face voters fairly soon in lower house elections over bureaucrats and business leaders.

 

TOKYO STOCKS END 1990S ON UPBEAT NOTE
--- by Jon Choy

Owners of Japanese equities watched warily but happily in 1999 as the Nikkei average of 225 stocks listed on the first section of the Tokyo Stock Exchange broke a three-year downward spiral. At 18,934.34, the index closed the trading year more than 41 percent higher than where it had begun. While questions persist about the economy's recovery and worries mount over the course of Tokyo's fiscal policy, securities analysts see several bright spots that could help sustain the Nikkei's upward drive through 2000. These include structural changes in domestic equity markets and surging interest in all things Internet-related.

 

JAPAN, SAUDI ARABIA IN TOUGH NEGOTIATIONS FOR RENEWED OIL-DRILLING RIGHTS
--- by Marc Castellano

In a last-ditch effort to secure extended crude oil production rights for Tokyo-based Arabian Oil Co., Ltd., International Trade and Industry Minister Takashi Fukaya has scheduled a January 15-16 trip to Saudi Arabia for what is supposed to be a final series of negotiations. Because talks conducted over the last few years have been unsuccessful and the two sides remain at loggerheads over a key issue, the outcome of the upcoming round is, at best, uncertain.

 

DEFENSE CHIEFS EXCHANGE VIEWS ON BASE RELOCATION, FUNDING MATTERS
--- by Barbara Wanner

Prime Minister Keizo Obuchi described as "significant" the January 5 meeting in Washington between Japan Defense Agency Director General Tsutomu Kawara and Secretary of Defense William Cohen. "It is desirable [for senior U.S. and Japanese officials] to exchange frank opinions on various issues to strengthen the U.S.-Japan alliance," Mr. Obuchi told reporters. While defense experts on both sides of the Pacific no doubt would concur that such talks are crucial to the effective management of the bilateral security relationship, they might not describe the one-hour Kawara-Cohen meeting at the Pentagon in such glowing terms.

Top aaaa Previous Issue aaaa Next Issue aaaa Index of Summaries aaaa Publications aaaa Home