State Spending May Cause Fiscal Collapse in Next 15 Years, Komine Says

The Japanese government may suffer fiscal collapse in 10 to 15 years if the ruling Democratic Party of Japan maintains its expansionary spending policy, said Takao Komine, a professor at Hosei University and former bureaucrat.

Even though “Japan’s fiscal conditions are very severe, people were saying voicing such concern was like crying wolf,” Komine, 63, said in an interview in Tokyo yesterday. “However, since the wolf has appeared in Greece, people have started worrying it may show up in Japan as well.”

Global scrutiny of sovereign debt has intensified as fiscal deficits in Europe swell, a crisis Finance Minister Naoto Kan has said the government needs to learn from as Japan’s public debt approaches 200 percent of gross domestic product. Prime Minister Yukio Hatoyama, who announced his intention to resign today, plans to unveil a roadmap this month to restore the nation’s fiscal health.

The yield on the benchmark 10-year government bond fell to 1.265 percent at 3:22 p.m. in Tokyo.

Komine, who spent more than 30 years as a bureaucrat overseeing economic research and transport policy, said the government should try to set specific fiscal targets, including deadlines for their goals.

He also said Japan’s debt may exceed households’ financial assets around 2020, causing uncertainty over whether Japanese will be able finance government bonds. Foreign ownership of Japanese debt was about 5 percent as of December, with the rest held by domestic investors, according to the Bank of Japan.

‘Tipping Point’

“Japan’s finances may collapse eventually, but it’s a story that may take 10 years or 15 years,” said Komine, who also sits on a government committee that charts the economic cycle. “But if the market’s trust is shaken, such a tipping point will come earlier.”

The International Monetary Fund last month pressed Japan’s government to pursue a credible fiscal program starting next fiscal year, including increasing the 5 percent sales tax. Kan has said that raising taxes could boost the economy if the proceeds are used wisely, adding to signs the government may consider increasing a levy on sales.

Komine said the European sovereign-debt problems probably won’t spur the next global financial crisis. Japan’s economy will likely continue to recover gradually, led by exports, he said.

The Cabinet Office will hold a meeting next week to determine when Japan’s worst postwar recession ended. Komine, who sits on the panel, said the economy may have hit bottom “in March or April last year.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Tatsuo Ito in Tokyo at tito2@bloomberg.net

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