There are already plenty of ways to measure just how deeply in hock Japan is. It is one of the most heavily indebted industrialized nations. Its national debt equals its gross domestic product, compared with half of GDP for the U.S. Now there's a new standard. For only the second time in five decades, Tokyo will borrow money from private banks to aid cash-strapped local administrations. After taking a modest $1.35 billion loan in 1998, the government is planning to ask banks for $75 billion this year--more than Singapore's GDP and roughly the same amount that Tokyo injected into the nation's top 15 banks last year.
Japan is turning to the banks, in part, because it is about to lose an important source of funds. The Ministry of Finance has long counted on a huge pool of money sitting in the country's postal savings and pension funds to underwrite local government spending. Not for much longer, though. The Posts & Telecommunications Ministry, which is one of the world's largest savings institutions, estimates that post office accounts worth some $990 billion will mature during the next two years. With interest rates under 1% now, it expects about $460 billion to exit, as depositors switch to mutual funds or other places where they can get higher returns. "The whole pyramid structure of public finances is starting to give," says Jesper Koll, chief economist at Merrill Lynch Japan Inc.
The government usually raises money by issuing low-interest bonds. The Ministry of Finance says it doesn't have the authority to do so now because the cash would go into an account that provides aid to local administrators to which special rules apply. Borrowing from banks is unusual but not necessarily dangerous. Tokyo will almost certainly get the money at a reasonable rate, since it will be able to negotiate terms with banks desperate to make loans. And that's the other seeming advantage of Tokyo's plan: It will help Japan's banks, which are stuck with piles of money and few credible borrowers. Of course, there are risks for the government: Some analysts predict that Moody's Investors Service may downgrade Japan's sovereign debt rating from AA1 this spring because the country lacks a realistic debt-management strategy. If so, Japan would have to pay more for credit.
In reality, the government is overextending itself. Even Prime Minister Keizo Obuchi acknowledges the problem. "I regard the fact that government debts will reach $6 trillion by the end of the fiscal year as a very serious matter," he told the Diet on Jan. 28. Nonetheless, Tokyo is committed to spending its way out of a recession. The trouble is that, so far, various stimulus packages haven't really worked--except to delay fiscal reform. "We are not able to pursue the two goals of putting the economy onto the track of full-fledged recovery and working on the important task of fiscal restructuring simultaneously," Obuchi said. "I believe he who runs after two hares will catch neither."
As it is, Japan is chasing a pretty modest growth target: 0.6% in the year ending this March. The problem is the lack of consumer spending, not government outlays: In Japan, consumer spending accounts for 62.3% of GDP. And Ronald Bevacqua, senior economist at Commerzbank Securities (Japan) Co., doubts that consumption will boost growth by more than one percentage point in the year ending in March, 2001.
STEADY CLIMB. Not long ago, it seemed that Japan was finally on the way to recovery. Towards the end of last year, the yen rebounded to 101.35, the highest in three years. Last year, as foreign investors became convinced that Japan was serious about reform, investment poured in. And the stock market started a steady climb. Commerzbank Securities estimates that foreigners bought a record $85 billion worth of Japanese stocks in 1999.
But now, Japanese officials don't think the country is ready for far-reaching reforms after all. In the past month, Tokyo has extended full protection for bank deposits to 2002. It has postponed medical-insurance reforms and changes in the corporate tax structure.
Many analysts agree that the country's recovery is still too fragile to survive fiscal tightening. Pulling the plug on government spending or raising taxes could halt Japan's recovery. But spending public money won't sustain real growth, either. "Fiscal expansion is positive for economic expansion over the short term, but it's not going to have a lasting impact," warns Desmond Supple, head of Asia research at Barclays Capital in Singapore. Japan is caught in a debt trap.