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Japan Faces Debt Test as Retirees Grow, Dai-Ichi Says

Japan may lose its ability to domestically finance its debt “in a few years” because of a surge of retirees in 2012, according to an analyst at Dai-Ichi Life Research Institute.

“The key year for public finances will be 2012, as the baby boomers retire and begin collecting their pensions en masse,” Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, said yesterday in an interview in Tokyo. “That may be when Japan’s sovereign risk becomes evident.”

Japan, the largest borrower among developed nations, has yet to face a Greece-like fiscal crisis because it has been able to finance most of its spending at home, Nagahama said. The first of Japan’s baby boomers will turn 65 in 2012, making them eligible for pension payments.

About 8 million, or 6 percent of the population, were born between 1947 and 1949, regarded as the baby boomer generation in Japan, government data show. Almost 23 percent of the nation’s 126 million people will be older than 65 this year, the highest proportion in the world, according to Bloomberg data.

More retirees will lead to a “rapid” surge in the natural growth of the government’s social security burden, which tracks the yearly increase of costs as a result of the aging population, Nagahama said. Costs will rise 2.5 trillion yen annually by 2013, he forecasts, more than double the 1.09 trillion yen growth the government is projecting for this fiscal year.

Draw on Savings

Retirees will also begin to draw on their savings, according to Nagahama. “If the value of household assets drops, or if it doesn’t fall but doesn’t rise either even as public debt continues to grow, the Japanese won’t be able to finance” government spending on their own, he said.

More than 90 percent of Japan’s government bonds are held by domestic investors. Prime Minister Yukio Hatoyama’s Cabinet is scheduled to unveil in June a plan to reduce a debt burden that the Organization for Economic Cooperation and Development estimates is at twice the size of the economy.

Public debt totaled a record 882.9 trillion yen ($9.5 trillion) as of March 31, up 4.3 percent from a year earlier, the Ministry of Finance said this week. Households’ financial assets stood at 1,456 trillion yen as of Dec. 31, Bank of Japan figures show.

Japan may need to depend more on foreign buyers of its bonds in the long term, a Finance Ministry official said today.

“Given Japan’s demographics, the current account surplus may decrease and some even say it will go into deficit, although it’s hard to predict when that would happen,” Masaaki Kaizuka, director of debt management at the ministry, said at a conference in Tokyo. “We may see the need to increase reliance from abroad whether we want to or not.”

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