Japan’s Debt Exceeds 1 Quadrillion Yen as Abe Mulls Tax Rise

Japan’s national debt exceeded 1,000 trillion yen for the first time, underscoring the case for Prime Minister Shinzo Abe to proceed with a sales-tax increase to shore up government finances.

The country’s outstanding public debt including borrowings reached a record 1,008.6 trillion yen ($10.46 trillion) as of June 30, up 1.7 percent from three months earlier, the finance ministry said in Tokyo today. Larger than the economies of Germany, France and the U.K. combined, the amount includes 830.5 trillion yen in government bonds.

The world’s heaviest debt burden will weigh on Abe when he decides next month whether to implement a two-step plan to double the tax on consumers in a nation with ballooning welfare costs. While boosting the levy would drag on growth, Moody’s Investors Service yesterday warned that a worsening of finances would erode confidence in government bonds.

“Ballooning public debt underlines the need for Abe to push for a sales-tax increase,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. “This is a minimum policy requirement for his government.”

The levy on consumption is due to be raised to 8 percent in April from the current 5 percent, followed by an increase to 10 percent in October 2015. Abe said he would make a final call on the plan after the release of revised second-quarter gross domestic product data on Sept. 9.

The sales-tax law enacted last year gives Abe the power to postpone the rise should he conclude that the economy is unable to weather the austerity measure.

Expert Panel

The prime minister yesterday ordered the creation of a panel of experts to analyze the impact on the economy of a higher levy. Advocates of an increase including Bank of Japan Governor Haruhiko Kuroda and Finance Minister Taro Aso will stand in the committee.

Etsuro Honda, an economic adviser to Abe, called this week for a shallower path of increases to ease the burden on households. Another adviser, retired Yale University professor Koichi Hamada, said the BOJ should be prepared to add stimulus if the sales-tax rise hurts the economy.

The country’s debt is more than twice the size of the economy, and its fiscal deficit will expand to 10.3 percent of GDP this year from 9.9 percent in 2012, according to OECD data compiled by Bloomberg.

Japan will still run a primary budget balance deficit equivalent to 2 percent of the economy in the fiscal year starting April 2020 even if it raises the tax as planned, a Cabinet Office estimate showed yesterday.

Overall social welfare benefits rose to 103 trillion yen in 2010 from 47 trillion yen in 1990, according to data compiled by the National Institute of Population and Social Security Research.

“Tax reform and containment of social security expenditure would further reduce the government’s budget deficit and enhance its debt-servicing capacity,” Thomas Byrne, senior vice president at Moody’s, wrote in a report yesterday.

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