U.S. Debt Mess Could Be Epically Worse. Just Ask Japan

Prime Minister Abe at a press conference in Tokyo Photograph by Piti A Sahakorn/Corbis

The U.S. government shutdown and debt ceiling drama have cast an unflattering light on the country’s stretched budget and toxic political culture. Turns out America really is an exceptional nation—exceptionally bad at managing its finances and setting long-term policy goals to get the country on a sustainable path to fiscal health.

Yet one nation that makes America look like a paragon of frugality: Japan, which has a far bigger debt load relative to the size of its economy than any other major industrialized country. Take a look at this chart from Japan’s Ministry of Finance.

Japanese Ministry of Finance

Japanese Prime Minister Shinzo Abe has had some success reviving the world’s third biggest economy with a mix of fiscal stimulus, aggressive monetary expansion, and tax incentives to boost business investment. The policies, known as Abenomics, have triggered an explosive rally in the Nikkei, which is up 33 percent through October 8.

However, because of Japan’s gargantuan debt burden, Abe and his government have had to raise taxes, which could be a drag on growth. The consumption tax will go up to 8 percent from 5 percent. Abe wants Japan to achieve a primary budget balance—in which government revenue equals outlays, excluding debt-service costs on existing liabilities—by 2020.

Daiwa Institute of Research analyst Mikio Mizobata estimates the consumption tax actually needs to be more like 19 percent if the government is serious about hitting that goal, given rapidly expanding outlays for social security and the state-run health-care system.

This next chart shows the huge pressure on Japan’s government budget to finance its current debt and spend on social programs, given the country’s aging population.

Japanese Ministry of Finance

Japan has been running trade deficits in recent months and the nation’s current account surplus hit a record low in August. That raises concerns about the country’s ability to shoulder its heavy government debt load going forward. By one measure—debt relative to tax revenues—Japan is truly in a class of its own and constitutes a far bigger default risk than the U.S.

Carmen M. Reinhart, Kenneth Rogoff

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