ANALYSIS-Japan's debt dilemma: how bad is it?
By Linda Sieg
TOKYO, Feb 17 (Reuters) - How long will it take and how much will it hurt for Japan to dig itself out from under a mountain of debt almost unprecedented in the industrial world?
Economists agree that's the key question thrown into sharp focus by credit rating agency Moody's move to put Japan's government debt issued in yen on review for a possible downgrade.
Some private pundits seconded Moody's warning that years of public stimulus and the resulting massive public debt will require a damaging fiscal tightening before reforms have gone far enough to generate sustainable private sector growth.
Others say an emerging ``New Economy' will bail out policy-makers sooner than pessimists think.
``Moody's is looking at snapshots in history, not the dynamism of where it (Japan) is heading,' said Darrel Whitten, head of research at ABN AMRO Securities.
``This whole Internet phenomenon is penetrating the Japanese eonomy a lot faster than people realise. A lot is happening beneath the surface,' he added.
Moody's said on Thursday it was putting Japanese government debt issued in yen on review for a possible downgrade out of concern that reforms would not be enough to propel Japan's economy into the high growth path vital to prevent its already huge public debt from ballooning. Fiscal tightening, however, would itself put the nation's recovery in danger, it said.
DEBT DOLDRUMS IN PUBLIC GLARE, PESSIMISTS LAMENT
Prime Minister Keizo Obuchi is already on the horns of a political dilemma due to a bulging public debt -- set to hit a whopping 130 percent of gross domestic product (GDP) in this fiscal year ending next month -- and a fragile recovery.
The government says it will stay in an expansionary mode in the year from April -- a statement economists say implies an extra budget down the road -- and hopes to shift to neutral for two or three years before embarking on fiscal reform.
But Obuchi, who has made clear fiscal reform must take a back seat to growth, faces mounting attacks from the opposition and rivals in his Liberal Democratic Party for piling up debt without producing a sustainable private sector-led recovery.
Voters -- who will get a chance to deliver their verdict on Obuchi in a Lower House election to be held no later than October -- are meanwhile growing anxious over the near-certainty that a decade of free-spending aimed at ending Japan's worst post-war recession spells higher taxes sometime soon.
Authorities argue that despite the probability that Japan's economy slipped back into a technical recession in the final three months of 1999, the recovery is still on track.
Private economists agree growth is improving again in the new year and could reach one percent in the next fiscal year. But some fear the need to tackle the public debt will act as a drag on growth for at least a decade.
``I think going forward that things are getting a bit better, it's hard to imagine them getting worse. But the fact remains that this is a country which has an explosive debt and needs probably 10 years of fiscal consolidation,' said Russell Jones, chief economist at Lehman Brothers in Tokyo.
``That will be a persistent headwind and I'm not sure that the rest of the economy is strong enough to deal with that...or that structural reform is enough to animate the private sector so that it can deal with public sector restraint,' Jones added.
OPTIMISTS BETTING ON CYCLICAL RECOVERY, ``NEW ECONOMY'
Some economists, however, questioned why the credit agency was considering a downgrade when Japan's economic outlook was better, not worse, than it was in November 1998 when Moody's took away Tokyo's top-notch Triple-A rating.
``From a static point of view, the are plenty of things to worry about concerning the debt and structural reform, but from a dynamic point of view, it's very difficult to find new negatives and very easy to find new positive,' said Richard Jerram, chief economist at ING Baring Securities in Tokyo.
AMB AMRO's Whitten went further, forecasting Japan would benefit from the same ``New Economy' dynamic that rescued the United States from its own fiscal deficits. ``Once upon a time, the United States had twin deficits...and they should have been falling off the edge of the cliff by now,' he said.
``Something happened along the way,' he said. ``I think when the Japanese economy gets back to its potential growth curve and the Internet kicks in, Japan's problem will start to solve itself as well, irrespective of government mismanagement.'
FOCUS-As economy struggles, Japan gets a debt warning
By Linda Sieg
TOKYO, Feb 17 (Reuters) - Japan's fragile economic recovery got a vote of no-confidence on Thursday, when international credit rating agency Moody's put its government yen debt under review for a possible downgrade.
Moody's said it was concerned that reforms and restructuring would not be enough to propel the world's second largest economy into the high growth path vital to prevent its already huge public debt from ballooning further.
A continued, large public sector debt build-up was likely over several years, approaching 150 percent of Gross Domestic Product -- levels not seen in the industrialised world since the 1920s or 1930s, Vincent Truglia, managing director of Moody's sovereign risk unit, told Reuters Television.
``It will be extremely difficult in the medium term for the present government or future governments to deal with this very large burden,' Truglia said. ``The government faces very, very difficult choices in the medium term.'
Moody's rattled markets and authorities in November 1998, when it downgraded Japan's sovereign debt rating from a top-notch Triple-A to Aa1, its second highest rating.
Analysts said the new review was a signal of concern over the sustainability of Japan's economic recovery and the problems that would pose for reining in an already massive public debt.
JAPANESE OFFICIALS UNCONCERNED
Japanese officials moved swiftly to downplay the U.S. credit rating agency report, saying they were not concerned.
``It's not worth discussion,' said Finance Minister Kiichi Miyazawa.
A decade of hefty stimulus packages aimed at reviving its economy from the worst recession in half a century have pushed outstanding national and local debt to more than 120 percent of gross domestic product (GDP) -- one of the worst levels in the industrial world.
The economy has shown signs of a tentative recovery but is expected to have shrunk for a second consecutive quarter in the last three months of 1999. Those figures are due out in March.
That would technically be a slip back into recession, although government officials argue it is no such thing and growth will then recover.
Within hours, Miyazawa told parliament that he expected the economy to show marked improvement around September and that, if it does, further fiscal stimulus would not be needed.
But Moody's said it had decided on the review because Japan's public sector debt would soon be the highest, relative to GDP, among the advanced industrial economies.
``It is unclear whether the reform and restructuring process will reach a critical mass to propel Japan's economy into a higher potential growth path, without which, Japan's public-sector debt problem should continue to worsen,' it said.
It recognised, however, that recent financial system reforms had helped Japan's tentative recovery, but indicated this was not enough.
It said the review was only for yen-denominated debt issued by the government and was not a review of Japan's country ceiling. It will thus not affect the credit ratings of bonds issued by private companies.
It confirmed it had changed the outlook for the government's foreign currency rating to stable from negative because of Japan's strong external position and its big pool of domestic savings.
``BUYER BEWARE' WARNING
While the Moody's move signals concern over the sustainability of Japan's fragile recovery, it does not imply Japan is likely to default on its debts, analysts said.
``The D-word doesn't come into it...This is not an Asian basket case,' said one foreign economist.
Authorities want to soothe concerns that a technical dip back into recession means that a recovery, which began with surprisingly robust growth in the first half of 1999, has been derailed.
Yen bears leapt on the announcement, sending the dollar up to hit five-month highs, breaking above 110 yen.
Japanese government bonds traded about 40 basis points lower. The reaction was muted because domestic investors, who hold over 90 percent of JGBs, have little choice but to park the bulk of their money in these instruments amid weak domestic corporate fund demand. |
