Japan's huge public debt not seen falling until 2018

PUBLISHED : Monday, 17 February, 2014, 4:47am
UPDATED : Monday, 17 February, 2014, 5:33am

Japan, the world's most indebted economy after Greece, could see its vast public debt begin falling in five years with two rounds of consumption tax rises and faster economic growth, the International Monetary Fund said.

"In a successful scenario, in five years from now, Japan's debt to gross domestic product ratio would have peaked and started to gradually come down," Jerald Schiff, a deputy director of the Asia and Pacific Department at the International Monetary Fund, told the South China Morning Post.

To revive Japan's economy, Prime Minister Shinzo Abe announced measures that were dubbed as "Abenomics". The first is monetary policy aimed at eliminating deflation. The second is flexible fiscal policy to support the economy in the short run and fiscal stability in the long run. The third is structural reform aimed at raising investment and trend growth.

Now the market is seeing fiscal consolidation to tackle the nation's severe debt problem, which is expected to approach 240 per cent of GDP next year. Japan's net government debt is about 140 per cent of GDP. In contrast, the United States is at 87 per cent, and Japan is sitting not that far below Greece.

"If all the measures succeed, Japan will [have] an economy with higher potential growth, higher trend growth and it would be a place that's more dynamic with more risk-taking [in five years]. That means people invest more and borrow more. It would be … more integrated with the rest of Asia, because we would see more foreign investments and banking activities in the region from Japan," Schiff said.

Japan's economy probably grew to a 2.8 per cent annualised rate in the fourth quarter from a 1.1 per cent rate in the previous three months, according to Bloomberg.

Under Abe's revival push, stocks and profits are soaring and even the prices of shop goods are up after years of deflation, but one cloud is that average wages may not be climbing with them.

Meanwhile, the IMF - in its latest World Economic Outlook - projects the nation to grow 1.7 per cent this year but drop back to 1 per cent next year.

Japan has passed a bill to raise the consumption tax from 5 per cent to 8 per cent in April and to 10 per cent in October next year. Market watchers said the extra revenue made the government's goal to halve the primary budget deficit to 3.2 per cent of GDP by next year achievable.

Schiff is positive on what Abenomics has achieved so far and calls for more action.

"The first year has been quite successful. But some important things still need to happen before people will feel that the success is sustainable because right now most of the growth has been because of either direct or indirect stimulus," he said.

He added that "they have done the stimulus, but now they need to make it clear how they are going to bring that down, because debt is very high as a share of GDP and still rising".

Japan should also raise labour force participation by women. The employment ratio for women aged 15 to 64 stood at 61 per cent in 2012, compared with 62 per cent in the US and 68 per cent in Germany.

"Just bringing the labour force participation rate up to the average of OECD countries can increase growth pretty substantially, between 0.2 per cent and 0.25 per cent a year," Schiff said.