Economy

Unsound financial situation attracts investors to Japan

By Zhang Ming (China Daily)
Updated: 2010-08-19 08:00

Japan's national debt level is so high that the Japanese government's financial condition is in danger, but Tokyo does not think it is a big problem because most of the country's national debt was sold to domestic financial institutions and individuals and the country boasts a high savings rate.

However, international investors have set their sights on Japan's debt market.

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They have started to resort to short selling of Japan's national debt since the end of last year to make profits given the unsound Japanese financial situation and rising debt.

For them, Japan is very much like the financial giant Lehman Brothers during the global financial crisis.

Although the current Japanese government debt value is smaller than the volume of the total assets of the Japanese people, it would exceed this as it is snowballing. Worse, Japan's savings rate fell from about 18 percent in the 1980s to 1.7 percent in 2007.

As Japan's elderly population grows, the savings rate will continue to drop.

The ratio of Japan's government debt to GDP was nearly 190 percent in 2007 and it could reach almost 250 percent by 2014, according to the International Monetary Fund.

If holders of Japanese debt feel the risks of holding the asset are increasing, they would sell. To prevent this, the Japanese government could raise the interest rate of the bonds, but this would greatly increase the government's financial burden, worsening the already shaky financial situation.

It could also ask the central bank to purchase the bonds or sell them to foreign investors. As the holdings of foreign investors increase, however, Japanese debt would not be as stable as before.

The only viable solution is to stabilize its fiscal conditions and cut borrowing. It goes against the interests of the government, however, to take expansionary measures to jazz up the economy.

The author is an economist with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.