Theories on Japan's ability to finance debt

In light of Greece specifically, and other European sovereign debts issues in general, a new spotlight is shining on Japan and its substantial national debt. Is there a coming debt shock for Japan?

As Japan enters the Golden Week holidays, there seems to be no worry of such a debt shock. In fact, TV pundits are claiming more Japanese holiday-makers are going on long, overseas and more expensive vacations then the preceding several years. Foreign media about a coming debt problem seems like much ado about nothing.

There are two schools of thought on Japanese government debt; 1) no national debt problem, and 2) current national debt is unsustainable. Let's explore the two ideologies:

First, the Japanese conventional wisdom on the subject is that since over 95% of Japanese Government Bond ("JGB")-holders are domestic individuals and institutions who are happy to roll over the debt, there is no problem. Due to low yield and international consensus that the Bank of Japan will not raise interest rates significantly, most foreign investors would rather place their capital in higher-yielding products. The potential cancellation of Japan Post's privatization scheme will also re-open a large pocket of capital for the government to use.

Secondly, there is a much smaller voice sounding out the unsustainability of the national debt. This group points to demographics and the decreasing labor force vis-a-vis a growing pensioner population as an insurmountable problem. In effect, the ability to pay down the national debt is canceled out by pension obligations - in fact, it is not only canceled out but the debt must increase to fulfill these obligations. Therefore, either government revenue must be increased or obligations decreased.

A hike in the consumption tax is often discussed and subsequently discarded; memories of the institution of the consumption tax during a period of economic weakness is still strong. However, there appears to be new interest in near-term need to raise taxes, as recently raised by Naoto Kan. How this will be politically feasible is anyone's guess.

Attacking the other side of the equation, the DPJ is holding fiery debates televised live with bureaucrats and attacking wasteful spending projects. Many of these pet projects will be canceled - the ramifications of this are more political than economic - the DPJ hopes to break the bureaucrats' regional power bases. However, a real issue which must be discussed is lowering pensioners' entitlements. As the country quickly progresses from 2 workers providing for each pensioner to 2 pensioners depending on each worker, something has to give. Stay tuned.

In conclusion, managing the national debt also concerns how the Japanese government re-distributes capital throughout the nation. Japan, post-World War II, has subsidized and supported national champions of industry, while maintaining its social contract of pensions, health care and regional support. Perhaps the most important agenda under re-distribution of capital is to subsidize children and re-build a worker population?