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People wait in line in front of a closed petrol station to get a number to be able to get fuel later in the day in the town of Tonoi on March 17, 2011, six days after a major earthquake and tsunami hit the northeastern coast of Japan. (NICHOLAS KAMM)
People wait in line in front of a closed petrol station to get a number to be able to get fuel later in the day in the town of Tonoi on March 17, 2011, six days after a major earthquake and tsunami hit the northeastern coast of Japan. (NICHOLAS KAMM)

Why Japan will avert a fiscal crash Add to ...

In these dark hours, Japan would do well to heed former White House Chief of Staff Rahm Emanuel's memorable maxim that you never want a serious crisis to go to waste.

As the nation struggles to avert a nuclear catastrophe on the heels of a deadly earthquake and tsunami, it takes a huge leap of faith to foresee any positives emerging from the triple disaster for a stagnant, rapidly aging and heavily indebted economy.

Yet a number of experts say the disaster might - just might - shake Japan out of its collective economic and political torpor of the past two decades and provide a new sense of purpose for a nation that has seemingly lost its way.

They also say that widespread fear of a Japanese fiscal death spiral is mostly overblown.

Masaru Hamasaki, a senior strategist at Toyota Asset Management in Tokyo, said the severity of the challenge facing Japan should not be underestimated.

The numbers killed in last Friday's quake centred on Sendai in northeastern Japan will far exceed the 6,400 toll from the 1995 temblor in Kobe.

Many more people have been affected directly and indirectly, for instance by power cuts and the risk of radioactive fallout from the crippled Fukushima Daiichi nuclear power plant. The usually bustling streets of Tokyo were eerily empty this week.

And the economy is even less vigorous than in 1995, smack in the middle of Japan's so-called Lost Decade.

"But out of this crisis affecting a large part of the population, a sense of 'public morality' is already building up," Mr. Hamasaki said. "If the country's leaders can harness this spirit in the long term, then I'm sure Japan will move in a positive direction."

This civic duty, an impulse of shared responsibility, is likely to count for more than any spreadsheet in trying to assess the impact on Japan's bond markets of financing the still unknowable bill of rebuilding after the quake, the strongest on record here.

Some pundits fear that adding substantially to a gross debt burden that is already more than twice Japan's national output will be the straw that breaks the bond market's back.

"The debt will rise significantly. Until now, the country could finance its obligations at relatively low rates. If additional debts come on top now, there will be questions about solvency," Peter Bofinger, a member of Germany's "wisemen" council of economic advisers, said in an interview with the German daily Sueddeutsche Zeitung published on Monday.

Economics Minister Kaoru Yosano has acknowledged that, unless it changes its ways, Japan faces a fiscal dead end.

But the Sendai quake is very unlikely to trigger that day of reckoning.


On paper, Japan's liabilities will hit 204 per cent of GDP this calendar year, larger than 137 per cent for Greece and 113 per cent for Ireland, according to the Organization for Economic Co-operation and Development (OECD).

But Japan is not about to follow Greece and Ireland into the emergency debt ward. Both countries have needed a bailout arranged by the euro zone and the International Monetary Fund.

For a start, the government owes nearly half of the debt to other arms of the government such as the Japan Post Bank and the Government Pension Investment Fund. The Bank of Japan also owns a tidy chunk of Japanese Government Bonds (JGBs).

Net debt, taking account also of Japan's official foreign reserves, will reach 120 per cent of GDP this year, according to the OECD.

That will be the highest among major economies, but the burden is not significantly greater than that shouldered by Belgium and Italy in the 1990s, both of which avoided a sovereign debt crisis.

True, net debt has risen sharply from 80 per cent of GDP in 2007, and the government is running a budget deficit of close to 10 per cent of GDP even before counting the cost of the quake.

But whereas about 70 per cent of Greece's public debt is held by foreigners, domestic investors hold 95.4 per cent of Japan's bonds. This gives Tokyo's policy makers a huge advantage.

"They have much more room to manoeuvre than Greece or Ireland would have in similar circumstances," said Marcus Noland of the Peterson Institute of International Economics in Washington.

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