Who would save Japan in a sovereign debt crisis?
By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
TOKYO — Who would save Japan in a sovereign debt crisis? Hopefully, it won’t have one. But given the country’s terrifying challenges, some senior Japanese financial executives and government bureaucrats are quietly considering how to deal with a doomsday scenario. A theoretical Japanese credit collapse could even see China coming to the rescue.
True, Japan looks incredibly unlikely to default on its debt. Ten-year government bond yields of around 1.1 percent reflect not an iota of concern. And as one of the world’s great creditor nations, Japan has vast resources to draw on, hard-working people and, if need be, a central bank that could let the printing presses fly.
But the numbers are frightening, especially given Japan’s lack of political leadership around fiscal issues. Government debt stands at about 1,000 trillion yen ($12 trillion), with gross borrowings of around 200 percent of GDP. The productive means to pay off those liabilities are shrinking as Japan’s average age creeps toward 50 and, thanks to scant immigration, the country loses 1 million people a year.
Japan can fund itself for now — 95 percent of government debt is held domestically. But the combination of ageing baby boomers drawing on savings, a lack of new household formation and bank deposit growth, and corporations opting to deploy cash overseas have some economists predicting that, without drastic reforms, Japan may need to look abroad for funding in the not-too-distant future.
That could trigger a crisis. If non-Japanese creditors demanded higher yields to compensate for low growth, the country’s dependence on short-term borrowings would quickly lead to spiralling debt service costs. A resulting sovereign crisis could make Greece, Portugal and Ireland look like amuse bouches. Even a 5 percent haircut on government debt would equate to $600 billion.
Few have pockets that deep. Europe’s resources are tapped out on its peripheral problems. America is struggling — and would be even more so if Japan dumped its almost-$1 trillion of U.S. Treasuries. The only sizeable pool of capital available to bail out Japan would probably be Chinese.
China might be willing to lend a helping hand. But the money may come with strings. Sovereignty over disputed, oil-rich islands could be one. Some theorise that China might demand independence for Okinawa, home to controversial U.S. military bases. Perhaps that’s the best reason for Japan to get its house in order: a Chinese rescue might be as uncomfortable as the debt crisis itself.