TOKYO, May 17 — Japan is likely to face a sovereign debt crisis in three to four years as its current account balance is expected to fall into deficit, former Bank of Japan board member Teizo Taya said today.
“Three to four years from now I expect a sovereign debt crisis to hit Japan and long-term interest rates to surge,” Taya said in an interview with Reuters.
He said the government would probably only start reforming the tattered public finances after such a crisis emerges, driving up government financing costs.
Japan’s public debt is roughly twice the size of its gross domestic product, the highest among industrial countries.
Taya said that until now savings in the corporate sector had helped make up for the deteriorating public fiscal balance and dwindling household savings. But as companies increase spending, “the current account balance is likely to fall into deficit in a few years”.
He argued against a widespread view that Japan is safe from a fiscal crisis because Japanese government bonds (JGBs) are 95 per cent held by domestic investors.
“Foreign investors with a 5 per cent ownership could trigger a crisis if they launch sell-offs,” he said.
There is little room for the government to cut spending, Taya said. “The consumption tax rate needs to be raised by two to four times. The government needs to start full-fledged debate on such a hike.”
BOJ’S NEW LOAN SCHEME
Taya said the Bank of Japan’s planned new loan programme focusing on growth industries was unlikely to boost the economy and merely reflected the bank’s desire to ward off government pressure to buy more bonds.
BOJ Governor Masaaki Shirakawa last month instructed staff to come up with a scheme to lend more to industries with growth potential.
“It is likely that the scheme will have hardly any impact. Whether the BOJ should be making such a move is doubtful because a central bank is supposed to supply liquidity, but it is not given a mandate to redistribute money,” Taya said.
But since the planned scheme is unlikely to have any adverse effects either, he said, it would at least be better than the BOJ having to buy more government bonds or adopt an inflation target if government pressure builds up.
A group of 130 ruling party lawmakers have said the BOJ should target 2 percent inflation in around 2 years, while its leading member has called for the BOJ to ditch its self-imposed cap to boost long-term government bond purchases from the current ¥21.6 trillion (RM757 billion)per year to reflate the economy.
Taya, who left the BOJ board in 2004 after serving for five years, said the government may lean on the central bank more depending on how the turmoil stemming from Greece’s debt problems develops. — Reuters
