Japan PM Naoto Kan warns of ‘collapse’ under debt pile

BBC News | Friday, 11 June 2010 | 09:42 GMT

Japan is at "risk of collapse" under its huge debt mountain, the country’s new prime minister has said. Naoto Kan, in his first major speech since taking over, said Japan needed a financial restructuring to avert a Greece-style crisis. "Our country’s outstanding public debt is huge… our public finances have become the worst of any developed country," he said. After years of borrowing, Japan’s debt is twice its gross domestic product. "It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds," said Mr Kan, Japan’s former finance minister. "Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets," he said.

Tax reform

Mr Kan did not detail the fiscal changes he may impose to revive Japan’s economy after years to stagnation. But in the past he has advocated increasing Japan’s sales tax, a move that would be unpopular. He said: "It is unavoidable to launch a full reform of the tax system. If we maintain the current level of issuance of new bonds, outstanding debt will surpass 200% of GDP in a few years. "It’s been 20 years since the collapse of the bubble economy in the early 1990s. Because the Japanese economy had been in the doldrums, people have lost the trust they had and fear the uncertainty of the future," he said.

Roland Buerk, BBC News, Tokyo

Pessimists have long warned that rising debt and a falling population mean Japan is headed for a point of no return. For 20 years the government has been borrowing to spend, hoping to revive the stagnant economy, 

amassing the biggest debt-to-GDP ratio in the industrialised world. The Japanese themselves have been buying those bonds at low interest rates. But as Japan ages, the thinking goes, households will save less. The Government will have to look abroad to borrow, and the higher interest rates demanded could tip the world’s second biggest economy into the abyss.

Now the new Prime Minister Naoto Kan has stepped into the debate in his first policy speech to the Diet, warning Japan could face similar debt problems to Europe. But not everyone is convinced Japan, with its huge trade surplus, is doomed. And Mr Kan may simply be easing the way towards raising consumption tax and reneging on spending pledges made during last year’s election.


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