Land of Rising Debt: Falling Tax Revenue Forces Japan to Sell More Bonds

Japan's government will have to sell more bonds - and grow the country's record debt - in the face of declining tax receipts.

The central government's tax revenue may fall below $442 billion (40 trillion yen) considerably less than the $439 billion (46 trillion yen) forecast a year ago, Japanese Finance Minister Hirohisa Fujii told The Wall Street Journal.

"This is due to the global recession that began last year, and we will deal with this through the additional issuance of government securities," Fujii said, suggesting in a report published in The New York Times that bond issuance for the current fiscal year could be 50 trillion yen - roughly $550 billion - or higher.

Japan's national debt accounts for 170% of its $5 trillion gross domestic product (GDP), and estimates say the figure will balloon to between 200% and 250% sometime next year.

Since the end of World War II, Japan spent big on infrastructure, particularly dams and roads. The problem, says Money Morning Contributing Editor Martin Hutchinson, is that much of that spending was wasted on remote rural areas, "which happen to be homes politically connected to [Liberal Democratic Party] barons."

Now the LDP, which has been in power for all but 11 months of the last 54 years, has finally yielded control of Japan to the Democratic Party of Japan (DPJ) after a resounding election win in August.

The DPJ is committed to reversing Japan's spending on infrastructure - which at its peak was 6.5% of the country's GDP in 2001, but will it try to tackle the nation's rising debt?

Maybe not.

The new regime won't use the 2.926 trillion yen it saved through restructuring the previous cabinet's extra budget to meet the shortfall in tax revenue, Finance Minister Fujii told The Journal.

Instead, Prime Minister Yukio Hatoyama has promised to redirect about 3% of GDP from infrastructure spending to payments to individuals. He will pay each family with children $3,000 per child per year. This should help Japan's demographic problem - its population is declining and is heavily weighted towards retirees. It will also boost consumer spending, especially among middle-income families.

"It's dangerous for the Democrats to push on with all of their policies when tax revenues are so low," Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan told The Times. "From a global perspective, Japan's debt ratio is way off the charts."

Despite this, Japan's $1 trillion of international currency reserves is reason to keep fears about a default in check, says Oriental Economist Alert's Richard Katz.

"The bears love to beat the Armageddon drum as far as Japan is concerned, but I just don't see any precipitating event to cause a crisis, such as a trade-induced international-payment crisis," Katz told Barron's.  "One shouldn't forget that Japan currently has $1 trillion in international currency reserves that mostly have come from positive trade balances to fall back on."

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