Japan Fears That It Is Next Greece

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Japan could be the next Greece, at least according to its new prime minister who use to be the nation’s finance minister.

“It is difficult to sustain a policy that relies too heavily on issuing debt. As we have seen with the financial confusion in the European community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone,” he said according to the AP.

His vision of the future is flawed.Japan is the second largest nation in the world as measured by GDP. It is also among the world’s five biggest exporters. While its national debt is dangerously large, the odds that it would default on its sovereign obligations are small, particularly because the country is likely to implement “Europe-like” austerity measures. Prime Minister Naoto Kan may simply be using his bully pulpit to push legislation to cut national spending through a Parliament which is unlikely to want to alienate voters.

One of the by-products of the Eurozone debt crisis is that political talk about economic stimulation has given way to rising pressure to cut spending. Even a relatively rich and stable Germany has announce plans for sharp decreases in national spending. Greece may not be a fair example of what the future will bring for Japan and Germany, but it is a convenient one.

The actions by Greece, Portugal, Spain, Germany, and now Japan will have two impacts. The first is that sovereign debt is likely to become more attractive as issues of default begin to disappear, at least beyond the Greek situation. This will bring money into sovereign paper which will reduce borrowing costs. The disaster in Greece may be the best thing to happen to national borrowing costs  since the Asian debt crisis of the late 1990s.

The other result of the move toward austerity is that it will bring pressure on the US Administration and Congress to admit what Ben Bernanke has told them is right. The national deficits and growing national debt are not sustainable and will threaten economic stability by the end of this decade. Even entitlements programs will need to be cut.

The ripples from Greece may be small in the US but they are detectable.

Douglas A. McIntyre

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