Japan is preparing to “lend” money to the International Monetary Fund (IMF) to help bailout the European Union. With want? The full faith and credit of Japan? Japan’s debt to GDP ratio is over 200%. Their economy was in shambles before the tsunami. How is Japan able to fund this debt?
One reason is that Japan owes most of its debt to Japanese families and businesses, who have been willing to plow their savings into government bonds.
When the Japanese people understand that their savings are being used (or more accurately misused) to finance Southern Europe’s fiscal incompetence, the very future of the Japanese government will be in jeopardy. Or are we talking about the United States where the Federal Reserve and the government are using our children’s future instead of our savings to fund the EU bailout?
TOKYO (Dow Jones)–A senior Japanese government official said Thursday that Japan is prepared to support efforts by European countries to stabilize the markets, including by lending to the International Monetary Fund.
“Japan is prepared to support European efforts to stabilize the market, including through lending to the IMF, based on strong efforts by European countries,” and in collaboration with the G-20 and other countries, the official told reporters.
The comments come after euro zone and IMF officials said Wednesday the fund has identified a need for an extra $500 billion to $600 billion in resources to help fight the European debt crisis, with countries such as China and Japan expected to contribute.
Regarding the amount of funding that may be provided, the official said that the $500 billion to $600 billion figure cited by the IMF originated with the Washington-based fund, and said discussions should now begin on what kind of funding increases are needed.
Rebuilding northern Japan from the swath of devastation wrought by last week’s quakes and tsunamis will cost the Japanese government tens of billions of dollars. Japan already has the world’s highest debt to GDP ratio, at 200 percent — more than three times the United States’ burden. Washington is already concerned about the U.S. tip-toeing toward a debt crisis with far less red ink on our shoulders. What makes Japan so different?
One reason is that Japan owes most of its debt to Japanese families and businesses, who have been willing to plow their savings into government bonds. The U.S. borrows about half our debt fromoverseas, which means we pay higher rates decided by the more cutthroat international bond market.
The upshot: So long as Japan borrows from willing domestic investors, it can afford to shoulder the world’s greatest debt burden.
Even if the Yen weathers this storm, Japan can’t expect to hold debt worth twice its GDP forever. High savings were sustainable when the population was younger, wealthy, and growing. Instead, Japan is old, stagnant and saving less every year. That investors have repeatedly failed to short Japanese debt since the early 1990s doesn’t mean that Japanese debt is a good bet tomorrow. The country will eventually find itself in a financial catastrophe when the public stops lending money at floor-scraping 1.5 percent rates. Consider this alarming fact: If its interest rates doubled to 3 percent, interest payments would suddenly consume half of government revenue.