Will Japan Collapse?

Many, both in the East and in the West, have raised a concern over Japan’s government debt problem. As I pointed out before, Japan’s debt to GDP ratio is about 200%.

In the meantime, foreign Firms started to pull out of Japan due to the continuous decline in domestic demand. Some are closing their manufacturing operation and shops. For instance, Michelin plans to shut down its plant; instead it will be building a factory in India.

According to the Bank of Japan, FDI in the country dropped by 55.7% last year compared to 2008. Moreover, the number of foreign companies listed on the Tokyo Stock Exchange has dropped from 127 to 15 over the past 20 years.

Japan seemed as the force of the future back in the 1980s. What has happened since then?

In order to comprehend the root causes of Japan’s sovereign debt problem, one has to look into the dynamics of many variables: its deflation and national stagnation for the last 20 years, its political system and economic structure, policy choices, and the bubble it has experienced.

The irony is that the U.S. seems to be following Japan’s path in terms of growing sovereign debt and policy undertaking to contain it.

The following article from Japan Times discusses Japan’s sovereign debt crisis.

From Japan Times:

Now the doomsday prophet is making another terrifying prediction: Japan is likely to be devastated by a snowballing public debt that will bankrupt its government and trigger catastrophic hyperinflation.

Compared with Greece, Japan's gross government debt is far worse, at 181 percent of gross domestic product — the highest among the developed countries. Greece's debt-to-GDP ratio is 115 percent.Japan's present debt-to-GDP ratio is only comparable with what it was at the end of World War II. At that time, the only way the government could reduce the debt was through hyperinflation, which wiped out much of the people's wealth with skyrocketing prices.

The professor argued that a more drastic increase in tax revenues will be needed to save Japan from going insolvent, a crisis he says would wipe out much of the value of JGBs and trigger a domestic financial panic."The possibility is high that panic like a run on banks would break out. People would try to withdraw their money, but banks would go insolvent because they wouldn't have enough assets anymore," Sakuragawa said.

http://search.japantimes.co.jp/cgi-bin/nn20100319f1.html