Why Japan's Debt Problems are overstated

There has been much hand wringing outside Japan about Japan's JGB debt. Standard & Poor’s, recently warned that it might lower Japan’s credit rating.

But the FT thinks that talk of a massive JGB bubble – let alone default – is farfetched. The government has spent to keep its economy going. That, combined with falling tax revenues, has pushed the country’s gross debt towards 200 per cent of gross domestic product. With an ageing population, this alarming figure could get worse. However, the 10-year JGB yield, is at about 1.3 per cent, looks low.

First, Japan’s debt, after netting off the state’s own holdings, is less than 100 per cent of GDP.

Second, the cost of servicing its debt is low, at roughly 1.3 per cent of GDP. That compares with 1.8 per cent in the US, 2.3 per cent in the UK and 5.3 per cent in Italy.

Third, Japan has fiscal wiggle room: sales tax is just 5 per cent.

Fourth, 95 per cent of Japan’s debt is domestically owned. Japan’s problem is still an excess of savings. Banks are awash with deposits that they need to place somewhere.

But the FT is more critical about BoJ's efforts to fight deflation suggesting it should increase its purchase of JGBs, monetising part of the debt.

http://www.ft.com/cms/s/0/cb125274-14e3-11df-8f1d-00144feab49a.html?nclick_check=1