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Sunday, January 15, 2012 12:18 PM

Japan's Prime Minister Seeks Doubling National Sales Tax; S&P Downgrade of Japan Likely; No Winning Play for Japan

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In an effort to halt expansion of Japan's massive public debt, Japan's Prime Minister Seeks Doubling National Sales Tax.

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

‘Worse and Worse’

Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”
No Winning Play for Japan

If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.

Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.

On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.

Massive Debt Rollover Problem

Country2012 Bond, Bill Redemptions ($)Coupon Payments
Japan3000 billion117 billion
U.S.2783 billion212 billion
Italy428 billion72 billion
France367 billion54 billion
Germany285 billion45 billion
Canada221 billion14 billion
Brazil169 billion31 billion
U.K.165 billion67 billion
China121 billion41 billion
India57 billion39 billion
Russia13 billion9 billion

For a discussion of the global debt rollover problem, please see World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe

There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.

Mike "Mish" Shedlock
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