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The Global Debt Crisis:
Will Japan Be Next?
Presentation by
Takeo Hoshi (UCSD, NBER, and TCER)
For 13th Annual Mitsui Symposium
At The Center on Japanese Economy and Business,
Columbia Business School
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Based on my paper with Takatoshi Ito
Hoshi and Ito (2012). “Defying Gravity: How
Long Will Japanese Government Bond Prices
Remain High?”
Defying gravity
in Tokyo
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Outline of the paper
1. Recent empirical studies (Japanese situation is
not sustainable)
2. Why no crisis yet?
3. Potential triggers of the crisis
4. Importance of how to finance the reconstruction
expenditure (after the earthquake/tsunami)
5. How the crisis will look like?
6. What can we do to manage the cost of the crisis
7. International spillovers and roles of IMF
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Size of Japanese Debt Compared to Other countries:
Central Government Debt at the end of 2010 (US$ Billion)
Greece
Ireland
Portugal
Spain
France
Germany
UK
Italy
USA
Japan (2009)
April 4, 2012
455
125
203
734
1,755
1,483
2,068
2,256
9,035
9,465
Global Debt Crisis: Will Japan Be Next?
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Conclusion—in advance
• Conditions that have supported the high debt /GDP ratio
1.
2.
3.
Large domestic savings with home bias of Japanese investors
Stagnating economy the depresses the interest rates
Expectations of future fiscal consolidation
• Any substantial change in these can lead to a debt crisis
• How to finance the reconstruction after the
earthquake/tsunami disaster can be critical
• When the crisis happens, the financial institutions sustain
losses. There may be negative spillovers for trading partners
• To avoid the crisis, a credible commitment to fiscal
consolidation is necessary. The current tax reform is
necessary but not sufficient
• IMF could help by issuing a strong early warning.
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Facts
• Gross Debt/GDP ratio, about 200%, the worst
among the OECD
• Net Debt/GDP ratio, about 120%, the worst
among the OECD
• Fiscal deficit is about 7% of GDP in the last three
years
• New bond issues exceeds the tax revenues in the
last two years
• Yet, the JGB yield is low (price is high)
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Fig 1. Gross Debt-GDP ratio
CAN: Canada
DEU: Germany
200
FRA: France
Gross Government Debt-GDP
ratio
Japan
GBR: United
Kingdom
ITA: Italy
JPN: Japan
150
Italy
USA: United States
Canada
100
France
50
Germany
United Kingdom
0
USA
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Fig. 2. Net Debt-GDP ratio
CAN: Canada
130
DEU:
Germany
FRA: France
110
GBR: United
Kingdom
ITA: Italy
Net Government Debt-GDP
Japan
Italy
JPN: Japan
90
Canada
70
USA
50
Germany
30
France
10
-10
United Kingdom
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Figure 3. JGB stock and yield
JGBdebt
JGBrate
700
8
600
7
6
500
5
400
4
300
3
200
2
1
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
100
April 4, 2012
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Why is the JGB yield so low?
1. High private saving and the home bias of Japanese
investors
2. Low opportunity cost of holding JGBs
Low policy (short-term) interest rate
Economic stagnation and deflation
Zero risk weight on JGB in capital ratio calculation (Basle I II and
III)
–
–
–
3. Expectation of drastic fiscal reform in the future
– Trust in the (future) government actions
– Room to increase the tax rate, especially VAT (currently 5%)
• Anything that changes any of these conditions can cause a
crisis
April 4, 2012
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Three Potential Triggers
1. Saving trigger
–
–
When the debt exceeds the total private sector financial
assets, the Japanese government cannot rely on domestic
investors anymore
Foreigners would demand higher risk premia for exchange
rate risk and credit risk
2. Fundamental trigger
–
Anything that increases the risk adjusted returns on
alternatives is a bad news for JGB
3. Expectation trigger
–
When people lose the trust that the government will
drastically change the fiscal policy
April 4, 2012
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1. Saving Trigger
• Situation that domestic investors hold almost
all of the Japanese government debt will not
continue
• Because the private saving rate has started to
decline and will continue to decline
(consequence of rapid aging)
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Table 2. JGB holders
2005 March
tril. Yen
2006 March
(%) tril. Yen
(%)
2007 March
tril.
(%)
Yen
2008 March
tril.
(%)
Yen
2009 March
tril.
(%)
Yen
2010 March
tril.
(%)
Yen
0.5%
2.5 0.4%
2.5 0.4%
1.9 0.3%
General
Government
Public Pension
2 0.3%
7.4 1.1%
57.6 9.0%
61.5 9.2%
68.3 10.1%
78.1 11.2%
80.1 11.8%
76.3 11.2%
FILP
48.8 7.6%
39.4 5.9%
23.9
10.9 1.6%
1.2 0.2%
0.8 0.1%
109.7 17.1%
126.2 18.9%
Postal Insurance
55.1 8.6%
57 8.5%
Bank of Japan
92.1 14.3%
86.7 13.0%
71 10.6%
63.7 9.2%
55.9 8.2%
51.2 7.5%
218.6 34.1%
218.5 32.7%
216.1 32.1%
439.7 63.3%
441.6 64.9%
464.5 68.1%
111.6 17.4%
114.5 17.2%
101.6 15.1%
246.4 35.5%
246.2 36.2%
258.7 37.9%
insurance
private pension
funds
others
54.8 8.5%
58.4 8.7%
61.8
9.2%
129.2 18.6%
135.1 19.8%
139.9 20.5%
21.3 3.3%
24 3.6%
26.2
3.9%
26.8 3.9%
25.6 3.8%
28 4.1%
31 4.8%
21.6 3.2%
26.5
3.9%
37.3 5.4%
34.7 5.1%
37.9 5.6%
Overseas
26.4 4.1%
30.2 4.5%
40.2
6.0%
47.4 6.8%
43.9 6.5%
31.6 4.6%
Household
21.8 3.4%
28 4.2%
33.4
5.0%
36.3 5.2%
36 5.3%
34.4 5.0%
12.4 1.9%
15.2 2.3%
16.5 2.4%
100.0
100.0
667.3
672.7 100.0%
695
%Crisis: Will Japan Be Next?
%
Global Debt
19.6 2.9%
100.0
680.9
%
21.4 3.1%
100.0
682.1
13 %
Postal Saving
Private Financial
Institutions
banks
Others
Total
April 4, 2012
9.6 1.5%
100.0
641.8
%
3.6
3.6%
140 20.8% －
61
9.1% －
－
－
－
－
－
－
－
－
－
－
2010
1950
Baby boomers’ income
is at the peak
Male
April 4, 2012
Female
Male
Global Debt Crisis: Will Japan Be Next?
Female
14
Figure 4. Aggregate Saving to GDP
Ratio: 2010-2050
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
2050
2048
2046
2044
2042
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
-3.00%
15
When does the fiscal crisis happen?
• When all private savings (less stock holdings)
are saturated by JGBs, there are no more
Japanese investors who can hold additional
JGBs.
• This is the absolute end, like hitting a wall
• A crisis is likely to occur way before this point
April 4, 2012
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Three Alternative Assumptions on the
Future Interest Rates
R1: Interest rate stays at the level of 2010 (1.3%) as long
as the growth rate does not exceed that level. When the
growth rate exceeds 1.3%, the interest rate is equal to the
growth rate.
R2: Interest rate starts at 1.3%. For every 1% increase in
the debt to GDP ratio over its level in 2010, the interest
rate increases by 2 basis points (0.02%).
R3: Interest rate starts at 1.3%. For every 1% increase in
the debt to GDP ratio over its level in 2010, the interest
rate increases by 3.5 basis points (0.035%).
April 4, 2012
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Table 7. Per-worker labor productivity
increase of 2.09%
⊿rGDP = ⊿POP + ⊿(wPOP /POP) + ⊿(rGDP /wPOP)
2011-20
0.98%
-0.31%
-0.77%
2.09%
2021-30
1.30%
-0.62%
-0.15%
2.09%
2031-40
0.55%
-0.83%
-0.68%
2.09%
2041-50
0.57%
-0.99%
-0.50%
2.09%
Notes: Authors’ calculation. Each row does not exactly add up as the equation
suggests, due to approximation in ten-year average growth rates . ⊿POP and
⊿(wPOP/POP) are calculated from forecasts of IPSS, then ⊿(rGDP/wPOP) is assumed
to be 2.09%, which was the average of 2001-2007. ⊿rGDP was derived from the
identity;
Data Source: GDP from Cabinet Office, Japan for GDP ; and population from
National Institute of Population and Social Security Research (IPSS)File: DemographyJapan.xlsx
April 4, 2012
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Figure 7. Government Debt and Private Sector Financial
Assets: 2010-2050 (2.09% GDP per worker growth)
850%
750%
650%
Debt/GDP
550%
Debt2
Debt3
450%
MaxDebt1
350%
MaxDebt2
250%
MaxDebt3
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
150%
April 4, 2012
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2. Fundamental Trigger
• Hard to predict when the rate of return on
investments other than JGB improves
• Instead, we consider how vulnerable the fiscal
condition is to sudden increase in the interest
rate
• We calculate the (minimum) interest rate
increase that would make the interest payment
on the government debt exceed 35% of the tax
revenue (considered to be a rough threshold for a
crisis)
April 4, 2012
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Figure 12. Increase in the Interest Rate that would
Trigger a Crisis
6.00%
5.00%
4.00%
3.00%
deltai1
2.00%
deltai3
deltai2
1.00%
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
0.00%
April 4, 2012
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3. Expectation Trigger
• We show the existence of an expected path of
future tax rates that eventually stabilize the
debt to GDP ratio
• If the market currently has such expectation,
the absence of crisis for JGB is understandable
• If the expectation changes (and this often
happens suddenly and unexpectedly), this will
result in a crisis
April 4, 2012
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Figure 13. Sustainable Tax Policy under Each Interest
Rate Assumption
50%
49%
48%
47%
46%
45%
44%
43%
42%
41%
40%
39%
38%
37%
36%
35%
34%
33%
32%
31%
30%
sustainable
tax rate
under R1
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
sustainable
tax rate
under R2
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
sustainable
tax rate
under R3
23
Figure 14. Debt/GDP Ratio with Sustainable Tax Policy
280%
260%
240%
220%
Debt/GDP (R1)
Debt/GDP (R2)
200%
Debt/GDP (R3)
180%
160%
140%
2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Figure 15. Debt to MaxDebt Ratio with Sustainable Tax
Policy
100%
90%
80%
70%
R1
60%
R2
50%
R3
40%
30%
April 4, 2012
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One thing that would not be a trigger
• Downgrading by credit rating agencies
• They have been happening already
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Fig 13. Japan's Sovereign Ratings
Moody's
Aaa / AAA
S&P
Fitch
Aa1 / AA+
Aa2/ AA
Aa3 / AAA1 / A+
A2 / A
A3 / A-
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Figure 14. Event Analysis, downgrade
on JGB rate
panel 2 JGB interest
rate(Moodys. downgrade
and negative watch)
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
t+150
t+75
t+25
t+5
-0.2
t+1
-0.15
t-1
-0.1
t-150
-0.05
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
t-5
0
t-25
0.05
panel 3. JGB interest
rate(Moodys,
including upgrades)
t-75
panel 1 JGB interest
rate(SP, downgrades)
28
Earthquake/Tsunami of March 2011
• Total property cost is estimated to be 3% to 5% of GDP
• The government issued Reconstruction Bonds of 11.6 trillion
yen (2.4% of GDP) in fiscal 2011 and plans to issue 12.7 trillion
yen (2.6% of GDP) in fiscal 2012
– These additional bond issues have only small impact
• We consider potential delay of tax increase (from 2012 to
2017)
– The additional delay can have substantial impact
• Cost of nuclear decommissioning is estimated to be substantial.
We add 1% of GDP to government expenditure for fiscal 2012,
2013, 2014, 2015
– Combined with delay, this would be fatal
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Figure 18. Debt to MaxDebt ratio with
reconstruction expenditures
100%
90%
With Delayed
Tax Increase
80%
70%
With
Reconstruction
Expenses
Sustainable
60%
50%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
40%
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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Figure 19. Debt to MaxDebt ratio with
reconstruction and nuclear cleanup expenses
100%
With Delayed
Tax Increase
90%
80%
With
Reconstruction
and Nuclear
Cleanup
Expenses
Sustainable
70%
60%
50%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
40%
April 4, 2012
Global Debt Crisis: Will Japan Be Next?
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