Will Japan Default?
Gordon G. Chang, 04.15.10, 01:45 PM EDT
Japan's new leader has promised to reduce reliance on debt financing and release a plan in June. Don't expect austerity, however. There is almost no chance the DPJ will get serious about getting Japan's financial house in order before crucial upper house elections in July. In a sign of Hatoyama's direction, the government has abandoned his predecessor's goal of turning in a government surplus by next year.
The DPJ will have little margin for error. Why? Japan's legendary savers are now much less thrifty, decreasing the demand for Tokyo's debt. The national pension fund has become a net seller of government bonds to pay benefits. Even the Post Bank, partially controlled by Tokyo, does not want to buy more JGBs. Government officials now advertise their bonds in taxis in the Japanese capital.
At least Japan's banks are putting funds into government debt. But this is ultimately a bad sign because these financial institutions do not have much else to do with their funds. Bank lending dropped in March as there was weak demand for corporate loans.
"Japan is rapidly approaching a crossover point in which expectations will suddenly change and existing trends prove unsustainable," says superstar analyst Bill Overholt, who once worked for Nomura. Perhaps that assessment is overly polite. Forget about Dubai and Greece--the Japanese look like they are handing the world the next sovereign debt crisis.
Gordon G. Chang is the author of The Coming Collapse of China. He writes a weekly column for Forbes.