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The Merkel Model Spreads to Japan

The European public debt crisis, artificially created by the puritan obtuseness of German Chancellor Angela Merkel, has spread to even Japan.  In fact, Naoto Kan, the new prime minister, mentioned Greece in a speech in which he claimed to fear the collapse of the Japanese economy under a heavy public debt equal to 230 percent of the GDP.  The debt burden is much lighter than common prejudices would have us believe, equating public debt with private debt.

To be sure, if governments and institutions made legislative and regulatory changes to treat public debt as if it were private debt, concerns about the solvency of the state would be justified, though even in that case it should not necessarily be decisive.

However, Japan is far from such a situation for two reasons.  95% of its national public debt is owned by legally and physically Japanese entities, so the country is indebted to itself.  Moreover, the Japanese interest rate has been very low for at least 15 years, thus its debt service is minimal.

The argument about the gravity of public debt advanced by Kan is based on the demographic decline, which supposedly will increase the burden on a smaller future generation of Japan.  The Japanese prime minister’s perspective cannot be accepted, for the new generation will inherit from their parents the financial assets in the form of government securities.  The securities liquidated upon their maturity will bring their ex-holders more access to money, which, in theory, they can spend on purchases, travels, new residences, etc.

But that won’t happen, for the problem of Japan lies in the inefficacy of all the notable policies for demand stimulation that have been introduced over the last 15 years to combat the crisis in which this country finds itself.  The Japanese economy is today geared exclusively to export, which, since Beijing launched the only real anti-crisis policy of recovery in November 2008, has been galloping toward China.

Kan hopes that the Chinese locomotive will remain powerful enough to nullify the domestic deflation induced by cuts in public spending.  A dangerous gamble, because, if the domestic demand remained stagnant for nearly two decades despite exports and large public deficits, the curtailment of the latter to reduce the debt will probably at least re-open the door to the great stagnation that paralyzed Japan in the nineties.


The original article “Se il modello Merkel contagia il Giappone” was published by Il Manifesto on 7 July 2010.  Translation by Yoshie Furuhashi (@yoshiefuruhashi | yoshie.furuhashi [at] gmail.com).  Four days after the publication of this article in Italy, Kan’s Democratic Party suffered defeat, its coalition losing the majority in the upper house.  Now his government’s approval rating has further declined to 38%.




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