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Sunday 13th of June 2010
June 11, 2010    

Japan at ‘risk of collapse’ under mountain of debt

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by Kay Murchie

The Japanese economy, which is the world’s second largest, faces many risks, one of them is deflation and the other is the country’s debt - which at nearly 230% of GDP is the highest of any industrialised nation.

The debt is the result of decades of stimulus spending and low tax receipts.

Japan’s new Prime Minister, Naoto Kan, has today warned of tough measures in order to reduce the debt mountain - or risk facing “collapse”.

In his first major speech since becoming PM, he said: “Our country’s outstanding public debt is huge… our public finances have become the worst of any developed country.”

He added: “It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds.

“Like the confusion in the euro zone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets,” he continued.

Last month, the International Monetary Fund (IMF) warned Japan to start cutting its massive debt burden from next year and suggested increasing consumption tax to deal with its debt.

Meanwhile in related news, official data yesterday revealed Japan’s annualised economic growth expanded in the first quarter at an annualised rate of 5%, higher than the initial estimate of 4.9%.

On a quarterly basis, however, the reading remained unchanged at 1.2%, according to the Cabinet Office.

Japan was one of the first major economies to emerge from recession in the second quarter of 2009 – boosted by the country’s dependence on exports.

However, not only is the economy grappling with debt, it continues to battle with deflation.

Japan’s core consumer price index, which excludes volatile fresh food prices, fell 1.5% in April from a year ago – representing the 14th straight month of decline and larger than a 1.2% fall in March.

Deflation (where prices fall rather than increase) can be a serious threat to an economy because it deters consumers and businesses from spending in expectation of falling prices.

Japan has battled with deflation in the past and was a problem for the economy during its so-called “Lost Decade” in the 1990s in which the economy struggled with falling prices.

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