Japan is likely to face a sovereign debt crisis in three to four years as its current account balance is expected to fall into deficit, former Bank of Japan board member Teizo Taya said on Monday.
“Three to four years from now I expect a sovereign debt crisis to hit Japan and long-term interest rates to surge,” Taya said in an interview.
He said the government would probably only start reforming the tattered public finances after such a crisis emerges, driving up government financing costs.
Japan’s public debt is roughly twice the size of its gross domestic product, the highest among industrial countries.
Taya said that until now savings in the corporate sector had helped make up for the deteriorating public fiscal balance and dwindling household savings. But as companies increase spending, “the current account balance is likely to fall into deficit in a few years”.
He argued against a widespread view that Japan is safe from a fiscal crisis because Japanese government bonds (JGBs) are 95 per cent held by domestic investors.
“Foreign investors with a 5 per cent ownership could trigger a crisis if they launch sell-offs,” he said.
There is little room for the government to cut spending, Taya said. “The consumption tax rate needs to be raised by two to four times. The government needs to start full-fledged debate on such a hike.”
Taya said the Bank of Japan’s planned new loan programme focusing on growth industries was unlikely to boost the economy and reflected the bank’s desire to ward off government pressure to buy more bonds.
Bank of Japan Governor Masaaki Shirakawa last month instructed staff to come up with a scheme to lend more to industries with growth potential.
“It is likely that the scheme will have hardly any impact. Whether the Bank of Japan should be making such a move is doubtful because a central bank is supposed to supply liquidity, but it is not given a mandate to redistribute money,” Taya said.
But since the planned scheme is unlikely to have any adverse effects either, he said, it would at least be better than the BOJ having to buy more government bonds or adopt an inflation target if government pressure builds up.
Lawmakers have said the Bank of Japan should target 2 per cent inflation in around 2 years time.