Tuesday, December 28, 2010

Economics: Japan: Too Big to Bail

... even at today's low interest rates, Japan's interest on its debt is eating up a scary proportion of its tax revenue—more than 25 percent (not including the funds that come from issuing yet more debt), according to government figures. In addition, much of Japan's debt is relatively short-term in nature, meaning that the government last year had to "roll" at least 140 trillion yen [1.7 trillion dollars] in debt (i.e., replace retiring debt with new debt) even as it issued some 50 trillion [600 billion] in fresh debt to fund the growing gap between what the government spent and what it took in.
If Japan's interest rate merely doubled, from 1.5 percent to 3 percent, then interest expense would be more than half of the government's tax revenues. [Emphasis added].
While any deterioration in Japan's finances should, mathematically speaking, happen gradually—savers don't yank their money out of the system all at once—modern markets have a way of accelerating underlying problems into crises with remarkable speed. If there's a lesson we should all have learned, it's that once fear takes hold, anything can happen. And if Japan is a problem, it's a problem for all of us. After all, Japan is still the world's third-largest economy. Unlike Greece and Ireland, it is simply too big to bail out, even if the world were willing to do so. China and Japan are the largest foreign holders of U.S. debt. One obvious question is, what happens here if Japan starts selling?

For more, see Too Big to Bail by Bethany Mcleanposted, December 21, 2010 at Slate.

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