The decision by Standard & Poor’s to cut Japan’s sovereign credit rating by a notch to AA minus has again highlighted the fiscal mess that the Tokyo government has gotten itself into.
Japan’s public debt is expected to hit 204 percent of GDP this year, the world’s highest ratio. The liabilities are forecast to surpass 1,000 trillion yen next year and, according to the International Monetary Fund, could shoot up to 247 percent of GDP in 2014.
The staggering debt burden is a legacy of massive government spending in the 1990s. Following the burst of a huge property bubble, the Tokyo government chose to keep the economy afloat through monetary easing and increased fiscal spending instead of undergoing the painful process of restructuring financial institutions mired in bad debts and insolvent corporations.
To make matters worse, the Democratic Party of Japan, which took power in September 2009, increased budget sharply to introduce new welfare programs it promised to voters. This expanded the budget deficit, forcing the government to issue more bonds to cover it.
The problem is that the fiscal situation is likely to worsen down the road as population aging will accelerate. Because of the rapid graying of the population, Japan’s welfare spending is bound to automatically grow by 1 trillion yen each year. But Japan’s younger generations have started to decrease in number, meaning Japan’s welfare system has become unsustainable.
But the DPJ government has no will to reform it. Prime Minister Naoto Kan vowed on Friday to push ahead with tax reforms to curb public debt growth, but few believe he would be able to bring the debt problem under control. S&P has pointed out that the DPJ government has no “coherent” debt strategy.
Japan’s fiscal mess is something that Korea cannot look on with indifference. Korea’s pace of population aging is even faster than Japan’s. Policymakers need to study Japan’s experience carefully to avoid falling into a similar trouble. These days, Korean politicians are competitively proposing populist welfare plans. To see the inevitable consequences of such reckless schemes, they need look no further than Japan.