MercoPress. South Atlantic News Agency

Japan’s public debt and fiscal deficit “unsustainable” warns IMF

Naoyuki Shinohara, IMF Deputy Executive Director

The weight of Japan's public debt, the highest in the world, is unsustainable in the medium and long term warned this week Naoyuki Shinohara, Deputy Executive Director of the International Monetary Fund.

“I don't think that Japan's public debt and fiscal deficit are tenable in the medium and long term - said Shinohara addressing a seminar in Tokyo - if Japan leaves the fiscal situation unchanged, this could be a source of problems in the future. It is important to find a national consensus as quickly as possible in order to give life to a new concrete agreement on how to achieve a fiscal restructuring.

The comments by Shinohara come weeks after Standard & Poor's lowered the country's credit rating and accused the government of not having a clear plan to ease the debt mountain.

”It is important to make a national consensus at the earliest possible time and form a concrete agreement on how to achieve fiscal rehabilitation“ he said, however ”we don't think serious problems will occur imminently” said Shinohara citing Japan's huge pool of savings.

Last month Standard & Poor's cut Japan's credit rating one notch to “AA-” from “AA”, saying the government lacked a “coherent strategy” in efforts to ease the highest debt proportional to GDP of any developed nation.

A rapidly ageing population, entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing, with years of pump priming creating a debt load that is well on course to exceed 200% of GDP.

Nearly a third of government spending is being swallowed up by a social security system catering to a rapidly greying society, Standard & Poor's warned, with that ratio set to rise without reforms as Japan continues to age.

Prime Minister Naoto Kan's centre-left government has prioritised social security reform and an overhaul of the tax system, but the opposition has so far refused to begin talks over the issue.

The government has been able to fund its growing fiscal gap by raising money in the domestic market and its ability to do so is seen as sustainable for now, with banks and pension schemes holding around 95% of the debt.

But analysts warn pressures will increase as the population ages and dips into savings to spend in retirement.

Shinohara also warned that Japanese banks may need to further increase capital buffers against risks such as a possible economic slowdown from European debt problems and bursting of a Chinese property boom.