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Debt crisis: In Japan, Greece is the word

New worries grip the world's second largest economy. Here's what you need to know.

A stock index board is reflected in a rain drop on a car window in Tokyo, May 20, 2010. Japan's Nikkei average hit a three-month closing low on Thursday, after dropping below 10,000 at one point, as weakness in the euro pushed shares of exporters lower. (Kim Kyung-Hoon/Reuters)

TOKYO, Japan — The ongoing crisis in Greece has focused global attention on sovereign debt, with many eyes inevitably drawn to Japan, the public finances of which — at least on paper — make those of Athens look almost healthy.

Sovereign debt now amounts to about 200 percent of Japan's GDP, while the figure for Greece is 115 percent. A report released by Switzerland's IMD business school on Wednesday estimates it will take Japan until 2084 to bring its debt down to a manageable 60 percent of GDP level; Greece will need until 2031, and the U.S. until 2033.

Meanwhile, the International Monetary Fund (IMF) has once again urged Japan to take steps to tackle its sovereign debt problem, this time from fiscal 2011. All this of course assumes the country is willing and able to take meaningful action in that direction.

As of now, the signs aren’t hopeful.

Figures released this month by the Ministry of Finance show that total outstanding debt in the fiscal year to March was 883 trillion yen ($9.55 trillion). This amounts to $75,000 per person. In comparison, the level in Greece is less than half that at $32,500 per capita.

Last year, about a quarter of Japan's entire government budget was spent on just servicing existing debt. This year’s budget is the first where more than half of the money has been raised by issuing new debt — in the form of government bonds — to make up the shortfall in tax revenue.

Although there are differences from the Greek situation, the question of this becoming a crisis for Japan is one of when rather than if, according to a growing number of economists, investors and observers.

Professor Yukio Noguchi of Tokyo’s elite Waseda University is renowned as an expert on Japan's bubble economy, and one of the few Japanese economists to have predicted its bursting.

His current reading of the situation is equally bleak. He now believes that the current debt situation can only end with the Japanese economy spiraling into hyperinflation.

“Inflation is the only answer, the only question is when,” Noguchi said.

With Japan stuck in a long deflationary cycle, the danger of hyperinflation is a difficult one for the public and politicians alike to imagine.

Although Noguchi doesn’t believe it will happen anytime soon, when inflation does hit, “the situation will change very quickly.”

“Another sovereign debt crisis, in say, the U.K., the U.S. or an Asian country could be the trigger,” said Martin Schulz, senior economist at the Fujitsu Research Institute in Tokyo.

http://www.globalpost.com/dispatch/japan/100520/japan-economy-debt-greece