The 31st Bank of Japan Governor Haruhiko Kuroda has issued a warning this week that the debts of Japan are “unsustainable” or must not be supported. Kuroda assumed office late in March 2013, after being the Asian Development Bank President since 2005. He advocates a looser monetary policy in his native country.
New stimulus package
His pronouncement on Thursday came after the new government under Prime Minister Shinzō Abe had called for more vigorous incentives to pour new life into the sluggish economy of Japan. The government has just approved in January a stimulus package worth 10.3 trillion yen, which is equivalent to £72 billion or US$116 billion. The package is termed as “print and spend strategy” by Morgan Stanley MUFG Securities.
Fears
While the stimulus package will bring in fresh money into the economy, many fear that this move will inflate the country’s public debt, which is considered among the industrialized countries in the world, as the highest. Currently it is close to 230% of the country’s GDP.
The bank governor calls the gross debt to GDP ratio in Japan as abnormal and extremely high and the IMF estimates the ratio to go beyond 245% in 2013. He fears that Japan may lose the confidence in the finances of the state, which will impact gravely on the country’s economy. It is already experiencing deflation because its long-term bonds fall in their yields as Japanese banks are flushed with cash.
Challenges
Mr. Kuroda believes that it is very important that the confidence in the bond and financial markets are maintained. It is a good thing that a large part of the Japanese debt is domestic, so the international criticism suffered by cash-strapped countries in the European Union is avoided. He has pledged that all efforts will be done to rid his county of its continued deflation and aims to reverse the falling prices that the country had been enduring for several years. This alone has caused corporate investment and private spending to be curtailed.
Mr. Kuroda will conduct his first policy meeting as the president of the Bank of Japan next week, where he will unveil the measures that will ease the monetary constraints of the country. He predicts that the economy of Japan will recover by midyear although the situation in the third largest economy in the world still holds a degree of uncertainty, affected mainly by the touchy relations with China, the shaky status of the economic recovery of the United States and the European crisis.
He also pledged to work with Prime Minister Abe’s government to achieve the targeted 2% inflation rate possibly by two years’ time.
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