By Choi Sung-jin
Japan is the world’s most heavily indebted country, owing 116.7 trillion yen (1.210 quadrillion won), more than 20 times more than Korea’s 595 trillion won.
This is an enormous external liability, even considering that Japan’s economy is about three times as large as Korea’s. Japan’s debt ratio against its gross domestic product (GDP) stood at 246 percent last year, higher than 177 percent in Greece, which came close to bankruptcy not long ago.
Japan had been a model of fiscal policy until the early 1990s but was hit by a double blow -- the burst of the asset bubbles and a decrease in the working population. The decline in the economically active population has led to a fall in taxpayers, but the Japanese government stuck to tax cuts for more than two decades despite snowballing welfare spending.
In 1991, Japan’s debt-to-GDP ratio was 64.8 percent with huge trade surplus and high growth rate firmly bolstering its fiscal health. The country’s state debt began to snowball as Tokyo injected massive liquidity to cope with an economic slump after bubbles in the stock and property market burst. The debt ratio exceeded 100 percent in 1997, and 200 percent in 2011.
Until the mid-2000s, Tokyo had remained complacent because its net debt situation was not so bad due to its tremendous overseas assets. Since 2008, however, even its net national debt has exceeded those of Greece and Italy.
Tokyo’s mistake was to ignore the population problem. It made light of the fact that the falling birthrate and an aging population was shaking the very foundation of fiscal common sense.
In the 1990s, Japan sharply cut income and corporate tax rates while drastically increasing government spending to create jobs, expecting these moves would bolster the economy, create jobs and increase tax revenue. But Tokyo overlooked the fact that Japan’s economically active population had been decreasing since the mid-1990s.
Japan’s welfare spending focused on elderly people, as the number of people aged 65 or older more than doubled, from 14.89 million in 1990 to 30.83 million in 2010. That reduced the budget for childcare, resulting in a low birthrate. “Tokyo thought high employment would lead to sufficient childbirth, focusing its spending on job creation and elderly people’s welfare,” said Professor Ahn Ju-young of Tokoha University in Japan.
Japan has not had a fiscal surplus since 1993. As budget demand increased, Tokyo filled the void by floating government bonds, and its bond issuance has even surpassed tax revenue since 2009. So far bond interest rates have remained stable because the Japanese people hold most of them.
There are signs of danger, however. Foreign investment in Japanese state bonds, which accounted for 4.5 percent of the total in 2005, increased to 8.4 percent in 2015. “Unlike their parents, Japan’s younger generations are unlikely to be able to accumulate much wealth, and foreign investors will buy an increasing share of Japanese bonds,” said a Ministry of Strategy and Finance official. “That means there could be a crisis at any time.”
Still, Tokyo cannot help but expand government spending. “The Japanese government cannot help but keep spending more because belt-tightening at this stage would dampen economic recovery,” said Professor Lee Kang-guk of Ritsumeikan University.
Korea is going the way that Japan did 20 years ago.
Government officials vow to curb budgetary increases every year but end up spending more. Korea’s debt-to-GDP ratio is expected to exceed 40 percent this year. National debt, which stood at 425 trillion won in 2012, jumped 32 percent to 561 trillion won last November.
“National debt can increase temporarily in the course of economic stimulus, but a revived economy would increase revenue and reduce debt,” a government budgeter said. That is exactly what Japanese officials have said over the past 20 years. Unlike Japan, Korea has never announced a long-term fiscal reform plan.
The nation’s economically active population will start to fall next year, and any government spending to expand the economy and tax receipts could have little effect. On the other hand, welfare spending will increase rapidly. Government spending for health, welfare and labor has taken about 120 trillion won ($100 billion), or 32 percent of this year’s budget.