Japan’s Debt Problem

Before Bloomberg started charging for content, I listened to their podcasts everyday.

One guest that I enjoyed was Carl Weinberg.  Not because I found much of what he said terribly useful, but rather that it was always interesting to see how much further he could go in his adamant loathing of Japan’s debt issues. He was always ranting that ratings agencies should lower the status of Japanese bonds to slightly better than “junk”.

Mr. Weinberg was mentioned in a recent article I read about Japan’s debt issues, and he was at it again, saying “the debt situation is irrecoverable.”

Please, Mr. Weinberg.  If there is a debt situation that is irrecoverable, it is surely that of the U.S. who have absolutely no way to pay back the monstrous amounts of money they have borrowed from the world.

To be sure, Japan has a lot of debt outstanding. But what I think analysts like Carl Weinberg forget, is that Japan mostly owes money to… the Japanese. More than I thought, actually, as the above-mentioned article states 95% of Japanese debt is domestic.

With that fact, the situation doesn’t seem as dire as it does on paper. First, the interest on Japanese bonds are ridiculously low, and as soon as it is paid to a Japanese resident, it is automatically taxed at 20%, meaning the government will get back almost 20% of the interest it pays in the form of taxes. The money is still in the economy, as well. So people and pension funds will either roll over the cash into a new bond, or will spend it in the economy.

Of course, the Japanese will still have an issue to deal with on the payment of principal, but that is where the easy difficult question lies. Easy because it is so simple, but difficult because of red-tape and political backlash.

Yes, taxes. Raising taxes will almost certainly alleviate this situation, and considering Japan’s foolishly low tax rates, will not terribly burden the consumer.

Last year I paid a dazzling 6.89% of my income to the government in the form of income tax.  Add my National health insurance premiums (no OHIP here) and it still came to a breath-taking 10.83% of my 2009 salary.

Ok, maybe not the best pill to swallow, but rasing taxes in this under-taxed country is the simple solution to it all.


One response to “Japan’s Debt Problem

  1. Pingback: Welcome, Mr. Kan « In Search of Salt

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