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Many fear that Japanis heading for a public-sector debt crisis.

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Introduction

Many fear that Japan is heading for a public-sector debt crisis. The issue of the Japanese excessive borrowing is vital, as it can lead to a debt crisis. Now in Japan, government debt is in danger of getting out of hand, which puts obstacles in the way of a rapid upsurge in sluggish Japanese economic activity. Yet I suppose that Japan is unlikely to suffer such an acute crisis as it was in Mexico, East Asia and Russia in the late 1990s, because Japanese debt, unlike emerging debtors, is in it own currency. However, the build-up of debt looks unsustainable now. The figures of Japan's government deficit are high enough; the budget deficit increased to about 7% of GDP. ...read more.

Middle

Borrowers throughout the ages have generally liked inflation as they wanted to bring down the real amount of its debt burden. And under current conditions, modest inflation would be a good thing for Japan. Besides, if the government runs a primary budget deficit and interest rates exceed nominal GDP growth, the debt will increase indefinitely relative to GDP. Unfortunately, the economic situation in Japan is very similar to that. All these factors give evidence that a public-sector debt crisis can really take place in Japan. Under current conditions, balancing the budget wouldn't be enough to stop the debt ratio from growing, the government needs to aim for a considerable primary budget surplus, but it is a dangerous thing when the economy is fragile and that's why the government shouldn't reduce its budget deficit. ...read more.

Conclusion

And if the Japanese government makes right changes in its policy, the country has a chance to escape a public-sector debt crisis. But even if there is a small chance for the Japanese economy to rebound, we see, that there are plenty of features which give evidence that a situation in the country gets worse. The path of Japan's debt looks unsustainable. The outlook is not encouraging at all. Many rating agencies predict that by 2007 Japan's gross public debt will increase to 200% of GDP. I guess that the Japanese government should implement some rather dramatic economic and financial reforms as soon as possible in order to get out of the recession. If it is slow, not only a public-sector debt crisis can occur, but also the whole economy can collapse. ...read more.

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