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

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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. Japan’s gross public debt is amounting to about 140% of GDP. And it looks as if Japan’s public debt can keep increasing in future. These figures show that the Japanese government is one of the biggest borrowers in the world.

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There are some reasons why a high level of public debt can be dangerous. Interest rates are currently rather low in Japan. But government borrowing can push up interest rates. First, it could oust more productive private-sector investment. Second, Japan can get involved in the so-called “debt trap” (i.e. a situation when total debt continues to grow even if the government is not overspending), because of the potential build-up of a huge budget deficit. A third concern is that Japan is suffering from deflation. Yet it would be better if there was a modest positive rate of inflation. Borrowers throughout ...

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