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The Greatest Threat to Japan's National Security Is Debt

The Huffington Post The Huffington Post 2/10/2015 Kosuke Takahashi
JAPAN PROTESTS SECURITY BILL © MASASHI KATO via Getty Images JAPAN PROTESTS SECURITY BILL


The Abe administration passed its security bill in September, despite widespread public opposition and large-scale protests that took place around the National Diet building leading up to the vote. Prime Minister Shinzo Abe has tried to gain public support for the bill by arguing that China and North Korea pose pressing security threats.
For Large Countries, Debt Is Like A Trojan Horse

However, the greatest threat to Japan's security at the moment is not China or North Korea, it is the nation's public debt, which has surpassed one quadrillion yen ($10.46 trillion). For Japan, this enormous debt is much like a Trojan horse. If, due to concerns over the depreciating state of public finances -- caused by social security and military expenditures -- the bond market were to crash, it could truly threaten the livelihoods of Japanese citizens. And, just like in Greece -- which has suffered financial failures of its own -- Japanese citizens will have to face painful service cuts, in addition to pension cuts and tax increases.
In addition, even if the bond market doesn't end up crashing, the government will still face funding problems going forward, despite any policies it may try to implement. The financial situation is dire, and whatever you do, the money will run out.
The background: Due to Japan's aging population and falling household incomes, the personal savings (including households and businesses) that support the national debt could fall into a long-term downward spiral. So far, personal savings had been consolidated in national banks in the forms of bank accounts, pensions, and insurance, and had contributed plenty of funds for the issuing of government bonds. However, it's clear that this will gradually become more difficult.
What will happen if the Japanese government can no longer issue enough bonds to meet demand? It seems likely that foreign holdings of bonds will suddenly spike, and because of interest rates in the market, there will start to be a strong foreign influence from hedge funds, for example. If interest rates increase, that will affect the balance sheets of institutions with large bond holdings, including banks and life insurers. If government bonds drop, major financial institutions might have no choice but to release their bonds.
The Worst Budget Deficit in the World
According to the Organization for Economic Cooperation and Development (OECD), Japan's financial liabilities as a percentage of GDP is now 232.5 percent; the worst in the world. Aside from surpassing Greece (188 percent) by a large margin, the size of its debt is also far greater than nations that have recently experienced financial crises, such as Italy (147 percent) and Portugal (142 percent), as well as France (116 percent) and America (106 percent).
The world's largest creditor, Japan has oftentimes emphasized safety and peace of mind (as well as international approval) and downplayed the risk of the bond market crashing. However, even the large quantity of American bonds held ($1197.5 billion) will not be easily sold to pay off Japan's debt. In 1997, Prime Minister Ryutaro Hashimoto hinted at the sale of United States Treasury bonds. (He was later forced to resign.)
In macroeconomics, a fall in personal savings and an increase in budget deficit means a reduction in current account surplus.
Fiscal Balance + Personal Savings (Businesses and Households) = Current Account Balance

If the trade balance falls into the red again -- like it did after the March 2011 earthquake hit Eastern Japan -- there will be insufficient demand within the country, replaced by a great deal of foreign influence.
In 2010, after the collapse of Lehman Brothers, when America's budget deficit broke $1 trillion for two years in a row, Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff warned against the rising deficit. He said "Our national debt is our biggest national security threat."
Is Japan a "Boiling Frog"?
So what about Japan? There are no politicians or businesspeople issuing such warnings. On the contrary, for the 2016 fiscal year, social security (pensions, medical care, and nursing care) and defense costs swelled, reaching over 102 trillion yen -- the highest it's ever been. The Abe administration financial laws have loosened, compared to when the Democratic Party was in power, and not much has been done to cut annual expenditure. Is Japan content with remaining like the proverbial boiling frog, blind to the looming risks, until it is too late?
This post originally appeared on HuffPost Japan and was translated into English.

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