How does a country pay off a debt load that’s 600% of its GDP? It probably doesn’t, not all of it, anyway. From Narayanan Somasundaram at bloomberg.com:
Japan is suffering from the excesses of the past,’ Baz says
Country is G-7 member that’s closest to ‘fiscal dominance’
There’s “very little” that Japan can do about its mounting debt pile, which presents a potential risk to growth, according to Pacific Investment Management Co.’s Jamil Baz.
With a government debt load that’s 2 1/2 times the size of annual gross domestic product and a total national borrowing burden that’s six times as large, “Japan is suffering from the excesses of the past” and the country “is in a bind right now,’’ the fund manager’s head of client analytics said in an interview in Sydney last week.
Japan’s economy is still struggling to gain traction even after policy makers hit it with repeated doses of budgetary stimulus and unprecedented monetary easing to drag the country out of its deflationary funk. The Bank of Japan’s adoption of negative interest rates has pushed down debt financing costs for now, but repeated delays to a planned sales tax increase, a new 28 trillion yen ($272 billion) fiscal boost from Prime Minister Shinzo Abe and the pressures of an aging population mean the borrowing pile is likely to keep on growing.
“In general, when you have these extremely high debt-to-GDP ratios, you have the choice between two things: you either default — explicitly or via high inflation — or you increase your savings to repay,” said Baz, who previously worked at Man GLG Partners and rejoined Pimco in February. “In both cases, there is obviously a substantial left tail risk to future growth.”
Japan is the Group of Seven nation that’s “closest to a situation of fiscal dominance,” Baz said, referring to a situation in which the country’s budgetary needs overwhelm more traditional objectives of monetary policy.
Baz, who has also taught at the University of Oxford, published a paper last month on seven potential outlier risks to the global economy. In it, he discussed the issue of Japan’s solvency and whether its problems might ultimately destabilize the nation and the global monetary system. He painted a tail-risk scenario in which there could be a backlash against negative yields on Japanese government bonds resulting in capital flight and a “melt-up” in the yen. That in turn could lead to either “fiscal dominance/hyperinflation” or a default by the government, he wrote.
While the probability of these outlier scenarios coming to pass in the next year is less than one-in-five in each case, the risks do increase over a longer horizon of 5-to-10 years, Baz said.
To continue reading: Pimco’s Baz Says Japan In a Bind as Total Debt Tops 600% of GDP
