JAPAN'S DETERIORATING FISCAL BALANCE, FY1976-02

JAPAN'S DETERIORATING FISCAL BALANCE, FY1976-02

Two indispensable measures of fiscal management at the national level are the level of tax revenue relative to the debt balance and its debt servicing cost. The debt balance is defined as the ratio of total debt (i.e., domestic debt, ordinary debt and borrowings) to retained tax revenues (i.e., total national taxes minus tax transfers to local governments). The debt servicing balance is defined as the percentage of debt servicing (i.e., interest expenses and fixed-rate provisions) to retained tax revenue. As mentioned elsewhere, retained tax revenue remains the ultimate source for paying back Japanese government long-term debt obligations.

The chart below measures the relative progress of Japan and the United States in achieving such fiscal balance over the past thirty years.

Currently, in terms of the ratio to retained tax revenue in FY2002, Japan's national debt versus America's national debt is 17.7x and 4.9x, respectively. Japan's debt service costs 55.9%. On the latter ratio, this means that over half of the government's net revenues are used in servicing its accumulated debt alone.

Still, despite the proportional increase relative to the United States, the fall in long-term interest rates in Japan to artificially low levels has prevented interest payment costs from ballooning dramatically (see chart below). Yet interest costs in the FY2000 General Account for JGBs alone were still ¥9.6tr.

Since FY1990, some economists estimate that the artificially lower rates have likely saved the central government ¥43tr in overall interest charges. Without lower interest rates, the outstanding JGBs that the central government would have been forced to issue would have been, according to some estimates, ¥412.9tr instead of the actual ¥369.7tr.

The critical issue is how debt servicing costs will change moving forward. With Japanese interest rates at record low levels, there is not much farther they can fall. Should they increase, the impact on government finances will be nothing short of a systemic disaster.

Back to Richard Katz Interview Back to Japan Review Net