A mountain of debt, 1,400 times higher than Mt. Fuji

That would be the height of Japan’s debt if converted into ¥10,000 notes, according to a Japanese Ministry of Finance (MoF) budget report cited by FT columnist Guy de Jonquières, in his column, “No need to panic about Japan’s debt mountain” (sorry, subscription required).

No need to panic, maybe, but certainly need for concern — and there’s certainly been no lack of concern, first under Koizumi and now under Abe.

But de Jonquières is right to put out that the situation may not be so bleak as commonly assumed. He questions the statistical method used by MoF to conclude that Japan’s public debt is 170 per cent of GDP, suggesting that a method that deducts government assets reduces that figure to a more manageable ninety per cent of GDP. He further observes that Japan’s debt burden has yet to have serious negative consequences for its economy — despite the significant amount of debt, the government has yet to “crowd out” private lending.

De Jonquières concludes, rightly in my opinion, that the onus will continue to rest with the national government to slash public spending, which won’t come without difficulty, as the government will have to tackle entrenched interests across sectors.

The case for thorough public sector reform would be compelling, even without fiscal pressures. Achieving it, however, will mean not only taking on powerful vested interests in the bureaucracy, the professions and the public services. It will mean carrying a conservative-minded electorate, whose appetite for reform has been dulled by the economic hardships and upheavals of the past decade.

Some of Mr Abe’s most influential advisers appear ready to think radically. But it is still unclear how hard he will push their ideas. He will be unlikely to risk serious unpopularity before next year’s upper house elections, widely seen as a test of his political authority. But if a successful outcome is to serve as a credible mandate for ramming through painful changes, he will need to prepare public opinion beforehand.

It will not be an easy balance to strike. Until Mr Abe shows whether he really means business, Japan cannot afford to relax about the state of its public finances. But given the margin of safety still available, there is no reason to panic, either.

The mention of the 2007 elections in the upper house is important. It would be wise not to expect any substantial reforms in any area before the elections — Abe may hint at reform to come, like constitutional reform, but the remainder of this year’s special session and the whole of next year’s regular session of the Diet will likely be used to pass no-brainer reform legislation that burnishes Abe’s credentials without touching any sacred cows. That could be one reason for Abe’s refusing to provide a detailed agenda. Better to not commit too early, minimizing the risk of having his tenure truncated by a major electoral defeat next summer.

In any case, expect Abe to focus on spending cuts that can be made with minimal toe smashing — and don’t expect the annual decline in the defense budget to be reversed anytime soon.

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