Japan 'at risk of collapse'

14 June 2010

Japan's new prime minister has warned that the country may be on the verge of collapse because of its huge debts.

In his first major speech since taking over the running of Japan, Naoto Kan said that a financial restructuring program is required to avoid the Asian nation following a similar path to Greece, reports BBC News.

"It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds," he stated.

"Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets."

Mr Kan added that a full reform of the current tax system is "unavoidable", as Japan's outstanding debts may pass 200 per cent of gross domestic product if the current situation is not rectified.

He has also promised to eliminate Japan's budget deficit by the end of the decade.

According to a forecast from Chris Scicluna, deputy head of economics at Daiwa Capital Markets, Japan's deficit currently stands at around eight per cent.

One major problem for Japan is that around 95 per cent of its debts are held by investors inside the country.

Mr Scicluna said this means serious medium-term problems for the nation, as its ageing population are likely to sell off government bonds to fund their retirements over the course of the next few years.

It was suggested that this will force Japan to borrow from other countries, paying higher interest rates than the current two per cent it pays on bonds.

Last week, Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo, told Reuters that the Japanese government needs to create a feasible mechanism with which it can cut the fiscal deficit.

"The initial goal would be a primary balance target and cutting deficits to half in the next five years and achieving surplus within ten years is desired," he stated.

By Asim Shah

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