The Japan News by The Yomiuri Shimbun

Home > Opinion > Government and Economy


Government and Economy

Japanese Government Bond and Greek Government Bond
- What Are Their Similarities and Differences?

Takao Kataoka
Professor, Faculty of Commerce, Waseda University

Almost every day, we hear dreadful news about Greece, a glorious country which was the root of the European civilization and where many philosophers appeared one after another. As Euro Member, Greece was required to keep its budget deficit no more than 3 percent of GDP and outstanding government debt no more than 60 percent of GDP. At the time of change of government in 2009, however, it was made public that its fiscal data had been dressed up, with the actual outstanding government debt as much as 130 percent of GDP. With the loss of confidence, the price of Greek Government Bond plummeted, which means that the government will pay higher interest rates as well as they will face increased difficulties in seeking sound fiscal consolidation. It is impossible to tell as to whether Greece will be able to remain in the Euro. Japan cannot regard it as somebody else's problem and having nothing to do with it. In Japan's FY 2012 budget, budget deficit is around 10 percent of GDP, which is as large as that of Greece. Its outstanding government debt of more than 200 percent of GDP is the worst among the OECD member countries.

Japanese Government Bonds (JGBs) are classified into two: Construction Bonds (based on Article 4 of the Public Finance Act) and Special Deficit Financing Bonds. The former are used to cover construction cost of facilities that can be used for a long period of time such as Seikan Tunnel. Their issuance, therefore, is more or less justified. On the other hand, Special Deficit Financing Bonds are issued to finance expenditures which should be paid by tax revenue of each year. Their issuance is in principle clearly prohibited as stipulated by Article 4 of the Public Finance Act: "Annual government expenditure has to be covered in principle by annual government revenue generated from other than government bonds or borrowings." Nonetheless, once deficit financing bond was issued as a special case in 1965 which saw the Japanese economy in recession after the Tokyo Olympic Games, special cases have been repeated - as if having lost all restraint - which has brought today's situation.

The rationale for the practical deviation from the balanced fiscal policy - clearly stated in Public Finance Act - was Keynesian economics which advocated that in the time of recession we should stimulate aggregate demand and invigorate the economy with public construction and tax reduction even if that means incurring budget deficit. One pitfall of this thinking was apparent from the start. Negative effects from accumulated budget deficit will linger for a long time, while the benefit of economic stimulus such as tax reduction and public construction through the issuance of government bonds is short-lived. As a result, if government and people are short-sighted, they resort to economic stimulus more often than necessary, and may end up having the resultant huge accumulated budget deficit. Keynes himself appeared to highly trust politicians and bureaucrats for their wisdom, and therefore, was rather optimistic about these risks. However, looking at such a huge amount of outstanding government bonds, it is clear that governments of Greece and Japan have become addicted to easy-to-swallow economic stimulus.

On the other hand, there are some significant differences between the situation of Japan and that of Greece. Moody's, a rating agency, graded the Greek bonds as C, saying that: "The situation is defined as a default on Greek government bonds." It is in the situation of default." In the meantime, the rating of JGBs remained at Aa3 which is almost at par with those of China and Taiwan. The rate of return on Greek Government Bonds must be over 20 percent, while that of JGBs is less than 1 percent. What makes these differences? As for the background of sustained confidence in JGBs, if barely, it has been pointed out that there is room for tax increase due to the low consumption tax rate, and the Japanese government has a lot of assets which makes its net liabilities - liabilities minus assets - at about 130 percent of GDP, smaller than those of Greece at present. The most important point, however, is that Japanese households have accumulated so much savings which are used to buy JGBs and therefore, financed budget deficit. While Greek government bonds are held mostly by foreigners, JGBs are mostly denominated in yen and purchased domestically.

If we use a household as a metaphor for a nation, the Greece family is borrowing money from outside the household, while the Japan family borrows and lends within the family but the household as a whole is a creditor to the outside world, and therefore there is no need to worry. Unfortunately, it is not true anymore that the saving ratio of Japan's households is high. It is the households of late middle age that are saving money in preparation for retirement: as the retired old people draw on their savings for their living expenses, with the accelerating ageing of the society and falling birthrate, the saving ratio of Japan's households is drastically declining. It is becoming increasingly difficult to finance budget deficit within the country.

In addition, it is also a myth that Japanese investors will continue to support the government of Japan and buy JGBs. Government bonds give the right to receive repayment from governments in the future. When government is owed twice its GDP, its interest payment alone will be huge only for trying to maintain the situation. How many Japanese people actually believe the government is capable of so swollen debts? If the government fails to raise the consumption tax rate now under discussion, it will have no choice but to increase money supply by forcing Bank of Japan to purchase JGBs in the near future, and thereby cause inflation in order to suppress the value of outstanding JGBs in real terms.

Takao Kataoka, Professor, Faculty of Commerce, Waseda University

Born in 1960. Graduated from Faculty of Economics, Hokkaido University. Obtained a Ph.D. from the University of Rochester.
He was with Fukushima University and Tokyo Keizai University, before taking up his current position as Professor, Faculty of Commerce, Waseda University.
His major publications include "Introduction to Business Economics" [Nyumon Bijinesu Ekonomikkusu] (co-author, CHUOKEIZAI-SHA, INC) and others.