The Coming Global Debt Default Binge: Japan’s Government Under Financial Strains

Unwieldy welfare states and bureaucracies are cracking.

Japan’s politicians bicker about maintaining unsustainable public spending even when source of funding has been depleting fast.

From Reuters,

Japan's government could run out of money by the end of October, halting all state spending including salaries, pensions and unemployment benefits, because of a standoff in parliament that has blocked a bill to finance the deficit.

The deficit financing bill, which would allow the government to sell bonds needed to fund almost half of the budget, has languished in parliament as the ruling Democratic Party tussles with opposition parties that can use their control of the upper house to reject legislation.

"Without this bill, the budget will collapse," Finance Minister Jun Azumi said on Friday, pleading for cooperation from the two largest opposition parties.

"It doesn't matter which party is in power. I really hope that we can get a multi-partisan agreement on the deficit bill."

If the bill is not passed, government spending would grind to a halt, the world's third-largest economy would be put in jeopardy and its standing among credit ratings agencies could suffer.

Japan is not the only developed nation that is staring at an imminent fiscal crisis. Greece's debt-strapped government could run out of money within weeks unless it secures a 31.8 billion euro tranche of bailout funds from the European Union.

The U.S. economy is facing $4 trillion worth of expiring tax cuts and automatic government spending reductions at the end of the year, and a standoff in Congress makes the chance of a compromise over the so-called "fiscal cliff" look dim.

chart of Japan’s unsustainable fiscal balances (tradingeconomics.com)

Not to worry, like the US Federal Reserve, the Bank of Japan (BOJ) will most likely come to the rescue.

They are likely to announce more stimulus in supposed aid to the “export” industry.

In reality, these will about saving the banks and financial institutions who constitutes as the major financiers or creditors or owners of Japan’s Government Bonds (JGBs) with some 76% share as of 2009. [chart from Japan Bankers Association]

But the share of ownership by banking and financial institutions of JGBs has even been larger based on 2011 data

From the Wall Street Journal,

Nearly two-thirds of all JGBs are held by just two groups: major Japanese banks with 44%, and insurers with 21%. If either sector starts to sell—or simply stops buying new debt—the market could tumble quickly, since there is little sign that foreign buyers would quickly fill the gap. Foreign investment is just 5.7%, as of end-June figures, less than the share held by Japan's biggest bank, Mitsubishi UFJ Financial Group, which has 6.9%.

So Japanese politicians, like their European and American counterparts, are increasingly caught between the metaphorical devil and the deep blue sea.

Default will either be through inflation or restructuring (bankruptcy).