The Japanese Debt

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The Japanese Debt
Economic Stress and Diversification

Alex Thorn Mr. C.J. Gurry

Class of 2004 November 9, 2003

With an economy made up of keiretsu, loose conglomerations of companies organized around their own single bank for their mutual benefit and who usually own equity in each other, Japan has always had the potential to grow – and fall – as an economic superpower. And, up until the late ‘90s, Japan had the second most technologically powerful and third largest economy in the world. Yet, as a result of over-investing in the 1980s and Japan’s heavy reliance on foreign imports, the economic growth rates in the 1960s, 1970s and 1980s of 10%, 5% and 4% respectively are long gone. Because Japan possesses nearly no natural resources, the government issued bonds and took out loans to help pay the costs of internal improvements when the economy wasn’t providing the cash. However, with the help of the ailing American and Asian economies, Japan’s national debt has reached nearly 150% of its GDP, and its workforce, famous for its “strong work” is aging. Thus, because Japan possesses nearly no natural resources of its own, the banks of Japan must stop lending money out on properties, the values of which fluctuate erratically, and the government must stop issuing bonds that cause deflation (because people replace the cash with bonds). Most importantly, Japan must create a government body, similar to the United States’ FDIC, that could insure the banking system that Japan is built upon.

The first step to regaining Japan’s prior economic success, or at least eliminating the massive amount of government debt, is to find a way to raise money other than borrowing and issuing bonds. Once the government’s debt is erased, Japan can focus on revitalizing its economy through a restructuring of the Bank of Japan. However, how can a nation so dependent on asset based loans and government issued bonds continue to make money without deflating the monetary value? Japan must raise taxes in some form. Rather than tax small firms or the public, which would further diminish the ailing domestic economy, the government must place a tax on equities shared between conglomerates. In doing so, the Japanese government would complete two things: A) the conglomerates that currently dominate the Japanese market would likely give up their interconnections and be separated, similar to the Anti-Trust legislation of the early 1900s, which would create a less volatile and interwoven domestic market that would be less likely to cause chain reaction economic downfalls, and, B) because of the great number of keiretsu that own stock in one another, the government would, at least initially, increase the national revenues tremendously and be able to combat its own debt without taking out bonds and, essentially, continuing the “pay off your debt by borrowing and getting into more debt” cycle.

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