This article is more than 10 years old

This article is more than 10 years old

Japan's new prime minister, Naoto Kan, today warned that the country risked being sucked into a Greek-style debt crisis unless it quickly reined in its massive public debt.

Kan, who took over last week after the sudden resignation of Yukio Hatoyama, told MPs that Japan risked defaulting if it continued to issue bonds at the current pace.

"Our country's outstanding public debt is huge," he said in his first policy speech to parliament. "Our public finances have become the worst of any developed country.

"We cannot sustain public finance that overly relies on issuing bonds. As we can see from the eurozone confusion that started in Greece, there is a risk of default if growing public debt is neglected and trust lost in the bond market."

Japan's public debt stood at 218% of gross domestic product last year, according to the International Monetary Fund – the highest in the industrialised world.

Kan said the debt problem could not be dealt with overnight. "That is why we need to have a drastic reform from now in order to obtain fiscal health."

His prospects for honouring a commitment to devise a tighter fiscal plan by the end of the month improved today after Shizuka Kamei resigned as financial services minister over a disagreement with cabinet colleagues on post office privatization.

Kamei, who leads a junior coalition partner, had advocated big spending to drag the world's second-largest economy into sustained recovery and fend off long-term deflation.

But other obstacles, including a looming election, remain to the sweeping fiscal reforms envisaged by Kan, who in his last job as finance minister criticised the Bank of Japan for doing too little to encourage lending, even after it lowered interest rates to near zero.

Kan may be able to gain a mandate for reform if his Democratic party performs well at upper house elections next month, giving them an outright majority in both houses. Support for the Democrats has leaped since Kan's election, from below 20% before he took office to almost 70% this week.

Analysts accused Kan of overplaying Japan's susceptibility to a Greek-style meltdown. "Greece had a huge public debt and huge overseas loans," said Hiromichi Shirakawa, chief economist at Credit Suisse Japan. "Japan has a trade surplus, and it's a major creditor nation. I don't think Japan's fiscal condition is facing a similar crisis."

The government's plan to tackle mid-term debt is expected to include a ¥44.3 trillion (£330bn) cap on government bond issuance through to the end of March 2012. Fiscal reformers in the government appear to have succeeded in including a reference to tax reform in the ruling party's manifesto for the upper house elections, although it is likely to stop short of suggesting a rise in the consumption tax, currently 5%, to pay for rising health and welfare costs.

Kan has been one of the few politicians to talk publicly about the need to raise the tax, an unpopular move but one that many voters now accept is inevitable.

Economists have warned, however, that the government will have to abandon some of its spending plans if it is to stand a chance of reining in debt.