5 key differences between U.S., Japan debt

Question: Thank you for your two great columns about the U.S. national debt. I'm a Japanese citizen living in the U.S. on assignment. As I understand it, Japan's national debt is even higher than that of the U.S. Yet Japan is very slow to change, if at all. The Japanese government continues to have large budget deficits. Doesn't Japan face even worse scenarios than you predicted for the U.S., and can they affect the global economy?

--Yuki, Phoenix

Answer: Japan has the second-highest government debt in the world, while the U.S. has the largest. But, what's even more important is to look at the government debt as a percentage of total GDP. The U.S. debt is roughly 100 percent of its GDP, while Japan's debt is 200 percent of its total GDP. So, one could predict even more dire consequences for Japan. However, I beg to differ. Here is why

My analysis is based on five fundamental differences between Japan and the U.S.:

Japan's military spending is negligible, at 2 percent of its budget. U.S. military spending is 17 percent of our budget. I'm not passing judgment on our military expenditures and commitments around the globe. That is a national-policy debate. I'm simply stating the facts.

Japan has no immigration problem. Japan is a homogeneous society that's essentially closed to outsiders. Japan is not a hyphenated country -- no Mexican-Japanese, Indian-Japanese, African-Japanese or Korean-Japanese. Japan does not publish its public ballot in multiple languages. Japan does not have the burden of millions of illegal immigrants on its schools, health-care system, justice system and education system. Japan protects and defends its borders. Most of the immigrants from throughout Southeast Asia landed in the U.S., even though Japan was much closer. Again, I'm not passing judgment on U.S. policy, just stating the facts.

Japan's government debt is owned by its citizens. In comparison, much of the U.S. government's debt is owned by foreigners. If Japan taxes its citizens to pay for its debt, then it goes back to its citizens. So, it is a self-contained loop. In the U.S., we need China and others to fund our budget deficit. So, our interest payments go out of the country.

Japanese society's ability to prevail through hardship is incredible. Just compare the behavior of Japanese citizens after the recent earthquakes and tsunamis with the behavior of Americans after the hurricane in New Orleans. The Japanese suffered through cold, hunger and lack of clean water and food in the affected areas, but they persevered with no looting and no civil disobedience. The Japanese citizens turned off heaters in their homes to preserve power for their industry. And large quantities of lost cash were turned in by Japanese citizens, during their cleanup efforts. Such behavior would be considered unprecedented and very unlikely in the U.S.

The Japanese largely purchase Japanese products. In a recent trip to Japan, I visited an appliance store. It only displayed Japanese brands for refrigerators, washers, dryers and cooking appliances. When I asked for Whirlpool, I was escorted to the back of the warehouse where there was a Whirlpool refrigerator in poor condition. There is no such "buy American" sentiment in the U.S. So, we continually send money to foreigners.

Although there are significant issues in Japan with its government debt, the liability is not national, since it is owned internally. U.S. government debt, by contrast, is a national liability. Japan's economy has been stuck in neutral for 22 years. The Nikkei stock index peaked in 1989 at 38,915. Today, the Nikkei is at 8,665. So, Japan has already endured a muddle-though economy with frequent recessions, which is one of the outcomes I predicted for the U.S.

Japan has two possible options. The first is to go through an extreme contraction of government spending, which its citizens are more likely to bear than the citizens of any other country. The second option is to print the money and devalue the Japanese yen. One U.S. dollar was equal to 125 yen just five years ago; today it is 78 yen. The yen is nearly at all-time record strength and can afford some devaluation. Devaluation would also make Japanese exports more competitive, something the Japanese love.

Happy New Year to all of my readers! May you all find peace and prosperity in 2012.

"Ask Steve" by writing to steve.sanghi@microchip.com. Read and comment on all columns at azcentral.com/members/User/SteveSanghi.