While the world is gripped in yet another great distraction over the great "will he, won't he" start World War III debate, things that are unsustainable remain unsustainable. Such as Japan's debt, and specifically the amount of cash interest that the nation with the 230% debt/GDP (and rising interest rates) will have to pay to service its gargantuan balance sheet. According to a document seen by Reuters, Japan expects to spend a record $257 billion to service its debt during the next fiscal year. The amount to be allocated for debt-servicing for the year that will begin on April 1 is nearly as large as the gross domestic product of Singapore, which the World Bank put at $275 billion at the end of 2012. More disturbing, this is a 14% increase in the debt interest cost in just one year. And yes, it is unsustainable absent an epic inflationary episode to "inflate away the debt", something that Abenomics has so far failed in achieving despite some hopeful early glimmers in crushing the Yen.
Japan's Ministry of Finance (MOF), charged with drafting the state budget and issuing government bonds, will request 25.3 trillion yen ($257 billion) in debt-servicing costs under the budget, the document showed on Tuesday.
That will be up 13.7 percent from the amount set aside for the current fiscal year, reflecting the ministry's plan to guard against any future rise in long-term interest rates.
And here we have a problem:
The increased debt-servicing cost may heighten pressure on Prime Minister Shinzo Abe to proceed with a scheduled two-stage sales tax hike from next year, which is seen as a necessary first step in fixing Japan's tattered finances.
But with Abe having made ending 15 years of deflation and revitalization of Japan's economy among his top policy priorities, some of his advisers and members of his ruling Liberal Democratic Party want to delay or water down the tax hikes, worried they could hurt a budding economic recovery.
In other words, just like the Fed, the BOJ is faced with a simple dilemma: 1) pretend there is a "long-run" and do the right thing, i.e., boost revenue generation, which however will reduce the amount of monetizable securities available for Kuroda purchase, or 2) admit it's all over for the irradiated nation, end any pretense that there is a happy ending to the island's current predicament, forget about this and any other tax hikes, and monetize to oblivion.
We are confident Japan will ultimately pick option #2.
Why? We will leave readers with our favorite Japan "WTF" chart, first posted here in May of 2012.