It will be impossible to continue with zero interest rates, and interest rates will have to go up. When this happens, the national bond price will collapse and the government will be unable to procure funds. The only way to counter this will be for the central bank to underwrite national bonds, leading to inflation. We have seen this happen in Russia and Latin America. The collapse of the national bond price creates hidden losses for the bank, leading to fears of a public finance and banking spiral.
Because previous economic measures were implemented on too grand a scale leading to accumulation of government debt, making it extremely difficult to implement policies in future. On the other hand, financial controls are declining, and funds unconnected with economic policy, such as lavish spending to counter the falling birthrate, and child allowances, will be budgeted, resulting in unbelievably bad administration of public finance.
Furthermore, government guarantees are being overissued by every ministry and agency, burdening the government with invisible risk. The Obuchi government considered it sufficient to deal with problems when they surfaced, but it must be recognized that the situation is not that easy.
The Japanese economy in the 21st century will be supported by the strength of the private sector economy, not by public Investment.
The Japanese economic system must therefore be capable of meeting structural changes in the world economy and the new technical revolution centered around IT (information technology). There must be elimination of overinvestment and over-employment, but an expansion of M&A for the sake of industrial reorganization, as well as expansion of market business, reform of the Japanese management system, improvement of the labor market, and fostering of venture businesses.
At the same time, the government must promote in its area of banking, the structure reforms of public finance, administration, social security, the economic structure, and education. It must also forge ahead with the local government system, local public finance, the tax system, financial investment, and the labor market. Such reforms in the private and government sectors will create the foundations for the Japanese economy in the 21st century.
