Economic crisis looms for Japan amid financial and manufacturing problems

Pedestrians cross a street in Tokyo January 29, 2010. (Reuters)

"It is a slow-motion implosion," said Takatoshi Ito, a professor of economics at the University of Tokyo. "The current direction is clearly unsustainable, and something has to be done. The more delayed the response, the more sacrifices will have to be made. It is not good for future generations."

Expert panels and detailed policy papers have been spelling out an antidote for decades:

-- Raise the consumption tax and control benefits for senior citizens, including pensions and access to health care.

-- Use the money to build day-care centers, improve public education and create a framework of subsidies that reward young people for bearing children and help mothers stay in the workforce.

-- Increase immigration so that by 2050, 10 million residents will be foreign-born.

The problem with these measures is that they are not very popular with voters, especially those older than 65, who make up about 22 percent of the population. These measures are likely to become less popular over time: By 2050, 40 percent of the population is projected to be older than 65.

"We haven't had a crisis big enough to force pensioners to see it is in their own best interest to force politicians to do the right thing," said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.

'Haven't bottomed out'

Feldman and many other analysts say Japan has the capacity to respond to a crisis and to mobilize its human and industrial resources in a highly focused way.

Out of the ashes of World War II, it organized a miracle of manufacturing. After the oil shock of the 1970s, no industrialized country squeezed more affluence out of less imported energy than Japan.

"We are quite strong in times of real peril," Ogiwara said. "But we haven't bottomed out yet."

Japan's public debt is the highest among industrial countries as a percentage of GDP, but it is probably not going to be the problem that sinks the economy. For unlike the United States, which has borrowed heavily from China, Japan borrows almost exclusively from its citizens.

Housewives and pensioners keep much of their money in bank savings accounts. They don't mind ultra-low interest rates and are unlikely to withdraw their money if Standard & Poor's blows a whistle on Japan's sovereign rating.

"Japan is not Iceland," said Ito, the economics professor, referring to the country that went bankrupt in fall 2008 when it could not meet foreign-debt obligations.

Ito said that even in the extremely unlikely event that Japan defaults on its debts, "it would not be an international crisis or a currency crisis."

But Ito and other economists also said the interest rates that the Japanese government pays to borrow from its citizens are creeping upward as the pool of Japanese workers and savers drains.

By 2060, Japan will have two retirees for every three workers, a ratio that will dry up savings and could overwhelm pension and health-care systems.