Japan’s economy slows in second quarter while government debt looks unsustainable

The week starts off with Japan reporting that its economy slowed more than expected in the second quarter. AFP/CNA reports:

Japan's economy grew by 0.3 percent in the three months to June from the previous quarter, the government said Monday, the country's fourth consecutive rising quarter but at a slower pace than before.

The data from the Cabinet Office came in significantly weaker than market expectations for a 0.7 percent increase, as exports slowed due to weaker global growth amid the eurozone crisis.

It also marked a sharp contrast from a brisk 1.3 percent increase in the January-March period.

Fiscal stimulus has helped the Japanese economy recover so far. However, Europe’s debt problem and weak growth will weigh on the Japanese economy.

And over the longer term, the reliance on fiscal stimulus may result in Japan facing a debt problem of its own. From a paper by Takeo Hoshi and Takatoshi Ito for the National Bureau of Economic Research (via Econbrowser):

The Japanese government debt is clearly unsustainable without a drastic change in fiscal policy... The continuing low JGB yields may reflect the market’s view that the ample amount of private sector financial assets in Japan will always be there to absorb additional JGBs, but the current calm situation is not likely to continue. The rapid aging of the Japanese population means that the growth of private sector savings is slowing down and eventually will turn negative. The Japanese government cannot rely on the private sector to continue buying JGBs beyond a certain point. Thus, the hope for fiscal consolidation can be abruptly dashed with some trigger of a crisis.