Title: What is "Fiscal Collapse"? —A Simple Guide to the Japanese Economy: Escaping the Confused Debate Over "Default" and "Inflation"—

Title: What is "Fiscal Collapse"? —A Simple Guide to the Japanese Economy: Escaping the Confused Debate Over "Default" and "Inflation"— Introduction: The "Thought-Stopping Virus" of the Word "Collapse" "Japan is saddled with enormous debt and will eventually face fiscal collapse." You have likely heard these words before. Repeated by the media, politicians, and even experts, this phrase casts a vague sense of dread over our future. However, what if this seemingly simple term, "fiscal collapse," is the very culprit that obstructs calm debate about Japan's economy and drives us into a state of mental paralysis? This article aims to untangle the two completely different scenarios packed into the word "collapse" and to offer a "new piece for your thinking puzzle" to see the true state of the Japanese economy. Chapter 1: Deconstructing "Fiscal Collapse" — The Two Scenarios Possible for Japan For many years, the debate in Japan has been stuck in a loop: "Printing too many government bonds will lead to collapse," "No, it's denominated in our own currency, so we won't collapse," "Instead of not collapsing, we'll collapse from hyperinflation!" The reason for this confusion is that the meaning of "collapse" is used differently by each side. You might think, "If the economy will be in chaos either way, it's pointless to think about the details." But just as misdiagnosing a disease leads to the wrong treatment, failing to understand this distinction will cause us to continue choosing the wrong economic policies. We need to consider the perspective that the fear of "collapse," which led to austerity, may be the very cause of our country's "Lost 30 Years" and declining birthrate. In Japan's case, a potential economic crisis can be divided into two main types: Scenario ①: Sovereign Default What it means: A situation where the government fails to make its promised interest payments or principal repayments on its bonds. A familiar image: This is akin to corporate or personal "bankruptcy." Because it's easy to grasp the idea of "being unable to repay debt," many people apply this image directly to national finances. Is it possible for Japan? Theoretically, no. This is because the Japanese government's debt (its bonds) is all financed in its own currency, the "Yen." Its subsidiary, the Bank of Japan, can, if necessary, issue more "Yen" to purchase these bonds. It will not become insolvent. Scenario ②: Hyperinflation What it means: A situation where the value of the currency plummets and extreme price increases spiral out of control. A familiar image: Think of post-war Germany or modern Zimbabwe, where money becomes nearly worthless paper. Is it possible for Japan? This is the more realistic risk. If the government issues money far exceeding the nation's productive capacity (its ability to supply goods and services), it is not impossible that the value of the yen could fall, leading to uncontrollable inflation. Many discussions lump these two completely different events under the single word "collapse," leading to the thought-stopping conclusion that "the economy will be ruined either way." However, if the cause is different, the prescription must also be different. If you fear DEFAULT → The prescription is AUSTERITY (tax hikes, spending cuts). If you fear INFLATION → The prescription is managing supply capacity, adjusting interest rates, and using appropriate tax policy to curb demand. Could it be that Japan's continued austerity, driven by the fear of "default" amidst deflation, has been a major cause of its economic stagnation? Chapter 2: The True State of Public Finances — Seeing Through a "Consolidated Balance Sheet," Not a Household Ledger Another problem common to the "national debt" debate is viewing public finances like a household ledger, focusing only on income and expenses. Just as a company's health is judged by its balance sheet (B/S) as well as its profit and loss statement (P/L), a nation's finances must be viewed by considering both assets and liabilities. Here, the perspective proposed by economist Yoichi Takahashi—the "consolidated balance sheet of the Government and the Bank of Japan"—is crucial. The Government and the BOJ are like a "Parent Company and Subsidiary": Over half of the government bonds issued by the government (the parent) are owned by the Bank of Japan (the subsidiary). On a consolidated basis, this is like an internal loan within a corporate group, and the debt is effectively canceled out. The Japanese Government is One of the World's Wealthiest Asset Holders: The government holds massive assets, including foreign exchange reserves and various public assets. Judging Japan as "drowning in debt" by looking only at its liabilities is a one-sided view that ignores its assets. From a consolidated balance sheet perspective, an argument can be made that Japan's fiscal position is sound compared to other developed nations. Conclusion: Overcoming Mental Paralysis to Restore Balance There is an old Chinese fable, "The Man from Qi Who Feared the Sky Might Fall" (Kiyū), which describes the foolishness of worrying excessively about things that cannot happen. Japan's debate over "default" may be a modern form of this fable. At the same time, it is also foolish to be like the farmer in another fable, "Guarding a Tree Stump to Wait for a Rabbit" (Shu shu tai to), who clings to a past success and fears change. The greatest danger in economic management is to make extreme decisions based on panic and anxiety. In the world of psychiatry, adding the term "agitated" to a condition raises its severity; the same applies to economic policy. "Printing money leads to hyperinflationary collapse," and "continuing tax hikes leads to deflationary collapse"—both are extremes. The key is balance. Japan has walked the path of austerity for over 30 years. Perhaps now is the time to try the other path: fiscal policies aimed at enriching the lives of the people. Ancient scriptures strictly limited interest because it was understood that such practices create disparity and division, destroying the community. As financial capitalism, which does the opposite, creates these very problems of inequality and division worldwide, perhaps it is time for us, too, to stop the mental paralysis induced by the word "collapse" and begin a calm debate about what is truly necessary for our community.