To Avoid a "Japanese Version of the Truss Shock": "Yubari Shock" and "Investment Division Shock" (Part 3)

Overview

The third installment analyzing Japan's fiscal risks, taking lessons from the UK Truss administration's fiscal turmoil. ## Key Points ### 1. Lessons from the "Yubari Shock" and Current Implications - 2006 Yubari City fiscal bankruptcy: 35.3 billion yen accumulated deficit, became fiscal rehabilitation organization - Ripple effects on local finances: Nationwide bond issuance restrictions, 30% reduction in public investment - Current similar risks: Estimated 45 trillion yen in hidden local government debt - Tax revenue decline due to population decrease: Expected 20% reduction in local tax revenue by 2040 ### 2. Mechanism of the "Investment Division Shock" - December 1998: Investment Division shock due to JGB investment losses - Long-term interest rate surge: 1.0% → 2.4% (1.4% increase in 3 months) - Financial institution losses: Estimated 8.5 trillion yen in valuation losses - Current risks: BOJ's JGB interest rate risk, increased regional bank dependence on JGBs ### 3. Measures to Avoid a Japanese Version of the Truss Shock - Strengthening fiscal discipline: Accelerating primary balance surplus - Market dialogue: Gradual policy changes and advance communication - Safety net: Strengthening financial institution capital, liquidity supply system - Accelerating structural reforms: Strengthening tax revenue base through growth strategies The article emphasizes that gradual reforms leveraging past lessons to maintain market confidence are essential.