Was Japan’s economy waiting for a Crisis.  Wharton School of Business’s online journal thinks so. Most Japan watchers and economists, and even Abe himself, say that to restore sustainable growth, Japan needs sweeping deregulation and structural reforms to cope with its growing public debt and its declining and aging population. But pushing through such changes is proving daunting, despite Abe’s pledges to “drill deep into the bedrock” of Japan’s vested interests.

Allen says there is an issue of long-term fiscal sustainability for Japan and this is part of the risk. “At some point, there will be a significant problem in the form of capital flight from Japan. Whether postponing [the sales tax hike] two years will trigger that or not — I don’t know. There’s some chance of it, but probably it won’t make too much difference,” Allen notes. Eventually, though, Japan must tackle its debt situation. “The problem is they can’t keep on borrowing,” he points out. “It’s a question of what one thinks the short-term versus the long-term effects are. The long-term effects at some point will catch up with them — but it could take a long time. This is why it’s such a tricky issue.”

Given the slow pace at which Japan has been tackling reforms needed to catalyze new industries, promote innovation and increase productivity, Japan may end up facing a fiscal crisis before any drastic action is taken, says Allen. Abenomics is no panacea, he adds. “The issue with long-term fiscal sustainability is Japan is potentially heading for some massive crisis. Maybe that will solve everything for it, but it is also likely to be extremely disruptive and politically dangerous.”    Does the Japanese Economy Need a Crisis