Japan's finances in 'very bad shape', says governor of national bank

The head of Japan's central bank today said the country lacks a sense of urgency to tackle the reforms needed to improve government finances that are in "very bad shape."

Japan needs to raise its growth potential and improve its fiscal health, according to Masaaki Shirakawa governor of the Bank of Japan.

"The country cannot continue to run deficits forever," he said. "Therefore, society needs a credible commitment to fiscal reform."

His comments come less than two weeks after Standard & Poor's cut Japan's credit rating for the first time in almost nine years. The move reminded the world of the country's ballooning debt, now twice the size of gross domestic product, and highlighted questions about Prime Minister Naoto Kan's ability to stem fiscal deterioration.

Kan has proposed a record 92.4 trillion yen ($1.1 trillion) budget for the next fiscal year starting April 1. He came under fire for his initial response to the S&P downgrade, which suggested that he did not understand what the move meant.

Shirakawa declined to comment on Kan's words, but he blamed the country's general complacency on the fact that right now, Japan overall stands on relatively sound financial footing.

Japanese companies are still profitable, and long-term interest rates are not rising, he said. The yen, a key international currency, has not depreciated, and the country has not seen any capital flight.

Recent signs suggest Japan is emerging from a temporary "pause" and performing at par with other advanced economies, Shirakawa said.

The country, however, faces looming issues that weigh on its future, such as a rapidly aging population, lackluster productivity and growing public debt. Japanese society, he said, is "losing a healthy sense of optimism."