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Guest Post: When Japan Collapses
Submitted by Jim Quinn of the Burning Platform
When Japan Collapses
Only a partisan two-bit hack economist/liberal rag columnist from an
Ivy League University with a Nobel Prize could look at the following two
charts and conclude that the Japanese Government failed to revive the
Japanese economy over the last twenty years because they spent far too
little on fiscal stimulus. Japanese government debt as a percentage of
GDP was 52% in 1989, prior to their real estate and stock market crash.
Today it stands at 200% of GDP. Current budget projections show the debt
reaching 250% of GDP by 2015. Meanwhile, Japanese consumers and
corporations have been reducing their debt for the last 16 years. The
net result has essentially been a 20 year recession. The pundits who
never see a crisis on the horizon point to the fact that Japan has not
collapsed under the weight of this debt as proof that the U.S. debt
level of 90% of GDP has plenty of room to grow without negative
repercussions. This is the same reasoning “experts” used in 2005 when
they proclaimed that home prices in the U.S. had NEVER fallen on a
national basis, so therefore there was no reason to worry about home
prices. A basic economic law is that an unsustainable trend will not be
sustained. When the 3rd largest economy in the world implodes,
the reverberations will be felt across the globe.
John Mauldin has described Japan as a bug in search of a windshield. Bug meet windshield.
The “nothing bad has happened so far” crowd continues to spout
fallacies about the Japanese owning the debt to themselves and their
high savings rates as the reason that Japanese debt can continue to
grow. About 95% of Japan’s debt is held domestically, which
sovereign-debt agencies have said supports the country’s
creditworthiness even as borrowings have reached 200% of gross domestic
product. In a sign that base is waning, Japan’s public pension fund,
holder of 12% of outstanding debt, sold more government bonds than it
bought for the first time in nine years. The National Savings rate has
declined from 18% in 1980 to 2% today. The days when the Japanese could
issue long term bonds yielding 1% and have it all bought by Japanese
citizens is over. In 2010, the Japanese government will issue an
additional ¥53 trillion in government debt. At the same time tax
revenues will drop from ¥46 trillion to ¥37 trillion. Do you see the bug
approaching the windshield?
The Japanese government has spent two decades squandering the wealth
of its citizens. The New York Times detailed the trillions wasted in a
story last year:
Japan’s rural areas have been paved
over and filled in with roads, dams and other big infrastructure
projects, the legacy of trillions of dollars spent to lift the economy
from a severe downturn caused by the bursting of a real estate bubble in
the late 1980s. During those nearly two decades, Japan accumulated the
largest public debt in the developed world while failing to generate a
convincing recovery. Between 1991 and 1995, Japan spent some
$2.1 trillion on public works, in an economy roughly half as large as
that of the United States, according to the Cabinet Office.
Dr. Ihori of the University of Tokyo
did a survey of public works in the 1990s, concluding that the spending
created almost no additional economic growth. Instead of spreading
beneficial ripple effects across the economy, he found that the spending
actually led to declines in business investment by driving out private
investors. He also said job creation was too narrowly focused in the
construction industry in rural areas to give much benefit to the overall
economy. He agreed with other critics that the 1990s stimulus failed
because too much of it went to roads and bridges, overbuilding this
already heavily developed nation. Critics also said decisions on how to
spend the money were made behind closed doors by bureaucrats,
politicians and the construction industry, and often reflected political
considerations more than economic.
In Hamada, residents say the city’s
most visible “hakomono,” the Japanese equivalent of “white elephant,”
was its own bridge to nowhere, the $70 million Marine Bridge, whose
1,006-foot span sat almost completely devoid of traffic on a recent
morning. Built in 1999, the bridge links the city to a small, sparsely
populated island already connected by a shorter bridge. “Roads and
bridges are attractive, but they create jobs only during construction,”
said Shunji Nakamura, chief of the city’s industrial policy section.
“You need projects with good jobs that will last through a bad economy.”
Last year, Moodys downgraded Japan from a AAA rating with the following warning:
The rating reflects the risks of
Japan’s high level of debt, which leaves the country’s fiscal position
vulnerable to shocks or imbalances that would cause a sharp rise in
interest rates. The ratings also reflect the sizable but temporary
increase in the government’s budget deficit caused by the severe effects
of the global collapse in trade and recession on the Japan’s economy.
Further, Japan’s large foreign exchange reserves, although large
compared to those of most other countries, are only a small fraction of
its liabilities and could not alone eliminate refinancing risk at a time
of severe stress.
For the government’s bond rating to
move higher, Japan’s economy would need a sustained recovery and the
government would need to shrink its budget deficit and lower its debt
trajectory. Conversely, the bond rating would be under pressure if the
trend in debt increases continues, which could result from demographic
pressures on social welfare and pension expenditures, or if the market
loses enthusiasm for the government’s new debt issuances.
The Japanese have kept their interest rates under 2% for the last 15
years. With a current rate of 0.3%, there is no room for further
decreases. The concept was that these rates would spur businesses to
expand and invest. They would spur Japanese savers to become Japanese
spenders. Neither happened. Instead, investors throughout the world
borrowed Yen at 1% and invested the proceeds in investments that would
earn in excess of 1% – the carry trade.
There has been only one reason that investors have accepted virtually
no interest income on Japanese bonds. The relentless strength of the
Japanese Yen has made up for the lack of interest. The Yen has
appreciated 100% versus the USD since 1995. The Yen has stayed strong
despite a weak economy because Japan has run a massive trade surplus for
decades. That unsustainable trend is also coming to an end. China,
Vietnam, Indonesia, and other developing Asian countries can produce the
crap that Americans desire much cheaper than Japan. The Japanese trade
surplus has begun to plummet. The Japanese politicians are flailing
about trying to revive their exports. Yesterday’s intervention in the
currency markets to weaken the Yen is a sign of desperation. It will
fail. Every Central Bank in the world is trying to devalue their way to
prosperity.
The more you analyze Japan’s predicament the more you realize that
there is no way out. They are trapped in a boundless morass of
uncertainty. If they successfully weaken the Yen, why will foreign
investors invest in their debt paying 1%? As the following chart clearly
shows, Japan has a bit of an aging problem. By 2050, 40% of the
Japanese population will be over 65 years old. Their population will be
in a relentless death spiral for decades. Japanese elderly will be
selling Japanese bonds in order to survive. Japan’s biggest customer for
their debt will no longer be a buyer, they’ll be a seller.
It should be clear that Japan is stuck between a rock and a hard
place. A weakening Yen combined with a demographic nightmare would
reduce demand for bonds paying 1.0%. This isn’t a positive development
when you are running $600 billion annual deficits and desperately need
investors to buy your debt. When demand for your debt is weak,
increasing the interest rate you pay is the logical next step. Sounds
reasonable unless you already have $10 trillion of debt outstanding.
Currently, interest rates on 10-year Japanese government bonds are
hovering around 0.5%. Even at these extraordinarily low interest rates,
debt service already consumes 59% of all Japanese tax revenues.
If the market demands an interest rate of anything more than 3.5% to
buy their debt then Japan will not have the revenue to service its
debt. As the interest rate approaches 3.5% Japan must use all its tax
revenue to pay interest on its debt. It becomes readily apparent that
Japan will eventually be forced to default on their debt. There are no
good options left. A minor uptick in interest rates will sink the 3rd
largest economy on the planet. The near failure of a 3rd world country
(Greece) turned the world upside down. The failure of Japan would likely
touch off a worldwide crash.
Japan is the Titanic and it has already hit the iceberg. It is taking
on water rapidly. Paul Krugman has recommended that the captain speed
up and all will be well. There aren’t enough lifeboats. Intervention in
the currency markets are on par with rearranging the deck furniture.
More stimulus is on par with the band playing while the boat sinks. The
destination is certain and time is running out.
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A generation X consisting of men who stay locked in a room in their parents home chewing their underpants...women who vow at college age never to get married and have a family. A coastline covered in concrete "infrastructure." This is the generational outcome of Japan's ushinawareta junen (Lost Decade).
Success is indeed a relative concept.
Looks like the end game for Japan is hyperinflation despite spending 2 decades in a so-called "deflation" trap.
Imagine those deflationists watching in horror when Yen finally collapses.
hmmm No, Japan hasn't spent 2 decades in a deflation trap
The overall level of debt is still the same as it was in 1990, private debt were transferred to the sovereign, inflation remained quasi null, Japan spent 2 decades in "Noflation" while keeping unemployment at a low level (average 3.88%) despite a quasi null GDP growth rate (0.27%).
Japan succeded in avoiding the deflation trap and falling into a depression because it benefitted from a fast growing world economy via its strong export sector.
Now that the world economy isn't growing so fast it will fall in the deflation trap which will quite likely cause a loss of confidence in the Yen and a hyperinflationary collapse.
As with other reserve currencies it's only a deflationary depression that can cause the sell off and the currency to hyperinflate.
Deflation in what, at least consumer prices were deflating very much in late 90's when i lived in Tokyo.
Well said WillBan7. On my trips to Japan I saw exactly what you describe.
55 years of Americanization has left that nation cored out, lost and adrift.
"The National Savings rate has declined from 18% in 1980 to 2% today. "
That stat about summed it up for me. First instinct on reading the post header was not "When" Japan collapses but, "Now that we all know the emperor is naked and that Japan collapsed long ago, a mere caricature now of it's once amazing culture and ethos".
Long header but probably more accurate.
ORI
http://aadivaahan.wordpress.com
There are two classes of people, those living off the wealth generated in the go go years and those less fortunate. Suicide, not surprisingly, is rampant.
Americans don't realize how this culture of the lost can rear its head very quickly.
Take a look at the Jugalo phenomenon.
That is one part of the problem.
The other part is there are many people in small spaces in large cities and when they all get old, hopefully they will have sufficient children to keep Japan going when they come of age.
I would not worry too much about Japan. We have our own Nation to try and keep from running off the rails too.
I have recently seen a lot of young folks in thier 20's having children, only because they are working in Professional Licensed Jobs (Plumbers, Electricitians etc) capable of supporting such families for a very long time. Or even those in the Military.
Japan will continue to do one thing right. Keep from living in debt and build up private savings. The Citizens do this, but the Government has failed to do the same.
Hmm. what a concept.
All Asians have the ability to survive on meager rations. Americans are comparatively fat, literally and figuratively. All hell will break loose much sooner. Japanese are naturally stoic. It takes a great deal of suffering before the lid blows off in Japan.
I make these observations as an American of japanese descent.
Hopefully your right....
What's up with Japanese women vowing never to get married? Do you have a link to a story on that?
PS. This is bad news to me. Always had a thing for Japanese young women.
Read this
http://www.chinadaily.com.cn/english/doc/2005-02/26/content_419717.htm
Actually it is good news for you because many single and unsingle Japanese women on holiday look forward to having some interaction (cultural and intimate) with the locals. They have been known to get very wild. Basic web research will provide the low down.
Bali is one destination they relish.
wow the habitats of the japanese woman.. right from the discovery channel
and you wonder why GenX slackers look at you as the loser
i spent several years in japan, and i can vouch for william's comments.
japanese women are anything but shy. Once behind closed doors they will very pleasantly shock you.
Problem is, the average japanese woman is really not that attractive, bad legs, bad teeth.
They do have beautiful skin and are scrupulously clean and healthy, and the ones that are beautiful are fabulously beautiful and can't be beat, IMHO.
Nice post. So do we have data on how many $ the BOJ has on its books? And how short the investment world is of Yen? If we remember back to 1995 (I was a yen spot trade then), the big move down was triggered by Asian central banks (among others) unloading long $Yen positions. Now it seems as if there is some huge force of gravity pulling this thing down. The authorities are now stuck with having to wheel out the intervention bazooka and fire away. I don't feel like there has been a huge speculative force to this move (I could be wrong). At some point there will be huge yen repatriation to shore up the domestic economy and local debt situation.
So it suggests at some point $yen may well fall quite far ...maybe close to 50-60 as the 20 year unwind takes place. Of course the Nikkei will go with it. Will Japan be the first fiat nation to finally implode?
Good luck to them sorting this mess out.
Counting treasuries, about $1T as of a year ago.
A world-wide default is indeed inevitable. There is too much debt/entitlements to service and to roll-over, not to mention the Quadrillion in notional derivatives.
The questions are:
1. When?
2. What's the catalyst?
3. How many moves will the PTB make before then?
4. The sheeple will defend the current system - when will they let go?
5. What's the endgame?
After a 7% ramp in the S&P's on the back of weakening eco data and rumblings in Europe, it makes me think there's still a bit more time left. On the other hand, it just takes a few dominoes to fall...
Go Silver!
I wonder why so many people are so obsessed with PMs? Why not buy agri which has been lacking sufficient investment for years...
I'm rooting for silver these days as there seems to be some credence to the silver manipulation. If silver runs away from the big banks (that are short), it may be a domino in the global collapse. On the other hand, getting a run on agriculture products (if that is what you mean) will only cause food inflation and crises in the EM's.
So silver breaks the cartel, while food inflation hits the little people.
In fact, some agricultural products have extremely strong fundamentals. One is cotton. For PMs, I really can't imagine they could appreciate as fast as cotton.
Sept.15 - Cotton futures dropped the most in two months on concern that textile mills will slow purchases, after prices reached a 15-year high.
http://www.bloomberg.com/news/2010-09-15/cotton-falls-most-in-two-months...
In spite of this I suspect Agri in general will be a good play.
Eventually we will end up with a commodity backed currency. This is likely to be a mixture of energy, PM and soft commodities. But it will be real, exchangeable and the focus will be on physical supply of note as opposed to the current nonsense that passes for monetary policy.
The confluence of peak debt and peak everything else will see a huge restructuring........all that paper, all those debts will be simply torn up and we'll start again. Maybe back where we should have been in 1944 at Bretton Woods. Oh to be a fly on the wall back then.
In the end natural laws apply. 2012 anyone?
Profit taking is natural. MSM sites often like to find lame excuses to explain price rises and falls like "concern that textile mills will slow purchases". Do you know why cotton price is still at the current level? Because the Chinese government is releasing half of the national reserve!! Next year, China won't have so much cotton reserve to suppress the price. Besides, just look how much soya beans and maize have appreciated since 2002 and how much cotton have? Cotton is extremely undervalued. What's more, in China, the biggest cotton producer, cotton area is shrinking fast because young farmers are moving into sweatshops to produce cheap products. Growing cotton is a very labour-intensive job.
Next year, we will probably see cotton price at 120 cents.
Problem with cotton (and other Ags) is that you can't store it easily like you can PMs, so the only real way to invest in it is via the futures market, which exposes you to counter-party risk. If things really go to shit in the markets, you may find yourself with no way to access those profits. Not so for PMs that you hold in your own safe.
Physical PMs have no counter-party risk. To buy agri, you must either buy an actual farm or buy agri stock. Buying agri stock has counter-party risk and systemic risk if things fall apart. If you have stock in your brokerage account, you don't directly own it. You have the brokerage risk, the DTCC risk and the government risk of nationalizing anything agriculture related for national security reasons.
To buy an actual farm or enough land to farm would require a lot of knowledge, time and capital to devote to it.
PMs will probably take care of things until a new, stable currency becomes generally accepted. This has all happened many times before in history and will probably happen again after we are all gone and everyone forgets the inherit evils of fiat money.
Because it's hard to fit in your pocket or take on a trip to elsewhere.
Ya have to pay taxes on real estate!
Rather than a worldwide default I prefer to call it hyperinflation of the main reserve currencies.
To your questions :
1. after a protracted period of worldwide credit deflation, say 6 to 9 years from now.
2. fear (eg a large holder of reserve currencies (in whatever form) decides to cut its losses and to bail out from the ponzi fearing someone else might move first. The rest follow suit.)
3. many
4. when it's too late
5. Tyranny
Here is your post, above, in a 1981 movie clip:
http://www.youtube.com/watch?v=-pQVZBtQ9cI
The difference, now, is that most people don't have a life savings to get angry about losing. The average retirement account balance in the USA is just $2,000.
As everyone debates deflation/hyperinflation to death the real story is which "Titanic" will sound the alarm first.
Anyone know how the dreaded JPY carry trade unwind would play out specifically? I'm guessing it would crash all risk trades and send everyone into USD/CHF/Gold. The derivatives it would trigger would bring down everything within a few days, though. That's my non-PhD guess.
It seems like it would be manageable if it weren't for all those pesky derivatives. Gold may actually crash temporarily in that scenario while everyone screams for FRNs at any cost to settle derivatives. Inconsequential, however, since the system would implode in on itself shortly after. I am sure physical would obtain a ridiculously high premium to paper at that point.
The BOJ officials are like WWII Zero dive bombers attacking their own people.
Japan is in a classic deflationary black-hole death spiral described by Irving Fisher seventy-five years ago.
For the past few weeks portfolio outflows from Japan have been 5-10 times bigger than foreign inflows. BOJ is dive bombing its own citizens and driving rates lower will only accelerate the fall in savings.
All the mainstream f.head economists can't come to terms with the fact that the only reason Japan survived for 2 decades was because the rest of the world was booming, now it is consuming itself.
This is why I predicted, back in 2003, Japanese sovereign default as the ultimate rogue wave financial event. I figured they'd default by 2009...a little early obviously.
I predicted
Link ? ;-)
Reminds me of being short JGBs back in 1998 thinking the same thing :-) As they say, timing is everything.
the truth squad is out in force tonight...first the usa is bankrupt and now japan...maybe this will go viral....and then uncle bernankrupt and blobama will plaster pixels with their butt ugly faces and wag their fingers in our faces, pump more lies through the liebilge, and tell us that such tales are undermining confidence...
little do the liars know that the truth will out....
The titanic was filled with all the opposition to the Federal Reserve system. The titanic was Lehman and Bear all wrapped into one day. Damn, the good ole days were great. We used to handle shit in one day, now it takes us 6-8 months.
FWIW, Japan will never default. The gov't may sell them up the river to create more volatility to profit from a declining yen but they will not, I repeat, will not default!
That depends on what you consider "default".
The way I and the author define default, they will, because they have no way to avoid it at this point.
Ditto for the USSA.
It's not up to them to default. They have no say in it. The taxpayers will default for them. But that's cute that you think it matters.
"Worldwide Simultaneous Sovereign Default !"
Coming soon to the streets near you.
^THIS^
Physical PM's bitchez!
This Japan-bashing is silly. Japan remains a global creditor nation, with a vast industrial base, world-class high-tech, a vast R & D base, a huge trade and current account surplus, all backed by a heavily regulated financial system which isn't about to indulge in suicidal bubbles. Japan's demographic problems can be solved by adopting French or Russian-style family bonuses for having more kids, plus allowing for more immigration.
Jim O'Neil is half right: the decoupling story is happening. But decoupling is going to bail out Germany and Japan, not the US. It's our own damn fault, for throwing our money away on toxic financial bubbles, bankster scams, and failed trillion dollar colonial wars.
You should have read Alex Kerr's Dogs and Demons: Tales from the Dark Side of Japan before you came up with such a conclusion.
One side effect of a housing bubble is lower birth rate. That's what's happened in Japan and South Korea and what'll happen in US and China.
The decoupling story is bullshit and Jim O'Neil's BRIC story is a sham. Do you think those Chinese consumers will buy tonnes of products from Japan to pull it out from a recession. Absolutely not!! First, the distribution of wealth in China is highly inequable. Second, ageing problem in Japan means more people consuming while not producing anything.
Why do you see this article as "Japan bashing"? Are we not allowed to acknowledge some of the very real problems facing Japan?
The chart on savings rate is a little alarming: according to reuters, this year the government deficit is about Y40tr; with just Y5tr of disposible income and pensions (2008 figure according to the chart), the rest must come from corporates like banks and overseas investors. Therein lies the key - overseas investors come and go, but banks must buy JGB as long as they rely on the BoJ fro liquidity. In other words, Japan has been monetizing its debt for all these years with seemingly little side effect apart from endless recession. Maybe that is why Krugman is confident the US ponzi can continue during his lifetime.
Is the writer an Eskimo? When he gets here........ Nice presentation and boat pic. Whadaya' frickin' know?...Corruption is universal...we'll I'll be damned....I thought they just did that here in Chicago....and the 3rd World...oops...guess we're all 3rd world now!
....."decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic." Howa'bout we dispatch anyone and everyone that has ever been in a "closed door" meeting...now that might beget transparency.
Let em go to their closed door meeting and lock them in.
'If they successfully weaken the Yen, why will foreign investors invest in their debt paying 1%?"
The Chinese recently purchased some Japan Government Bonds. And what does the Japanese government do with the proceeds of the bond sales? Whoo-hee! It goes on a dollar buying spree in order to weaken the yen vs. the dollar (and vs. the yuan which is tied to the dollar). Doesn't sound like such a good deal for the Chinese...
Those Chinese bureaucrats are idiots and have always behaving like cretins. Just look at their track record. They invested in MBS and Morgan Stanley. You know the results...
Is this a dumb question?
Why have Japan's public and private sectors not paid off their debt in 20 years?
I don't want to see us going down the same path.
Because the economy has been contracting for 20 years. Corporates don't have enough money to pay off the debt. Besides, the central bank has been supporting zombie banks and then corporates by rolling over existing debt. The low rate has encouraged corporates to borrow and invest overseas.
hmmm no, the Japanese economy hasn't been contracting for 20 years.
It hasn't been growing much either :
the annual GDP growth adjusted for inflation has averaged +0.27% during that period
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=JPY
and despite this quasi zero growth the unemployment rate during that same period has averaged 3.88%
For the man in the street not really what I would call a "depression", but for those who invested in Japanese equities and real estate it has been a catastrophy.
As to the future, Yes, the Japanese economy is likely to collapse. But so are the US and European economies. Which of the 3 big dominoes will collapse first is IMHO difficult to predict, anyway the other two will fall very quickly thereafter.
it seems that most analysis on japanese tax receipts never factor in the ~50% estate duties which will soon be coming in through the demographic 'time-bomb'. If you don't understand why the yen is so strong, it's probably a market you want to stay out of.
Good point Epsilonphase! The wasteful bureaucrats certainly have access to more of the citizens' assets than is known.
So now I'm wondering how much of those prospective estates have already been consumed by the soon-to-be-deceaseds' NEET children.
NEET- Not in Employment, Education, or Training. Iapanese for "parasite"
With a falling domestic stock market, falling Real Estate market, and at least one do-nothing adult child at home eating up savings, exactly what estate are we talking about?
hmmm...
That is one of the reasons why they have so many (230000) missing centenarians? Guess most of them have a zombie account at a zombie bank to receive their zombie pensions and avoid real estate taxes...
And yet the Yen keeps strengthening. Obvious the doom of Japan will happen, but I'll be damned if I can say when.
The market can indeed stay insane far longer than any of us can remain solvent, it seems.
I don't know if the following strategy will be valid for Japan, but I know how the US can solve its debt problem. Of course, this is the one thing I have written that is most likely to get me killed.
The American government has been spending trillions of dollars on programs it had no Constitutional authority to create, and such unconstitutional expenditures exceed the amount of the federal debt. Therefore, the federal debt is unconstitutional, and given that the US Constitution is pretty simple, then anyone who loaned money to the US government should have known that they were loaning money to a fraudulent enterprise and thus should not expect repayment.
Ha! Ha!
Nanner! Nanner! Nanner!
Of course, there would be a huge consequence – no one would be willing to loan money to the US government again until it started obeying the Constitution, which would be ...
Good!
http://www.endofinnocence.com/2010/09/us-federal-debt-problem-solved.html
One of the stranger things I found about Japan, especially in dealing with government bodies and super large corporations was that everyone was essentially broke.
Definitely broke when it came to meaningful expenditure, and yet the road repair and bridge building crews were always at work.
Even the largest, multi-billion dollar giant kiretsu (sp) are credit heavy and cash broke.
That after 30 years of export dominance. We can all draw our own conclusions.
ORI
http://aadivaahan.wordpress.com
I looked at one of the eye-candy charts above that read "japan's central bank rate was the lowest since 1880," at 0.3% and cannot be lowered. However casual scrutiny of the same chart revealed that the rate was lower from about 2001 to 2004. I would be uncomfortable briefing this author's observations and charts.
help but wonder about the implications of a Japanese economic crash on Red China's influence. Any japanese bailout or stimulus will come from China. If the Japanese people see the Western imposed systems as being responsible for their plight we could see much stronger Sino-Nippon ties including a military alliance.
The Chinese hate the Japanese and vice versa. The Japanese won't blame us - they know we have saved them trillions over the decades by providing defense for them.
agreed. way too much bad blood & history between the two tribes.
Cooperation could only be a Sun-Tzuian/ninia ruse to get close enough to decapitate the enemy leadership. Which is also highly unlikely to be considered by their respective hide-bound bureaucracies.
They both might blame the US for blowing up their Current Account Surpluses, however. That could lead to something interesting.
I'm not sure I see the fiscal side of the problem in japan - the debt is largely held domestically and the government has been spending to stimulate... ipso facto, the government can buy bonds off the market straight through the centralbank whilst feeding money into the economy. Likewise, Japan can stop govt. stimulus.If that causes deflation, at the same time - like ever other nation - it caneither collapse or enact 'structural' reform reform. - and it's in a much better position to that than anywhere else.
I look at it differently, I think Japan will do fine as it still has the production capacity. Furthermore, Japan is in its >finishing< lapses of amortizing banking losses over 25-30 years. When that's done, it give you even more capacity for investment. They are also starting to look at how to increase childbirth rates, look at the turnaround in Russia when it comes to birthrates. Third, asset prices in Japan are compatibly cheaper than in most developed countries.
This is a great article. Simply written, giving a panoramic and dynamic presentation of what ails Japan's economy and easy to understand even by a non-expert, so you can recommend it to those who aren't trained in economics. I give it 5 stars and will recommend it.
It is hard to see this ending well but Japan has juggled and kept so many balls in the air for so long that she may not be the first to go. The favourite still looks like Greece.
I'm going to sleep. While I sleep. Gold and silver will be doing this all over the world.
http://soundbible.com/576-Barrel-Exploding.html
Sleep well. $1277 so far.
It's not hard to see where a fallout could come from. One default (anywhere) and the dominoes will start to tumble. This was highlighted with the euro bank exposure to greek debt. A greek failure would crush french or uk banks, with no room for further bailouts and put more strain on the struggling economies/bond markets.
The system is too interconnected to allow a 'controlled demolition'.
Japan has dodged many bullets over the years but this was when the rest of the world were beginning to build their debt. We have now reached the top and the most dangerous part of what is truly a ponzi scheme.
My lord, we're still on the "Japan will collapse" theme? This is even worse than the 'gold is going to $2500' cries the goldbugs have been claiming for years now.
When is Japan collapsing? What's the trade on this? What's the timeframe?
These same arguments have been made about Japan since the mid 90's, yet Japan hasn't collapsed.
If you're not giving hard dates with these predictions, they're bunk. I predict sometime in the next 50 years the stock market with experience a 25% drop. If it happens, remember this post because I was oh so prescient.
I knew you had no idea how a currency sovereign operates under a fiat monetary system when you posted nonsense like this:
"This isn’t a positive development when you are running $600 billion annual deficits and desperately need investors to buy your debt."
"If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. "
Japan can keep the rate on its "debt" as low as it wants for as long as it wants. There is no 'market' that will force rates higher. If you're theories were true, we would have seen evidence of this in the 10 year rate which has stayed at low levels for a decade or more. The BOJ can easily buy the bonds if outside demand falls and can continue to do so for as long as needed but here's the kicker:
JAPAN DOESN'T EVEN NEED TO ISSUE DEBT IF IT DOESNT WANT TO!!!!
That has and always will be a voluntary move. If they stop issuing debt, no problem, they come up with new ways to accomodate the spending without the accompanying reserve drain that debt causes. They simply do this to keep a risk free rate the private sector can base it's own debt operations on, not to "fund' anything. Get this right.
Japan will always be able to service its debt. How could it not? It "owes" everything in Yen, WHICH IT CONTROLS AND ISSUES AT WILL. There is no worry of default EVER. AAA ratings mean nothing for currency sovereign, Moody's could reduce their rating to CCC and it wouldn't impact yields. The BOJ could always by the bonds to achieve the rate levels it wants to maintain. Even if it required "printing", so what? You just mentioned the skyrocketing Yen, doesn't that and the deflationary environment give Japan room to print and inflate?
You folks seriously need to get off your gold standard, currency sovereign governments are like individuals, there are bond market vigilantes mindset. You clearly have no idea how modern monetary operations work for regimes like this and as such, your analysis is pretty laughable as a result.
You guys have continued to maintain your credibility with respect to Japan by continuously trotting out these predictions of doom and gloom, yet the empirical evidence always shuts you down. Japan keeps trotting along just fine. Start rethinking the paradigm by which you analyze these economies and you just might be able to square your predictions with reality.
Pretty lame stuff most of the way through.
" There is no worry of default EVER."
Good to disclose you have no idea what default is.
Try again, but with some sense this time.
Huh? I only know one definition, when you stop making payments on legal obligations of debt. No other definition of default is included in any analysis.
If you're referring to inflation or currency risk, that's another issue.
The game ends when the savings rate goes negative. The game ends when an aging population needs to cash in its Yucho and Kampo accounts, plus collect their pensions.
I am someone who managed money there and was happy to keep buying JGB's even when the rates approached zero, because I was of the belief that the then savings rate, plus the not-yet-scary demographics would save them, especially when coupled with the cultural idiosyncracies that make Japan Japan. (That's also why I am not yet scared by UST's, though I will be later....let it breathe)
I have some idea what their pensions and major public savings accounts look like (see my post below). I have waited patiently for the match that might set off the dynamite in their system. Perhaps the match has not yet been lit, but it is in the room. Savings rate and demographics, plus a system now built on a bedrock of ZIRP has brought the day of reckoning within sight. This year or next SR goes negative. Yes, that is a wide time frame, but it ain't fifty years.
I'm going to play broken record and sing the same song I've sung before. Key of Bb please.....
Japan is in a world of hurt. The attempted "solutions" to the dai boraku (big crash) are what's hurting it.
Japan did three things to try to recover from the end of the Bubble Economy. First was obfuscate. Second was spend. Third was ZIRP. The overused phrase is 'perfect storm'.
The deficit has been covered here, so I'll leave out the spending part and concentrate on the obfuscation and ZIRP.
Japan played hide the pea to try to make the bad debts go away. Generous accounting rules allowed banks to hide toxicity in unconsolidated subsidiaries. These same subs were used to generate "income" by crossing trades and using the settlement period to determine what side of the trade was a winner and which was a loser, with the losers eventually booked in a non-consolidated sub. Like the carnival barker says, everybody's a winner (when you are both long and short the same future at the same time). A bizarre aside: BOJ rules had Japanese banks setting aside HIGHER reserves for German Bunds owned than for "loans to bankrupt Japanese companies". Currency risk does not explain that oddity.
By the mid 1990's Japan decided to reliquify the banking system by using public accounts and pensions to buy the cross shareholdings of corporate Japan. It was euphemistically called PKO (price keeping operation), a play on the UN Middle East peacekeeping operation of the time. Another goal was to create confidence by initiating a stock market rally.
Hundreds of billions of dollars worth of stocks were purchased by trust banks using funds allocated from the Postal Savings and Postal Insurance accounts (Yucho and Kampo) as well as pensions.
Enter more innovative accounting.....contractual payouts (originally 6% per annum at the time of PKO intitation) could be made from realized gains, offset by realized losses. With JGB rates a hundred or more pips below the contractual payout rate, fund managers needed to chase alpha. Unfortunately, it was in scarce supply, so winning positions were realized (often put back on the books at the crossed price) and losers were held so as to avoid having to offset the meager gains. Over time the equity portfolio became a collection of losing positions, i.e., dead money. On a Nikkei basis, the Yucho/Kampo/pension portfolios are probably somewhere around Nikkei 25000-30000, even though the index never approached those levels during the time of the PKO.
In subsequent years, many of these accounts benefited from the JGB bull market, but a large percentage of these bond positions were also crossed to realize gains and make the contractual payout. Many of these JGB positions are now on the books at or near current market, so any backup in rates creates paper losses and more dead money.
How underwater are these accounts? I doubt even the authorities in Japan know, because one of the cultural traits of that society is to avoid stating the obvious if the obvious is unpleasant. Lack of knowledge is sometimes considered a good thing, because it obviates the possibility that someone will say something unpleasant or "confusing".
If Japan had Saudi Arabia's demographics (average age about 18 months, average fertility about 200 per woman), underwater pensions and national savings accounts would not present an immediate problem. With Japan's reality, however, it is not good.
Enter ZIRP (with implications for the US as ZIRP becomes a bedrock of the economy)....
What does ZIRP do to old people and to the savings rate? Kicks it in the teeth. Savings are wonderful when they earn enough interest to cover living expenses of retirees. When .001% coupled with a 20% tax withholding becomes entrenched, an aging population---who were Japan's savers---dips into principle. Japan's savings rate will probably go below zero in 2010 or 2011 at the latest. People gotta eat.
Oh yes, lest I forget, when Mrs. Watanabe tries to cash out her Yucho or Kampo account, or Mr. Suzuki waits for his pension check to arrive, both will soon learn that the money they think is there, and should be there, is not. Underfunded is the term.
ZIRP's problems do not end there. Low low rates discouraged fiscal responsibility, since the marginal increase in debt service is deemed acceptable. The debt continues to build up, however. Imagine a Japan with 10 year JGB rates at 3% and short term rates at 1.5%. That would be a Japan where 100% of tax and fee revenue goes toward debt service, leaving nothing for schools, roads, defense, bridges to nowhere, etc.
As the Ginsu (non Japanese) ad says, "But wait; there's more"
Any lending that came out of Japan's banks during the Za-ru-pu years was put on at very low rates. That's all well and good when it is funded short term by free money. Any rise in rates, however, makes funding more difficult. It would be nice if Japan's multi-trillion dollar banking system was running a matched book, but they are not. The belief in perpetual ZIRP encourages short term funding of long term positions. Ever try to hedge a few trillion dollars worth of positions? Who is going to take the other side of that trade?
ZIRP is addictive. Dabble with it and escape is still possible. Once it becomes entrenched in the system, escape is impossible. Governments cannot service debt, banks cannot hedge assets, and aging citizens cannot help but dip into principle.
As savings go negative and as Japan's demographics catch up with it, they are left with two choices: let rates rise or let the yen go.
The recent yen rally (clobbered by a victorious Kan) was, I believe, a headfake having a lot to do with repatriation as Japan's fiscal half year ends. It also had a lot to do with the world's embracing of momentum investing.
Kan may be Japan's first realist PM since Koizumi. I think he's going to let the yen go. Can the decline be controlled? Will a yen tumble---if it occurs---lead to a rush into another currency or an abandonment of all fiat money? I am not a practising goldbug, but I have to admit that when I consider this scenario, Gordon Gekko's argument looks a little better than Johnny Bravo's.
So if I translate this, it means the following:
- The Japanese population will move from saving to spending cause as you said 'people gotta eat'
- They will reduce their demand for govt bonds, which I assume you think means that the market for govt bonds collapses and drives rates higher.
The next logical step I assume would be what you alluded to in the end of your post, which is that the increasing rates will cripple the banks and the other ripple effects.
When will people realize that Japan can keep the rate as low as it wants for as long as it wants? The market has nothing to do with it.
They don't need to issue debt to fund a damn thing. When will people hop off this bandwagon? They issue debt for the following reasons:
- to drain reserves that result from govt spending or provide a return for those holding excess Yen(namely countries that have a trade surplus with Japan)
- to provide a RFR that banks and other financial firms can base their risk pricing off of
- provide a safe haven for money in times of uncertainty
That's it.
I might be missing your point.
Japan runs a fiscal deficit every year, adding to the pile they began accumulating after the collapse of the Bubble. They have three ways to pay for this deficit: print yen, sell external assets, issue new JGB's.
Japan has chosen to issue new JGB's.
As existing JGB's mature, they are being reissued, albeit at the current low rate. This is all well and good if Japan has surplus savings. This year (or next) the rate will go negative. The pool of funds available to purchase these JGB's, both maturing and newly issued, will be in deficit.
Why the negative savings rate? The demographic bubble skewed toward the golden years, coupled with ZIRP. People are not choosing to spend vs. save, they have no choice. Pensions and interest received no longer covers living expenses, so the retirees are dipping into principle or withdrawing from Yucho. Japan's young are neither a sizeable enough population to make up for what the elderly are cashing out, nor do they earn enough to make up for what is being eaten. From 1989 until this year the rate was positive, so the deficits could be funded domestically. This ends now.
What can Japan do? Attract external capital, allow rates to rise so that funds move from other assets to JGB's, or print yen. I suppose they could also slash the budget, but there is no political will to do this. Thus they will issue more debt.
In my post I alluded to a conundrum Japan faces (after years of ZIRP) and what the US will face: the system cannot tolerate a rise in rates. Everything is geared toward low rates. Thus, I suspect Japan will first try to attract external capital, perhaps liquidate more non-yen assets, and then print yen. The yen's recent rise has been a result of corporate Japan repatriating external assets in order to fund themselves and the government's deficits.
Another of my points was that as the population ages, the holes in pensions, Yucho and Kampo will become clear. The shortfalls are staggering. I suspect the solution to this will also be yen printing. Frankly, I doubt the authorities even know how bad their own situation is, nor do I think they want to know. That is the Japanese style, as I witnessed for more than a decade running money there.
I did not mention default, as I am well aware printing remains the option of last resort. My argument is based on a change in the fundamentals (positive to negative savings rate) which materializes this year or next. Their economy cannot tolerate higher rates, so my belief is that yen printing will pick up steam. In times past a country might be able to get away with endless printing; the last few years have changed that view. Most now realize that there is a marginal unit of currency that once printed, renders every other existing unit of that currency worthless. Orderly declines may no longer be allowed by the market.
The Yen only gained altitude because it is like a small plane that got hit by a 747 mid air. It got a big bump while both are exploding.
I've lived in the Land of A Billion Automatic Sliding Doors for quite some time and can only confirm the crazy boondoggles the Japanese government is involved in to keep the show going. Many, many anecdotes about this... The poor Japanese people, indoctrinated with the ethic of obedience and suffering in silence, pretty much keep their jaws clenched when confronted with these excesses. I think these cultural factors are the most overlooked aspect of the great Japanese Ice Age. Westerners will NOT buy near-zero yield bonds for so many years while the government runs huge deficits. Especially not the average US citizen; too emancipated for that. Only few people understood the negative effects of credit expansion enough to get pissed about it when it was happening; but enough understand the problem of govt deficits. I'd like to meet the PhD who can express that in his equations when comparing the US to Japan.
http://www.abs-cbnnews.com/global-filipino/world/07/08/10/japan-pm-targe...
Chart of the day: DOW/YEN
http://i298.photobucket.com/albums/mm246/johnlf/dow-yen.jpg
I think they should write off at least 50% of the debt but raise the interest rate paid on the remaining debt to 2-3%......that should do it.
To think that with the current political policy along with following bankrupt economic ideas that the US is not headed for the same out come is insane in and of itself. Unless major policy changes are made soon we will pass the point of no return and the consumer will act accordingly
The Japanese's problem is less one of debt than it is one of a contracting population, increasingly dominated by the senior aged cohort, which in addition to getting smaller in absolute numbers every year, demonstrates a shrinking marginal propensity to consume as the median age of the population steadily advances.
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