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Japan: Land of the Rising Debt

Vitaliy Katsenelson's picture




 

Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

The prelude to the current crisis began in the early 1990s, after Japan’s housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan’s ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe.

A country with ballooning debt needs to have an expanding economy to outgrow the burden. Economic growth is driven by two factors: productivity and population growth. Although the Japanese economy may continue to reap the benefits of productivity gains, population growth is not in the cards.

Japan has one of the oldest populations in the developed world — every fourth person is 65 or older — and its number is on the decline. The Japanese birth rate is one of the lowest in the world, a meager 1.2 children per woman. To maintain its current popu­lation level, the average woman in Japan would need to give birth to 2.1 children. (Of course, only economists know how a woman can give birth to a fractional child.)

The severity of the debt problem in Japan has been masked by the fact that government spending on interest payments has not changed over the past two decades, as the average interest rate paid on the country’s debt declined to 1.4 percent in 2009 from more than 6 percent in the 1990s. This is about to change. Historically, more than 90 percent of Japan’s government-issued debt has been consumed internally by its citizens, directly or through its pension system. But the savings rate in Japan, which was in the midteens in the 1990s, today is approaching zero and will likely go negative in the not-so-distant future.

The Japanese economy operates on the assumption, soon to be proved false, that the government will always be able to borrow at low interest rates. As internal demand evaporates, the government will have to start hawking its debt outside Japan — in a more realistic world, where interest rates are a lot higher. Japanese ten-year Treasuries currently yielding 1.3 percent will not stand a chance against U.S. or German bonds of the same maturity, which yield 3.5 percent and 3 percent, respectively. Japan will have to offer rates far in excess of its U.S. and German counterparts. Although they have their own set of problems, the U.S. and Germany still have much lower indebtedness and superior demographic growth profiles.

Higher taxes and the austerity measures that undoubtedly will follow, combined with higher interest rates, will further slow Japan’s economy and drive the country toward insolvency. Unlike Greece, which because of its size could be bailed out by Germany and friends — with a little help from the ever-willing International Monetary Fund — Japan is too big to be bailed out. Defaulting on its debt, especially when the majority of it is held by its own citizens, is a political impossibility. But unlike European nations that socialized their currencies and cannot print euros on their own, Japan has complete control over its currency printing press. And print it will! Decades of deflation will turn into hyperinflation, which will destroy the purchasing power of Japanese citizens’ savings and collapse the yen.

The consequences of the economy’s slow but sure unraveling in Japan will spill over to the rest of the world. Japan is the second-­largest holder of U.S. government debt, and most likely it will start selling Treasuries. To make matters worse, Japan will start competing with the U.S., not just in cars and electronics but for buyers of sovereign debt. As Japan exports inflation, interest rates around the globe undoubtedly will rise.

Timing bubbles — and Japan is in the late stages of an enormous debt bubble — is very difficult. They tend to last longer than rational observers expect. But as Japan’s debt continues to swell, the eventual bursting of the bubble grows more catastrophic.

Japan is proof that a country cannot borrow itself to prosperity. The U.S. and other developed nations still have a chance to make the politically difficult but right decision to cut fiscal spending and stop looking for government to be the source of sustainable growth — which it never is.

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo.  He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).  To receive Vitaliy’s future articles by email, click here.

 

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Mon, 08/02/2010 - 02:15 | 499217 Bear
Bear's picture

If Japan is in such precarious shape, why is the Yen at 1.15?

Why is the Yen a safe haven?

If the US is approaching the same precipice then why is UST at 128.5?

And the Mother of all Whys ... Why if there is such a rush into 'safe havens' (Yen and UST) is the Market at 1106 and not 806. How can it be both bad and good simultaneously? 

Mon, 08/02/2010 - 06:43 | 499277 anvILL
anvILL's picture

Here are some very real reasons on why the JPY is strong.

Reason 1
We tend to keep our savings in Japanese banks with unbelievably low rates.
Then, the banks buy lots of treasuries with our savings.
Which are both rather irrational actions, but its real.

Reason 2
We are about the only group of people on the face of this earth that doesn't riot even if 95% our country's extraordinary debt is financed by ourselves.

Reason 3
No other country is going to ask us to pay back our debt.
Even if they did, they can only take out 5% of it.

Reason 4
Ben Bernanke is not a Japanese name.

Therefore, change in Japaneses' perception, Japanese savings (and of course our printers) are the things to watch if you want to make an educated guess on when JPY will tank.


Mon, 08/02/2010 - 06:52 | 499280 anvILL
anvILL's picture

One really big reason I forgot to add.

Japan is far from overbanked compared to other developed nations.

Sun, 08/01/2010 - 23:30 | 499144 chindit13
chindit13's picture

Tabi tabi sumimasen, but I will add a little wrap-up here with some stray thoughts on Japan.

Everything in Japan moves at the measured and even glacial pace of the Tea Ceremony (along with the agreed-upon "meaning" of every discreet movement), but it does move.  Japan is changing.  In a land where there is ceremony for the sake of ceremony, and where sometimes ancient history is invented on the spot (and where Kurosawa once said, "Japanese culture?  I invented Japanese culture!"), time will tell if it is for the better.

One of the more admirable parts of that society is the willingness, even compulsion, to pass down expertise from one generation to another, and for the learner to possess both the patience and the passion to become the next expert.  One can see this in everything from laquerware to noodle making, the produce of which can be spectacular and border on perfect.

This trait was also incorporated (after a prod from an American) into industry, and resulted in the evolution of miserable and shameful products like 1963 Toyotas and the old Mazda 505's into the Toyotas and Hondas of the late 1990's.  For those who are unaware, this industrial thrust into quality and efficiency was centered primarily in export industries;  domestically Japan is wildly inefficient (see goods transportation) and produces some real crap (residential construction).  In any event, somehow and at some point, this began to change.  Sony products are not what they used to be.  The rash of Toyota and Nissan recalls borders on a national disgrace. 

On the spectrum of the 1960's insult "Made in Japan" to the 1990's "Japan quality", things are moving back to the left.  Maybe that is the natural progression of a society.  Maybe it is the effect of lost confidence after the collapse of the Bubble Economy.  Maybe it is a result of too much outsourcing of components to China.  Maybe it is the "economy" forced upon a nation no longer as rich as it once was and where corners now must be cut in order to compete.  Maybe it is the offshoot of a land where polled youth once listed "salaryman" as their life's goal, but where the majority now list "hair dresser" as the ultimate.

Whatever the reason, Japan and its place in the world are not what they were.  The change may be slow and almost imperceptible, but it is there.  It's economy is no longer Number Two in size, now passed by China.  Its manufacturing and engineering, while previously on par with German, has been usurped.  Even its international tourists are no longer the ones most favored and catered to for the size of their wallets and willingness to open them.

Most of this is subjective.  The country's finances, however, are objective.  Japan's decline has been at a snail's pace, but it may gather steam in light of the world's economic slowdown, Japan's aging populace, and the fact that the once vaunted savings rate goes negative in 2010.

 

Sun, 08/01/2010 - 23:37 | 499152 bingocat
bingocat's picture

Otsukaresama desu (MIME doesn't work on ZH).

Sun, 08/01/2010 - 22:53 | 499122 chindit13
chindit13's picture

My own mention of the late Shin Kanemaru (for those of you who don't know him, imagine a humorless Don Rickles in Japanese skin) brings to mind an experience from the time of his demise.

Japan's LDP use to feast off of "contributions" from the country's construction industry, which in turn was rewarded with contracts to build bridges to nowhere and to dig Cool Hand Luke ditches.  It was a wonderfully cozy relationship until the electorate began to awake from its society-imposed slumber.

An investigation into this relationship led to a visit to one of Shin Kanemaru's homes, where a 'deconstruction' of his floor revealed an enormous stash of physical gold.

A disgraced major political figure then led to some interesting behavior, which I was privy to see after being invited to the inner sanctum of a major Swiss private bank vault room in Tokyo.  My Swiss guide told me, at the time of the visit, that a seemingly endless number of political "secretaries" had been calling and asking to store personal stuff at the bank.  The vault was filled with enough gold bars, coins, ornaments and other treasure to bring our own Gordon Gekko to multiple orgasm.

A few years earlier I had visited the vaults at Iron Mountain Depository.  I'm not sure the Swiss bank's vault in Tokyo held less gold.

Sun, 08/01/2010 - 23:32 | 499150 bingocat
bingocat's picture

Classic! One of the few ways to get Swiss banking secrecy in Japan is bearer assets in Safety Deposit boxes...  That and really aggressive bank loans on real estate purchases (or companies issuing Alpine CBs purchased by family scions).

I remember doing the math at the time when Shin Kanemaru was arrested and thinking that the total (gold, securities, cash, bearer bonds, etc) had to come to more than JPY 50 billion. I thought that was a pretty impressive pile of envelopes left on tables at ryotei in Akasaka.

Sat, 07/31/2010 - 23:55 | 498339 Terra-Firma
Terra-Firma's picture

Hungry people are not patient people. Homeless people maybe; but not hungry ones.

People are starting to get hungry folks. This is really happening. The cognitive dissonance created by government's PR machines and market manipulations are stirring anger as a natural response. People will not accept that global wage arbitrage has reduced their price in the open market.

The US standard of living is going to drop by about 1T maybe 2T tops. The real political question for the elites is who to cut off. Their will be winners and losers. Question is who decides? government or the market?

Is US society capable of these political decisions without bloodshed?

The soft Japanese landing won't work in the US. Gun ownership is higher here. Totally different cultures. Lots of business research to justify this reality. So let's not blindly assume that what's happening in Japan will happen in the US. I call BS on this.

I think the US economy will fragment and morf into an economy with pockets of supply chain breakdown inflation; extreme wealth concentrations, and deflation everywhere else.

Ask yourself if government can really pull it off!!!? I call BS on this. The only way to do it without civil war is to let the market decide who wins and who loses and to contain the collateral damage. I've always wanted to use that in a market sense.

Sat, 07/31/2010 - 17:43 | 498153 linrom
linrom's picture

Oh my, the land that actually works wonders for its citizens. Imagine US spending all its tax revenue on social security and taking care of its elderly at the same time? US is broke even before its social security fund contributions turned negative--imagine, if 25% of its citizens will draw retirement funds!

At least in Japan, men wear Gucci shoes and Armani suits for leisure, feast on tuna, drink exquisite tea and are chauffeured to work in public trains, beaming with Nippon pride. In the US men live in bank owned tenements, wear clothing Made in Thailand, eat chicken byproducts, drink corn syrup water and drive in soon to be reposed Japanese made cars while listening to newscasts telling them how we must get rid of social security, spend more money on bombing cave dwellers in Pashtun and let in more H1B Indians because we are too stupid and lazy and that's why we need more Mexican immigrants.

Sun, 08/01/2010 - 12:05 | 498572 Kobe Beef
Kobe Beef's picture

uh...really? Which Japan do you live in? Not to be a troll, but...

I should post some pics of the horrible 4000Y shoes & shabby 10,000Y suits I see on broken, depressed salarymen oozing with Nippon despair "chauffeured" on JR everyday.

If you want to see any Gucci or Armani, you have to catch the Housewives at the department store. If a man is wearing expensive shoes, he's a gangster or a host. These guys are chauffeured, however, and you simply will not see them on a train.

Your perspective on Americans may be correct. I haven't been there in awhile.

Sun, 08/01/2010 - 22:37 | 499103 chindit13
chindit13's picture

I believe the fellow spends too much time on Omote Sando.  Ought to stop by a pachinko parlor on any given workday and see those Armani (sic) wearing salarymen putting in a good day's work, before heading home "fashionably late" so as not to lose face in the watchful eyes of the neighbors.

Of course, even Omote Sando has lost some of the glitz, as a Japanese friend in the jewelry business regularly makes low-ball offers on Piagets and Audemars Piquet, Kashmir sapphires and Golconda diamonds, that those prolific savers of Japan used to sport so proudly.

It ain't Shin Kanemaru's Japan anymore. 

Sun, 08/01/2010 - 17:42 | 498908 stev3e
stev3e's picture

@Kobe Beef-  Right On.  All these people trying to tell everyone how well the Japanese are living have no clue.  Obviously they do not live in Japan.

Sat, 07/31/2010 - 16:21 | 498091 eludog
eludog's picture

Japan will print money if they ever have to in order to pay off debt.  It is that simple.  If the yen's value decreases, so be it.  It will make their products cheaper.  I've always wondered who would ever buy a ten year Japanese bond at 1.5%.  The answer is simple.  Just print more yen.

Sat, 07/31/2010 - 15:42 | 498046 Grand Supercycle
Sat, 07/31/2010 - 13:51 | 497902 ElvisDog
ElvisDog's picture

I'll believe it (Japan raising rates) when I see it. I've been reading predictions of Japan imploding and having to raise rates for 10 years at least.

Sat, 07/31/2010 - 18:44 | 498190 Colonel Sun
Colonel Sun's picture

Exactly. 

And the collapse of Japan was always presented as both a foregone conclusion and imminent.

Sat, 07/31/2010 - 08:41 | 497641 Gussiefink-nottle
Gussiefink-nottle's picture

Japan is the model that is held out as proving that it is possible to rack up huge quantities of sovereign debt and indulge in periodic bouts of quantitative easing without catastrophe ensuing. And twenty years on Japan is still there, without much growth it's true, but with a reasonable standard of living for the majority of its population.

However Japan did and does have a number of advantages that are not universally shared. First and foremost it is an export driven economy. Looking at Japan as a corporation, it enjoys strong revenue and is therefore able to purchase from abroad the things it needs without incurring debt because its trade balance is positive.

Secondly, Japan has an homogenous population who were inclined to save. It was therefore possible for the government to sell the majority of its bonds to its own population. This avoided the less palatable alternative of being forced to borrow from abroad.

Thirdly, a large proportion of Japan's twenty year stagnation has been during a period when the rest of the planet was enjoying strong economic growth.

The question has to be asked, is it possible for other economies and in particular the USA and Western Europe to operate similar policies to Japan but without sharing the advantages of that country? And indeed, now that those advantages seem to be slipping away, can Japan itself continue to operate as it has previously? I suspect not.

The real challenge remains the global imbalances in the world, where one half produces and sells whilst the other half buys and consumes. Long term that cannot work because the consuming half does not enjoy rising real incomes. For many a year that consumption was financed by rising real debt and when the consumer ran out of puff, governments took over leading inexorably to the current sovereign debt problems.

The truth is that the global imbalances are the elephant in the room which nobody wants to face up to. The exporting economies want to keep on just as they are because they hunger for high levels of economic growth. Western corporations are happy because they can outsource their production so keeping their costs down and their margins high, and western governments have been content to see consumer prices kept in check so that any index linked liabilities that they might have have been minimized.

It is the people in the middle who have been squeezed. If we are ever to have a truly sustainable recovery these imbalances have to be addressed, but don't hold your breath. 

 

 

Sat, 07/31/2010 - 11:14 | 497754 pitz
pitz's picture

Thirdly, a large proportion of Japan's twenty year stagnation has been during a period when the rest of the planet was enjoying strong economic growth.

I'd suggest that the 'rest of the planet was' not 'enjoying strong economic growth'.  Only that the rest of the planet's GDP figures were being juiced by the heavy introduction of FIRE, and not by real, sustainable economic growth.

Viewed through that lens, Japan actually looks very good. 

Since we know that FIRE is doomed to collapse, Japan is far ahead of the curve in ridding their economy of such waste. 

Mon, 08/02/2010 - 19:51 | 500347 Kayman
Kayman's picture

Pitz

That is right on.  The rest of the world went through the ILLUSION OF GROWTH.

Everything was MARKED TO MARKET on the way up. Now the Fed has $2.5 trillion of used toilet paper (one side only) and the assets to support debts are not there.

 

Sat, 07/31/2010 - 07:14 | 497591 chindit13
chindit13's picture

This is an interesting read (comments section). A bit of cheerleading mixed with a dash of doom and gloom.  With Japan, the reality is the hardest thing to know, because in that culture there is often a collective and unspoken agreement to pretend.

Having headed an IB prop desk there in the 80's and 90's, and also been a fund manager (yes, one of the dreaded FIRE-types), I am of the view that US financial shenanigans have nothing on the Japanese. 

First an anecdote about a peculiarity of the culture, which in a way is illustrative.  Way back when, a married Western colleague was having a fling with one of the OL's. So was a married Japanese colleague, with another OL.  On a night out, some other Japanese colleagues---after having their tongues traditionally loosened by the first sip of alcohol---remarked that "Jones" was typical of the decadent West and its loose morals.  I noted that "Tanaka" was doing the same thing.  Their answer:  "Yes, but in Japan we do not frown upon such things;  wives even expect it, so it is okay for Tanaka to do it".

Now for some "financial engineering", Japanese style.  Back then (maybe still) subsidiaries did not need to be consolidated on the parent's BS or IS if the subs' revenues, sales, or profits represented less than ten percent of the parents' total.  What firms used to do, then, was to cross a large block of futures contracts on the open or close of either the AM or PM session.  When it was time to settle the trade a few days hence, the "winner" was booked on the parent's books and the "loser" in a subsidiary.  This was extremely common and even became a product offered by IB's to local firms.  Everyone from major beer companies to giant manufacturers used it.  I remember a listed company declaring bankruptcy in the early 1990's, with the Chairman quoted in the paper as saying, "I don't understand it;  just last month we declared record profits".

Another peculiarity of Japanese accounting is how pensions, insurance and savings products are managed, e.g., Kampo and Yucho.  There is a contractual payout rate, and this must be made with realized gains on the portfolio.  Realized gains must be offset by realized losses.  You can guess what happens, or happened.  Every winner is sold, every loser is held.  The portfolio could lose 50% but still be able to make its contractual payout.  Unfortunately, what is left after a few years is a collection of dead money.  ALL of the PKO money (KAMPO and YUCHO) that was forced into the market in the 1990's by a government hoping to resurrect the Nikkei was managed this way.  Every last yen.  Similarly, JGB's were "crossed" for years to extract the gains, so the cost basis for these is not so far from current market.  Real estate was also crossed to book gains.

Japan's population is aging, and they'll be dipping into their Kampo, Yucho, and pension accounts pretty soon.  What they think is there is simply not there.

Someone mentioned that a consumption tax is an effective way to promote savings.  In 1989 Japan had no CT but had a savings rate of 17%.  Today it has a 5% CT and a savings rate that this will will turn negative.  Economic theory meets reality.

I don't quite know the advantage of a "totally domestically funded" debt when the savings rate is about to turn negative (years of ZIRP and an aging society leads to a negative rate).  The US has had no trouble funding its deficits either, and even has a kind of nuclear option of repudiating any foreign owned CUSIPS if it needed.  I see no advantage here to either country.

What would be the result if 10-year JGB rates went back to the levels of twenty years ago, which given the deficit and the declining savings is not an impossibility?  Rates at 3.5% would consume 100% of total current revenues just in debt service.

Maybe there is something I am missing, but it seems either JGB's have to go or the yen has to go.  Perhaps if we all agree to pretend.  Or maybe global growth will surge and save everyone from himself.

 

Mon, 08/02/2010 - 00:19 | 499175 Not Anyone You Know
Not Anyone You Know's picture

"A married Western colleague was having a fling with one of the OL's. So was a married Japanese colleague, with another OL.  On a night out, some other Japanese colleagues---after having their tongues traditionally loosened by the first sip of alcohol---remarked that "Jones" was typical of the decadent West and its loose morals.  I noted that "Tanaka" was doing the same thing.  Their answer:  "Yes, but in Japan we do not frown upon such things;  wives even expect it, so it is okay for Tanaka to do it".

Yes, and...?

It's simply not something that is considered betrayal in the same way.  You can't use that example to suggest that Japanese are engage in more "creative" behavior because to do that, you'd have to impose your western morals.

I have a friend in Hong Kong who used to visit his mistress in Shenzen regularly, and his wife knew.  He's not allowed to do that anymore... the mistress gave him crabs ;^)

"Japan's population is aging, and they'll be dipping into their Kampo, Yucho, and pension accounts pretty soon.  What they think is there is simply not there...


I don't quite know the advantage of a "totally domestically funded" debt when the savings rate is about to turn negative (years of ZIRP and an aging society leads to a negative rate)."

This, I worry about.  This is what I mean when I said (up thread) that we shall see if Japan can avoid immigration.  Not that I think immigration is actually a solution either.

Sat, 07/31/2010 - 18:59 | 498195 bingocat
bingocat's picture

Thank you. You have provided some subtlety and insight into Japanese practices of financial "management" which most outsiders don't get to see. Other readers could stand to read more from you when it comes to Japan. I agree with the comment about doom & gloom and cheerleading (though I think the cheerleading in these comments has been done without much basis in actual knowledge). 

As to your comment about either JGBs or yen having to go... the issues involved are interesting, but ultimately, I expect it is the yen.

  1. If the yen goes, who in Japan benefits? The traditional economic expectation is that expectations of own-currency decline stoking inflation expectations leads to increased spending (bringing forward consumption) boosting the domestic economy. But given the demographic spread of spending power, I would posit that a weaker yen actually acts as a tax. 
  2. If JGBs went to 3.5%, that by itself would not cause debt service costs to consume 100% of total current revenues assuming short-term rates stayed low.
  3. If the yen goes, then the yen value of foreign securities holdings rises, making the net debt picture look even better.
  4. It is possible that if the yen goes, corporate Japan will make more money and therefore this will create higher tax revenue which could lead to a primary surplus at some point in the future. A primary surplus. This would have the effect of exporting deflation to the rest of the world because of the relatively cost of Japanese exports (Japan exports high value-added items and manufacturers abroad the lower-value-added stuff so the average "Japanese" manufactured item sourced from Japan has a higher cost or value add than the average Japanese manufacturer-labelled item), which might also boost spending. 

In the end, I think it may be neither yen weakness nor significantly higher Japanese rates. I think the endgame is in cutting welfare/medicare/social security payouts (possibly arranging for the export of senior citizens). That is effective default on debt without it really being default.

What I do not see happening, which should be happening, is the rationalization of government services. Government employees have jobs for life, and the assumption is always that the budget next year will be higher than this year and so employees who retire are replaced with a young one. In a declining nominal GDP situation caused by an aging society, that cannot be sustained. The practice of lifetime employment guarantee will have to go. The level of "service" must fall. Contrary to most people's expecetations, I expect it will be popular with Japanese (except those who work for the government). It is off the radar now, but it will HAVE to be done.

I expect other measures as well, such as an asset tax. I expect inheritance tax rates may rise too. I would expect that some of the loopholes available to small companies to hide income will disappear. There is simply too little work being done in Japan to change the future financial balance of the nation. 

Mon, 08/02/2010 - 19:42 | 500337 Kayman
Kayman's picture

But since currencies are relative and not absolute, and every major country wants to weaken their currency, who gains ?  Someone's currency must go up in value- name the winner (loser) please ?

Thu, 08/05/2010 - 21:01 | 506167 bingocat
bingocat's picture

"If the yen goes" is code for the yen going down vs other currencies. I would expect that the currencies which would go up in value over time would be Brazil (which would be a crying shame for Brazilians because they are not ready to handle a strong currency yet), India (gradually), and the euro. I expect that the USD could outperform the JPY over time as well. The most significant impediment to the yen getting weaker is the fact that Japan does not have a large enough supply (oversupply causes price falls). The "supply" in Japan is substantial but the problem is that the major purveyors of yen (employers) don't act that way. Japan's social structure is singularly unsuited to a non-growth inflation scenario.

 

 

Sat, 07/31/2010 - 03:51 | 497554 chrisina
chrisina's picture

Japan, Land of the rising debt? Declining debt that is.

Why do so many people only look at public debt? Japanese public debt has indeed been rising during the last 15 years by about 100% of GDP, but private debt has been declining FASTER by about 150% of GDP so that total debt has been declining during that period. The net result is that the total amount of debt that lies on each and every Japanese resident is on average 25% smaller in relation to income than on each and every American. And unlike for most Americans, as Japan has been enjoying current account surpluses during that period, that Japanese debt is all financed internally.

So please make an analysis that is a bit more profound than simply quoting public debt as a percentage of GDP when you compare the credit worthiness of countries.

 

Sat, 07/31/2010 - 03:42 | 497551 Martel
Martel's picture

Defaulting on its debt, especially when the majority of it is held by its own citizens, is a political impossibility.

Sentences like that require proof, and I don't see any. Japan is a homogenous country, where people have a high sense of duty and willingness to sacrifice their own good for the greater good. From those premises it wouldn't be impossible that all of the nation's bondholders would accept to take a patriotic haircut. It just needs a big enough crisis and maybe a coalition government of the two big parties.

 

Sun, 08/01/2010 - 17:32 | 498904 stev3e
stev3e's picture

This has already happened without so much as a hiccup.  The government lost Social Security records at one point.

Sat, 07/31/2010 - 19:04 | 498197 bingocat
bingocat's picture

The practical way to "default" without defaulting is to reduce government services, reduce transfer payments (social security, etc), raise the deductible for senior citizens to go see the doctor (it is so low now that hospital waiting rooms are like social clubs for senior citizens) and see government spending come WAY down. This would lower the outgo burden for future generations allowing a gradually weaker yen to allow "profitable" reduction of FX reserves to pay off debt.

Sat, 07/31/2010 - 02:37 | 497548 merehuman
merehuman's picture

Land off of australia is rising 13 ft per day, leaves japan in the dust

Yes i drank my silly juice and the viagra too, just cant remember why.

Oh i am so sorry, thats not your bathroom?

Have a nice weekend you all.

Fri, 07/30/2010 - 21:57 | 497386 Akrunner907
Akrunner907's picture

Help me understand this.  If you borrow another $1 trillion, at one percent your interest cost is $10 billion a year.  So if you only generate $2.5 trillion in tax revenue, you are paying out 40 basis points of your receipts.  At three percent you are paying about 120 basis points for each $1 trillion in debt. 

For our current debt load, do you take the whole $13.2 trillion or just the $8.4 trillion that is circulated in public debt?  At current 10-yr treasury rate, on $13.2 trillion you are paying 15.84 percent of tax receipts, and at $8.4 trillion you are paying out 10.08 percent of tax receipts.  If you are paying out between 10 and 15 percent of tax receipts on just interest costs, and entitlements take up another 70-80 percent, you have little left over to paydown the debt or finance any economic incentives to grow the economy. 

So how does this get fixed without resorting to some horrible horrible scroched earth policy of budget cutting or debt default?  I appreciate the information from people far smarter than I am.

Sat, 07/31/2010 - 21:05 | 498245 Cojock
Cojock's picture

So how does this get fixed without resorting to some horrible horrible scroched earth policy of budget cutting or debt default?

Simples.

QE just like ours: print Yen and buy debt .

Next question?

 

 

 

Fri, 07/30/2010 - 23:18 | 497452 pitz
pitz's picture

Rapid GDP growth.  Devalues the debt (because people would rather own companies, not debt), and provides the economic output.

In the Japanese scenario, this rapid GDP growth comes not from an increase in production, but rather, the production being tradeable for more imports than previously possible (ie: more barrels of oil, for instance).

In 1980, for instance, it cost 20 ounces of gold to buy a good computer.  Today, you can buy a good computer for less than once ounce of gold.  This is the sort of deflation that has been afflicting Japan and causing much of the problem concerning high government debt.  But at least there's a light at the end of the tunnel, unlike the situation that stalks the rest of the western world.

Look to Canada for an example of how this played out.  Canada's economy suffered 2 decades of anemic growth when its main industry, commodities, was in a secular bear market.  Government debt soared.  Bear market in commodities abated, and wham, the finances haven't been this good in years compared to other G-7 nations.  Similar set of circumstances with Japan, except replace commodities, with highly engineered goods and services. 

Mon, 08/02/2010 - 19:26 | 500320 Kayman
Kayman's picture

Pitz

 

Canada suffered 2 decades of anemic growth because of commodities. Wrong. Canada had Trudeau and Mulroney- way too pink on the inside.

If you have a government job (complete with subsidized pension) in Canada, you have it made.  If you work in the private sector, well, too bad for you.

When the China bubble bursts, Canada and Australia will get a very rude awakening.

All your arguments were plausible until this stink bomb arrived.

Sat, 07/31/2010 - 19:10 | 498198 bingocat
bingocat's picture

You've obviously got this solved. 

All you have to do in order to achieve that is require foreigners to buy more highly-engineered Japanese goods (because it is certainly not the highly-engineered Japanese services foreigners will buy). Maybe those people will spend even more than they have (supporting the Japanese trade surplus for the past several decades). They will do this as commodity prices fall (because they have to) and other countries' GDP rises (in order to generate the larger amount of money needed to pay for more Japanese goods). 

Sun, 08/01/2010 - 17:30 | 498899 stev3e
stev3e's picture

And of course, this assumes a future where there are no develpoed highly-engineered products coming out of China, India, Korea, etc., etc. that compete severely with Japanese goods.

This major ingredient is missing form Pitz's argument.

Sun, 08/01/2010 - 18:03 | 498922 bingocat
bingocat's picture

The gist of pitz' argument is that all countries will value products more than money, and because they value them so highly, they will spend more money on them. And Japan's manufacturers of highly-engineered products will be most-highly-prized because they are most highly-engineered. Those other countries' products will obviously not be as prized because they are not Japanese. Therefore, Japan will come out of its GDP funk.

It is not the only major ingredient left out. There is the other one of where other countries' money comes from to buy Japanese goods (they obviously don't have FIRE money or money from manufacturing and selling highly-engineered goods because FIRE has stopped and all highly-engineered goods are produced in Japan in this new world). 

 

Fri, 07/30/2010 - 20:14 | 497306 vxpatel
vxpatel's picture

Nikkei 1987 = 39,000

Nikkei 2011 = 9,500

 

DJIA 1999 = 10,000

DJIA 2010 = 10,000

 

Round and round she goes, up, down, down, up.

Fri, 07/30/2010 - 19:14 | 497248 Colonel Sun
Colonel Sun's picture

Financial middlemen in Japan are held in lower esteem than pimps.

This includes hedge fund traders that try to raid cash rich companies to "unlock shareholder value", a quaint euphemism for trying to help themselves to cash that could otherwise be used for R&D, market development, a buffer during any economic downturn, etc.

Fri, 07/30/2010 - 19:39 | 497261 pitz
pitz's picture

Exactly.  Which is why banker-centric propoganda like "Japan headed for a collapse", "Japan has had no growth in 2 decades", "Japan's economy is a disaster", "America would cease to exist if it went down the Japanese path", is so patently ridiculous.

Seriously, Japan is a perfect textbook example of a very efficient and prosperous economy, for which, hard work is rewarded with value.  Unlike America, where, bankers are rewarded for doing no work, and engineers who do all the work are often relegated to the unemployment lines after their projects are completed.

Fri, 07/30/2010 - 20:46 | 497324 suteibu
suteibu's picture

You have no idea.  Do you even know what a contract worker or a temp worker in Japan is?  These people have no quarantee of work and few benefits.  34% of all workers fall in this category.  The Keidanren companies are making profits just like the major corps in the US.  And they did it the same way, cutting expenses, labor being the first and deepest cut.

Japan has much to be proud of, despite the growing command economy that promised to give them an economic recovery 20 years ago. But to suggest that people in Japan are not scared or suffering is silly.

Fri, 07/30/2010 - 20:53 | 497328 pitz
pitz's picture

These people have no quarantee of work and few benefits.

Sounds like a massive chunk of workers in every other country.  I know it might be a horrifying trend to Japanese workers, but is it any different in Japan, than it is everywhere else? 

Suffering and being 'scared' is just relative.  6% unemployment is very low compared to everywhere else.  If we keep the definitions of economic "recovery" constant, then the USA hasn't had one since the tech crash.  At least the lack of a robust recovery is acknowledged in Japan, not just swept under the rug with a phony (and now collapsing) real estate bubble as it was in the rest of the 'industrialized' world.

Fri, 07/30/2010 - 21:04 | 497338 suteibu
suteibu's picture

You miss the data points so I'll spell it out (or, in this case, add it up) for you.  6% plus 34% equals 40% of the workforce that is either unemployed or under-employed compared to the US which is somewhere in the 17% to 18% range.

Any other discussion with you about this its beyond moot.

Sat, 07/31/2010 - 19:38 | 498216 bingocat
bingocat's picture

Suteibu,

While you obviously right on your side in the various pissing contests you have had with pitz here, this is not one where the comparison to the US is obvious.

  1. Just because they are a contract worker does not mean that they are underemployed. It may mean their position is more precarious than that of a seishain (regular employee) and that they have less potential career growth, but it does not mean they are currently underemployed. 
  2. Your 17-18% range is the common (current) number for US unemployment plus underemployment using all the available BLS data. What it does not include is all the people in the US who have jobs which have similar characteristics to contract/temp employee jobs in Japan (i.e. little potential for wage growth, little potential for advancement, lower quality of perks than other employees, potential to be cut out of work next week should the workplace suffer economically). What portion of the US workforce works in jobs which are not called temporary or contract, and which may not be underemployed now, but which are just as precarious, and where they can be picked up, or let go, in a heartbeat. 90% of employees in the retail industry for a start. In Japan they would be called contract or temp employees but in the US they are just plain 'employees.'

I do agree with your last point though...

Sat, 07/31/2010 - 19:16 | 498202 anvILL
anvILL's picture

Also, don't forget those diligent workers with horrible pay pursuing our tradition of "service overtime".
Hey, I really do have friends who works about 80-100 hours for nothing.
So, the "real" number has to be greater than 40%.

And the statistics for those 6% and 34% has been decreased by volunteers as well.
How?
Well, let me give you a quick example.
16% of the people who graduated with a doctor's degree does not have a job.
8% of the people who graduated with a doctor's degree commits suicide or is missing.
The other 76% gets to live with a job.........for the mean time.

Fri, 07/30/2010 - 21:41 | 497363 Colonel Sun
Colonel Sun's picture

Those haken - temp workers are anything but underemployed.

Japan did go through some wrenching adjustments post Bubble Economy.

It will interesting to see how the US deals with similar adjustments . . . 

Yes, the large J-government debt is a problem.

However, any predictions for the imminent demise of Japan [or the US, for that matter] need to be taken with a large crystal of salt.

Especially if they come from financial types annoyed that Japan won't set it's economy on FIRE [Finance, Insurance, and Real Estate]

Sat, 07/31/2010 - 01:31 | 497527 suteibu
suteibu's picture

Thanks for the sane comments.  I actually believe that the Japanese can pull themselves out of this mess, but not with the political direction they are heading. 

I agree about the FIRE assault.  The world would love to get its hands on the savings of the Japanese families.  Unfortunately, so would the Japanese government.

Sat, 07/31/2010 - 05:01 | 497570 nobita
nobita's picture

i don´t understand how one can be so optimistic about japan when they change prime minister more than once a year.

last election they kicked out the ruling party for the last 50 years. the party in charge now is deeply unpopular as well btw.

barring major political change/reform japan is doomed. to support a welfare state when citizens live longer than ever you need more workers/taxpayers.

Sat, 07/31/2010 - 11:52 | 497789 pitz
pitz's picture

i don´t understand how one can be so optimistic about japan when they change prime minister more than once a year.

 

Changing Prime Ministers "more than once a year" speaks to the vibrancy of the Japanese political process.  Why must this be viewed as a negative thing? 

Sun, 08/01/2010 - 23:47 | 499156 Not Anyone You Know
Not Anyone You Know's picture

"Changing Prime Ministers "more than once a year" speaks to the vibrancy of the Japanese political process.  Why must this be viewed as a negative thing?"

Wow, this is just a ludicrous statement.  You can't execute your legislative agenda in less than a year no matter what it is.

Now I think it's likely you're just an otaku.

What this really says, I think, is that Japan is becoming ungovernable (even for the LDP)... and this, to me, is one of the real risks all the democratic countries face as austerity hits.  And yes I know Japan is not really democratic... do you?

Sat, 07/31/2010 - 19:27 | 498209 bingocat
bingocat's picture

Changing Prime Ministers "more than once a year" speaks to the vibrancy of the Japanese political process.  Why must this be viewed as a negative thing? 

It is not necessary to view this as a negative thing. But it is negative. There is no vibrancy in the Japanese political process. The changes in PM are not based on changing opinions of the well-informed electorate. They are not based on elections. It is simply musical chairs among factions within parties and coalitions of parties. Politicians horse-trade the ability to say that they said something. At a certain point, someone gets into trouble and so he is replaced by a former pro wrestler/actress/comedian who decides that politics would be a cool job to monetize some prior popularity. Because things change so often, in order to get re-elected, factions of politicians have to rely on pandering to an electorate to get re-elected.

The last government fell ostensibly because it could not make a decision to move a US military base from a place where it had been for decades. Japan has so many larger problems than whether one community has (and has had) enough of the noise associated with constant landings and takeoffs of heavy jets and helicopters at all hours of the day and night. 


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