This page has been archived and commenting is disabled.
Japan: Land of the Rising Debt
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.
»
- advertisements -
Loving the intelligent discussion here. Allow me to interject that the last government fell because the (Japanese) Friends of the Pentagon were given notice not to tolerate any more questions of America's Basing Policies. The Japanese industrial keiretsu have longstanding ties to US Defense interests. Sacrificing a DPJ PM is a small price to continue riding the US DOD gravy train, especially since the industrialists are old-line LDP members.
That said, it would be nice if US politicians would have the honor to resign once they have been proven stupid and ineffective leaders.
But Kobe
If a politician had to resign if he/she were stupid, ineffective (or on the take) then we would have no one left.
Oh- that's a good thing- sorry.
Look at the Japanese and American news right after Lehman tanked, then, compare and contrast.
The US government quickly and vibrantly made socialist decisions while
the Japanese government pretty much sat there confused for quite a while.
Also, could Obama have done the Healthcare reform, which is quite some change,
in 6 month?
Turn on the TV before elections in Japan and you will see an increasing number of people who are not interested in the elections because there is no change.(excluding prime ministers)
And don't forget. Japan is the US's proxy state as somebody at ZH pointed out.
If not, why are the politicians in Japan so busy following the "US-Japan Regulatory Reform and Competition Policy Initiative" every year so much?
delete plz
delete plz
Precisely. Sniff beneath the words of anyone who makes such bizarre claims about the Japanese economy being on the verge of collapse, or the Japanese economy having no growth over the past few decades, and you'll usually find a FIRE man who is just jealous that Japan has achieved such technological and social greatness without the FIRE industry having their tentacles in the economy.
Nonsense. 34% of workers on 'contracts' or 'temps' means that they're unemployed?
If we use that definition, what's the equivalent rate of unemployment/underemployment in the USA, and the rest of the G-7? 50%? 60%? At least.
Print money.
Most government debt is held locally (captive buyers)
Exports will soar with the devalued currency and inflation will cure the debt problem. If done fast enough it might have a chance of working.
The debt isn't really even a problem if, on a global basis, the value of engineered goods are revalued to something approximating the cost of their inputs + a reasonable return.
Japan's GDP could easily double or triple in the next decade or two from such a revaluation, as the result of a secular shift towards re-valuing physical things, as opposed to 'financial' things.
Why do you think engineered goods are valued so low? It's because of over-investment and over-capacity in the manufacture of these goods. Japan will continue to struggle until overcapacity is resolved, and all the currency manipulation and inflation in the world won't change that. Better to 'waste' output as consumption that do invest in something that has high maintanence costs but can't turn a profit. If Japan (and soon to be China) had just burned their capital instead of pouring it into investments that generate a negative return, they would be better off. The over-investment yields spectacular results in the short term, but ultimately crushes the economy under the weight of enormous amounts of unproductive enterprise.
Before Japan the Soviet Union also went down this path. Soviet industrial capacity soared under Stalin with levels of investment similar to what China has now, but the country subsequently stagnated and eventually collapsed under the weight of unproductive enterprise. Japan is well into the stagnation phase, and China is about to enter it. If I start to constantly hear just how wonderfully intelligent country X is because central planners are investing in some fantastic capacity or industry, it's time to get out.
Engineered goods are valued so low because of overproduction 20-30 years ago, not today, and the propensity of consumers to wear their stuff out, rather than replace it for greater energy efficiency.
For instance, Japanese firms are leaders in the production of heavy equipment for the electrical generating industry. The US electric grid has been strained beyond what was originally anticipated as being 'reasonable'. As a result of this strain (and the inefficiency thus induced), orders for equipment in this sector have been relatively suppressed. But once the dam breaks (no pun intended), everyone will be scrambling to replace their worn out, highly engineered goods, and Japan will be a huge beneficiary of a worldwide shortage in capacity in this crucial sector.
The reason why American engineers are mostly unemployed these days, is largely the same reason that Japan's economy sucks -- the physical infrastructure of manufacturing, of energy production, transmission and distribution, and of transportation, has been run into liquidation, instead of being re-generated. The legacy of Japanese exports in the 1960s and 1970s, has largely been depleted. Once the re-investment cycle begins a'new, the scarcity of those highly engineered goods and Japan's unique capabilities in producing them will more than make up for the years of slow orders and slow replacement cycles.
pitz, this seems to be a good place for me to mention that Japanese BEARINGS are of excellent quality, we buy them for our import co. in Peru, although we do buy more Korean (price...).
I wish Japan well, as their bearing companies worked with us while the Americans essentially told our little family-owned bearing company to go to Hell.
Timken Bearing Works along with some other very old Bearing Works prior to World War Two did well enough to get America rolling, literally. Ironically that same technology had transferred to Germany which required a bit of bombing to slow down the production.
I don't know the current bearing situation having been out of that line of cargo for a long time.
I think that looking at places like Tokyo there are plenty of young people, middle aged people doing well. The bigger challenge is probably places to park, places to rest and those ball games they like to play up there.
My view is simplistic but I think Japan will be around a very long time. Also reinforced by my thinking that World War Two wrecked the Japan Homeland and everyone is working and doing well while preserving thier history.
The United States is such a large Nation with space plenty for everyone. Now if we can get everything rolling again and on track and under budget for all, we will do better.
Maybe when things slow down a little bit and perhaps people in Japan have a bit more room than they already do, things will improve.
The new Timken is not what it was.
Besides, they (and Torrington before Timken bought them from Ingersoll-Rand) told us to go away and not pester them with buying their bearings for Peru.
It was only the foreigners who would sell to us, Japan and Korea make fine bearings at lower cost and WANT our business. A year or two ago I inquired again about the possibility of buying from them. They said they wanted to CUT the number of their distributors in Peru. Go figure. Yet they whine and moan about the big bad foreigners "dumping" bearings into the USA.
ebearing.com is more or less the industry's newsite.
I wish that I could find American made tapered roller bearings these days. I replace a few over the course of a year (hevy loads on our trailers). I agree, I would buy a Japanese made bearing over Chinese made. I have had fair results using eastern European ones, but they tend to be more sensitive to moisture intrusion than the old U.S. or Japanese made ones.
Just an observation. I know, I should probably re-pack them more often - shouldn't I?
BTW, strip out unsustainable financial sector 'growth' in the USA (or Europe) for that matter over the past couple of decades, and I think you will see that, compared to Japan, Japan has also been one of the fastest growing industrialized nations. The Japanese simply have too much pride to have turned themselves into a nation of wasteful bankers as has the UK, the USA, etc. "Its not how much work you do, its what you actually produce that matters."
This is very simplistic reasoning, but to me it seems that Japan may have an upside surprise to their economy. After all, if there are such things as economic cycles, Japan would seem to be due for an upswing after 20 cruel years of deflation. 40 year cycle anyone?
> The Japanese simply have too much pride to have turned themselves into a nation of wasteful bankers as has the UK, the USA, etc.
The amount of those bankers have increased, but still very very far from it.
Just look at their low compensations and their poor defrauding skills compared to that of the western nations.
Those bankers are dumb and greedy, but far less predatory.
Also, the biggest problem is NOT turning ourselves into bankers.
Its the competition against lower wage countries and big manufacturing firms shipping jobs over to it.
However, without shipping jobs over, many companies can not survive.
So, there is a dillema.
And thanks to this crisis, the surging Yen is making things worse, while Germany is enjoying their crappy Euro.
*cough* Keiretsu *cough*
The keiretsu is very crony, but it is absolutely nothing compared to JPM, GS and others.
Just look at Japan's Gini coefficient.
If that's not enough, just compare their compensations, their work hours and graduate's quit their job within 3 years rate and their social contributions with crony American companies.
It is said that 1/3 of people who gets a job at Japanese megabanks quit in the first 3 years. The first 3 years quit rate is published for most listed companies, but not for the keiretsu mega banks because their work conditions are horrible. I know this because I graduated from a Japanese university 2 years ago.
By the way, the Japanese bank with the most insane pay with regards to their performance, is probably Shinsei, which is an foreign owned bank.
And a huge part of the lack of America's competitiveness with China/etc. is having a massive banking industry that sucks the life out of industries that are trying to innovate and become more productive.
No country on the face of the planet has ever devalued their currency on the way to prosperity. A strong Yen means a strong Japan.
@pitz
Re 'unproductive' burdens on the US, you haven't even mentioned the legal system.
As the man said, there are as many Sumo wrestlers in the US as there are attorneys in Japan.
Where's the lack of prosperity in Japan? Japan is one of the most prosperous nations on earth, which is amazing, given its lack of a significant natural resources endowment. The problem of (apparently) little growth in the Japanese economy is one of the Japanese not succumbing to the siren call of bankers and filling their economy up with unproductive financial activities, but rather, one of a secular trend in the reduction of the cost of highly engineered goods and services, an industry which is the cornerstone of the Japanese economy.
Japan's economy is very likely one of the most sustainable and vibrant of all the industrialized nations. Japan remains a net exporter (in spite of a depression in the engineering industry!), and most of its "debt" is internally funded. As Japan exports inflation, ie: as the price of engineered goods and services rise, this will dramatically reduce Japan's debt to GDP ratio, and re-solidify Japan's position as an economic leader in the world.
Quite to the contrary of your argument, Japan is proof that borrowing money, using credit, and investing it into long-term infrastructure that yields a positive ROI, is the way to create a prosperous nation. And Japan has been lucky in that, it avoided excess immigration, hence, it is nowhere near the verge of collapse as is the USA, which has been suffering excess, runaway immigration.
And if the US collapses, Japan will find out how expensive building a halfway effective military force is. One huge difference between Japan and all the other larger sized economies it competes with is that its defense budget is nothing in percentage terms ($50 billion US in a $4 to $5 trillion economy). However much they need to increase defense spending it will all have to be borrowed. I'm not an economist or a Japan expert but if you figure the US is on its way out as a world power then its probably a good idea to factor in at least another 5% of GDP needing to be borrowed into your 'Japan is proof you can borrow your way to being a prosperous nation' idea. Either that figure out how much it will cost to move to a nicer neighborhood a little farther from N. Korea.
pitz, Japan has the opposite problem of the US. We have hordes of immigrants while Japan has a rapidly aging population. Yes, Japan is overpopulated, but they need enough young people to support the old folks and that is not going to happen anytime soon.
Supporting the old people is the same old dreary argument and really is not the relevant issue when discussing Japan. Why?
Because the older people in Japan are already well cared for and will continue to be well cared for simply because they have a very different and un-American concept of their "needs".
The real issue is the younger generation that is becoming more Western in their decadence - a generation like in the US that are not good for much but expect everything. As the s**t really hits the fan in the next few years we will all see what everyone is made of.
Round up the illegal immigrants and ship them off to work in Japan.
2 BIRDS, ONE STONE!
Like America, Japan doesn't need or want immigrants. Except Japanese leaders listen to the people and American ones do not.
Population MUST age, otherwise it is increasing indefinitely. Population does not and cannot increase indefinitely on a finite planet.
Yeah if population growth is a determinant of economic prosperity, then India must be the most prosperous nation on the planet. And Canada not.
Right...
No they don't need young folks to 'support the old folks'. The 'old folks' built enough productivity into the economy (think: lots of vending machines, automated factories, and an economy that is relatively clean of unproductive financial activity, etc.), and made enough foreign investments that immigration to Japan is simply unnecessary. Japan will become even more prosperous and capable of supporting itself as the population reduces itself and fewer people have claims on the nation's industrial output and the nation's foreign imports.
Once highly engineered goods start going back up in price, Japanese youth will be able to afford to have kids again, and the population will come into a sustainable equilibrium.
Japan is a model economy for the world, and Americans should be absolutely dreaming and praying that they can achieve a similar sort of economy over the next few decades. I know the banker-controlled western media tries to portray Japan as a disaster, because there is little room for banker profits in that country, but really, its quite the opposite.
We shall see if Japan can weather the storm, so to speak, without the need for immigration. There is room for debate, and I'm not sure which side of it I'm on. As for highly engineered goods, yes it is the leader... that's why I have an engineering office there. Creative, engaged and highly available, Japan's skilled engineers make Western "engineers" look... jouzu arimasen.
But, here's the punch line: I build our production goods in China once the design is proven in Japan.
I agree with your post except this statement. It is already too late. We have way too much debt.
Too much debt incurred to create things of no lasting value (ie: Afghanistan/Iraq wars, banker bonuses, etc.). Quite in contrast with the Japanese situation where the debt was largely incurred to build infrastructure that made the country more efficient, reduced its dependance on foreign energy imports, built out high quality telecom infrastructure, and educated the next generation of citizens.
Actually, the money was spent creating a social welfare state. Debt servicing is 20.6% of the budget, while Social Welfare is 27.3%. Local government tax grants - which, in part, funds local responsibilities for the welfare system is another 17.5%. That totals 60.36 trillion yen of the 92.3 trillion budget. Revenue is projected to be around 44 trillion. It doesn't take long to build the world's largest debt with those numbers.
The bubble of the 80s did more damage than the numbers indicate. It made the Japanese believe that they could fund their welfare state forever.
Its worked out fairly well so far, despite the value of their exports plummetting. Japan still has a trade surplus in spite of low prices. This is in contrast with nations that produce commodities, that tend to go into trade deficits whenever commodity prices crash.
Can cars get any cheaper? Can computer chips? LCDs? Technology and highly engineered stuff? Probably not. So this puts Japan on a long-term up-trend as prices normalize, not a down-trend.
Pitz - Great series of comments!
Hahaha. The welfare state is unsustainable. People will not die fast enough to rescue them at the current rate of spending. Unemployment has risen for 4 months and though it has yet to hit 6%, the number is not relative to US unemployment. 34% of the working population are contract and temp employees. The response of the government is to increase social spending and propose a hike in the consumption tax which will only cripple the domestic economy even further.
Japan is one of the longest lived nations on earth. No chance for the welfare state in the longer run.
it comes down to the birthrate and their unwillingness to accept refugees and immigrants.
their population is shrinking and aging. pensions/welfare costs increase while there are fewer workers contributing taxes.
sweden has the same situation with people living longer than ever at same time as women have fewer children.
unlike japan we are importing people to keep our population growing. our economy is doing ok and goverment debt is under control. i believe japan is doomed unless they open their borders like we did.
I think the idea that "population growth" = "good" is false and will become increasing false as we enter the age of scarcity that is the World's future. It Keynesian BS to focus on nominal economic growth (which population growth helps) instead of per-capita GDP economic growth, which is what you really want. I think Japan's shrinking population will be an asset in the future, not a liability.
+ 100
Japan will stay as Japan, whereas Sweden will morph into global socialist hostile immigrant wasteland. IMO Japan is taking the better option, the color of your glasses may vary.
Isn't smoking and heavy drinking nearly universal amongst older working male adults?
Yes, along with sex, its how they have fun.
If Japan is a 'welfare state', what then is the USA, Canada, the UK, Spain, France? A "double-welfare" state? "welfare^2" -states?
6% is nothing for unemployment, and shows the sheer resilience of the Japanese economy in keeping its people working despite the global downturn. And nothing wrong with consumption taxes, especially since they generally have the effect of promoting savings and investment, rather than consumption, which goes to further strengthen and re-inforce the long-term prosperity and viability of the Japanese economy.
Source - http://www.mofa.go.jp/j_info/japan/socsec/maruo/maruo_1.html
One of the problems with the Keynesian model in which Japan is fully engaged is that consumers must spend money. They don't need people to save. In fact, they are toying around with the idea now to heavily tax interest on savings in order to force people to spend or invest in equities.
And, yes, the UK, Spain, and France are double welfare states compared to Japan. PM Kan envisions the Swedish welfare model for Japan. I believe Sweden is the number one welfare state of developed countries (maybe No 2).
For the Japanese, 6% unemployment is high and the trend is worse.
At first I thought you were just a Japanophile who wanted to defend it. You're so far off in your assumptions and information though, I can't tell what you're about.
Let me tell you something about the model welfare state of Sweden. Despite running a stellar tax rate (visible+hidden) at 60% of the average Swede's gross income, the government still succeeds in racking up deficits. Not a single new net private sector job has been created in Sweden since the 1970s and total employment overall is lower than 20 years ago. All new net jobs after the 70s in Sweden has been created in the government. It is the same dynamic that escalate government employee salaries in the US way above the private sector. The key systemic difference is that in Sweden it is less useful to increase government employee salaries because it recycles back to the tax coffers again, unlike in US which has lower marginal taxes. The public sector sucks the life out of the value adding economy that actually produces goods and services (while fighting competing government-backed business activities popping up in multiple sectors) while the Keynesians pile on more debt on the next generation and nobody learns from history.
Welfare in this context means more government employment, persistently maintaining top tax rates that deprives citizens of most of their economic decision making and borrowing the rest from the new unemployed generation. If this is where Japan wants to go, well, they are just as screwed.
Good Points Sutei,
As someone with extensive Japan experience, business and otherwise, I can say with a great degree of confidence that Japan is eally uckd.
One visit by anyone with eyes to see peels off the entire charade of prosperity.
Japan's current form has been entirely sculpted under US directed hege-money(!) since the end of WWII. (US/Britain, same same).
And they are, along with Denmark, Singapore, Brunei etc., poster-children for a dystopian nightmare.
Otsukarisama desu!
ORI
http://aadivaahan.wordpress.com
Those 'double welfare' states will collapse far before Japan does. Call me when that happens, and when Japan is the worst. Right now, you're just reading charts, and not looking at the actual situation on the ground, which is, Japan is a net exporter, Japan's debt, as large as it is, is almost entirely domestic, and Japan is not expanding its population beyond the ability of its industry to support it, while still maintaining prosperity for the people.