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Japan - Past the Point of No Return
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excellent presentation. it's logic is easily followed.
We are all captured by the corporate/media "group think" of growth as indicator of national health. Go to Japan. Do they look like a nation in terminal decline? Are individual's standard of living crashing? We will gladly trade places with them in a few years.
Their population is declining, so a declining GDP means a sustainable standard of living. Arent we all into sustainable environment and lifestyle?
I find such comparisons are like comparing apples to oranges. No the Us is not in a better shape,and no the US corporations are not more robust and managed to maximize shareholders profit.
rather they are managed to maximize management profit.Proof?:Leh,Aig,Fan,Fred,Bear,and a host of many other corporations that are still alive cortesy to tax payers subsidies,while they have tremendously enriched their management and close to bankrupt their shareholders. Where is Mr. Kastenlson living?in another palnet?.Better future due to different demography?. May be,provided the whole financial and corporate system is restructured.It is not enough to have a young population and keep on running a constant trade deficit. Eventually,the wealth that the grandfathers and fathers built,will be depleted...
Sorry but I have to say this after reading so many articles and what could almost be described as Hysteria in the US Market Over issues that are way smaller than the issues in your own back garden.
What is going on with all the commentary, Greece and the rest of the PIGS,Japan. Its a smoke screeen for what is happening in your own back garden. My god Japan is the biggest holder of US debt now what if they decide to cash in to help themselves out? Same as China.
Im not sure of the figure of how many US states are bankrupt now but even if you just take one, California 5th biggest economy in the world and everyone is concerned with Greece??? Give us a break.
My god someone only has to sneeze now and the markets react it's all becoming a joke!
I would rather my money in Yen than US dollars, But thank God its in Aussie(for the time being) even then Gold will be the currency of the future, It has lasted for thousands of years cant see any paper currency around for that long???
Galvo
Japan cashing on the US debt will not happen right now.
Because Japan has nested its own debt within the US debt.
Long short story: Japan has borrowed from themselves to lend to the US.
As long as the US boat floats, the Japan boat will float.
Japan will not sink the US boat.
And Japan will not hit the point of no return before the US (even if in my opinion, the point of no return was reached long ago)
The only point of value in Japan story is when they are going to hit the theorical point when internal debt is said to be unsustainable ( over the 2xx pc mark, I cant even remember)
None of the predicted outcomes in that case will happen and you will see economists clinging to floating dead wood like "other stuff's happened, see, other stuff's happened", coming up with new 'scientific' theories (tales) explaining the what of the how.
The only point of interest.
1. Nice presentation.
2. Sovereignty means that you can print money. Sovereigns' don't have to borrow. Yes, if you print a lot of money, your foreign exchange rate will go down. But in the long run it will go down more if you borrow instead of printing, because borrowing kicks the can (of your various bad financial habits) down the road, and once you see that you can put off the pain by kicking the can down the road, you are likely to continue (your various bad financial habits).
3. Sooner or later, all nations are going to have negative population growth, so instead of repeating the refrain that "it's bad", why not start asking, "how can we use this"? Also, why should people have more kids, if there aren't more jobs for those kids, which there aren't. The more we advance technologically, the fewer production jobs there will be, except in the arts (entertainment).
4. "Economic growth" should not be a goal. Happiness should be a goal. The two are a lot different.
Distinguish Japan's balance sheet as a country from Japanese government's balance sheet.
Japan has been almost always a current account surplus country for 3 decades. As a result, Japan accumulated the largest surplus in the world, which is about 1.8 times bigger than that of China's.
http://en.wikipedia.org/wiki/File:Cumulative_Current_Account_Balance.png
Japan is like a combination of Germany & Switzerland. Japan is the world's largest creditor and investor as a nation.
http://en.wikipedia.org/wiki/Capital_flows_in_Japan
Japan has no external "net" debt as a country. The Japanese government bond is denominated in JPY, which Japanese government can print. Japanese government bond's 95% are owned by Japanese. In other worlds, Japanese government's debt is Japanese people's credit. The sales tax is still very low, and so the government can collect tax if needed. So, it's a family issue as FT wrote.
http://www.ft.com/cms/s/0/cb125274-14e3-11df-8f1d-00144feab49a.html
To the FT's editorial, I added my comment as "equus". For sovereign default issue, short term external debt is the biggest problem, which Japan does not have.
If you want to learn more on sovereign default issue, read McKinsey's report.
http://www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/...
By the way, saving rate is a misleading concept. In US household, they are reducing debt, which counts as saving. In Japan, where household has lots of financial assets, saving is really depositing money into bank account. In Japan, money spent by elder people does not disappear, and picked up by Japanese business, and ends up to their bank account, which in turn is used to buy Japanese government bond, which is risk free in Japan. In deflationary economy, the JGB's ultra low yield is still enough for banks to make big money.
The situation is a little more complex. The savings rate decline is immensely important, because (to use a tired cliche) when the tide goes out we can all see who was swimming naked.
Debt destruction evaporates wealth. The high savings rate Japan previously enjoyed prevented banks from having to admit the deposits were gone. The toxic waste Japan had/has never had to be realized when folks kept their money in the bank. As the population ages and the elderly need to dip into the nest egg (years of ZIRP will eventually force that sort of thing), the banks will be forced to come clean on what they have been able to mask since 1990. A lot of deposits and savings exist merely on paper.
The same situation exists in the two huge national savings and insurance schemes, Yucho and Kampo. Years of PKO (price keeping operation) in the equity market, during which these funds were used to attempt to prop up Nikkei/TOPIX, have left these entities grossly underfunded relative to what policyholders are entitled to receive/redeem. Average Nikkei cost of the equity portion of Yucho/Kampo is surely well north of 25000 (Japan's bizarre accountings rules explain why the cost basis is higher than the market was at any point of the PKO).
The analogy is Bernie Madoff and his investors. They all thought they had big money with him, and they were only disabused of that notion when the weak world economy prompted folks to ask for redemptions. Only then did the ruse come to light. This is Japan and its "savings".
>Who is Japan going to have a current surplus with now?
> Incidentally, in 1929 the US had the largest current account surplus but it
> didnt prevent a pretty bad depression.
In human history, there have been only 2 countries who accumulated 5% of world's GDP as current account surplus. One is US of 1920s. The other is Japan of 1980s. We know what had happed to them right after that. Too much accumulation of account surplus was the indirect cause of the asset bubble, its bust, and severe depression right after the bust. In Japan, we call the decade as lost decade.
Japan, however, continued having current account surplus even during the lost decade. I had better explain why.
Japanese manufacturers basically gave up assembling components and shipping the final product overseas. Yes, some of them still do, but they are no longer mainstream. Most of them focused on making high quality components/parts or developing patents/intellectual properties. It simply did not make little sense to build factories in Japan where everything got very expensive. Japanese manufactureres built factories overseas close to the market. That's also the way to minimize the risk of currency exchange rate change. Those overseas factories are making money over there and sending those money to Japan. The patents/intelectual properties are also making money for Japan. Imagin how much money Hello Kitty made for Japan. The actual labor to make Hello Kitty products may be done by other countries, but it's the designer of Hello Kitty who is really making big money. That's the virture of intellectual property. For example, to the best of my memory, Japan is making about $30bn from trade with South Korea every year.
I wrote Japan is like a combination of Germany and Switzerland. From current account's viewpoint, Japan's model is unique. On one hand, Japan is making money by exporting high quality components/parts, mother machines, patents/intelectual properties, and other goods. On the other hand, Japan is making money by investing in foreign countries. I am sure you have heard of Yen carry trade. Just like CHF, JPY is still one of the major funding currencies of carry trade. If you check last year's current account of Japan, you will notice that Japan was rather like Switzerland than Germany. I think Japan will go between Germany's model and Switzerland's model, but moving closer to Switzerland's, because of its rapidly aging society.
Note that Japan is less dependent to international trade than other advanced economies except US. I know no one believes this until actually checking the numbers by themselves. As you may know, Japan has lots of modern railway systems, nuclear power plants, and highly sofisticated environmental technologies. Japan is one of the most energy efficient economies in the world. Japan does need import something, but it is minimized with Japan's highly efficient economy.
>Reinhart and Rogoff traced at least 70 domestic defaults.
In economy, history could be very misleading, because there is no exact same situation. If Japan still had Gold Standard, it might have been in difficult position. But, JPY is now a fiat money, and Japanese government can print them. Only 5% of Japanese goverment bond, which is denominated in JPY, is owned by foreigners. If Japan had big external debt denominated in foreign currencies and also if Japan were a net debtor country and also if Japan had little foreign reserve, the situation might have been difficult. Well, that's not the case. Recently, there was a news that Japan surpassed China in terms of US Treasuries holdings. Japan is investing all over the world. With this situation, please explain how Japan, the world's largest net creditor/investor country, can default.
The last and not the least, someone seems talking about Japan's accounting. If Enron's creative accounting or Barclay's use of Protium or the Citi's use of deffered tax asset & FAS 157 or Wells Fargo's abuse of FAS 166/167 is the international standard, Japan's accounting could look very strange to you. As a matter of fact, Japan recently protested EU on this very issue, because it bent IFRS, and helped European banks hide NPL.
JGB is owned mainly by banks, insurance companies, and pension funds. It is true that pension funds will be net seller of JGB. It is also true that savings rate will decrease in Japan. Well, that's O.K. because money does not vanish in Japan and always ends up to banks or other financial institutions, who have to buy JGB, because there is no better investment for big money than JGB in Japan. For example, elder people may not save a lot, but that means they spend that money on something, and that will be most likely picked up by Japanese businesses, which deposit that money into their bank account.
1) Who is Japan going to have a current surplus with now? Incidentally, in 1929 the US had the largest current account surplus but it didnt prevent a pretty bad depression.
2) That is true, Japan could simply print away its debt. But how will the average Japanese buyer feel when their savings melt away? And more importantly, with the death of the foreign [American] consumer who will be the next consumer? The Japanese who just saw their savings whipped out by the printing press?
"For sovereign default issue, short term external debt is the biggest problem, which Japan does not have."
This is not true. Reinhart and Rogoff traced at least 70 domestic defaults.
Thanks for your post. This captures the essence of it: Japan's IIP (international investment position) is much better than is commonly understood. They run a current account surplus. Could all this change? Sure. Is it likely to change quickly? No.
You didn't mention that their overall tax burden (tax/GDP) is lower than all the major European countries. They can close their deficit on an emergency basis by raising taxes. Of course, this would probably slow growth even more. But it would preclude a fiscal debacle.
They are in way better shape than the US or UK.
Too many of these "sovreign short" players fail to look at the whole picture of a country's finances.
Of course, most are in bad shape.
Sorry captain, although I agree that Japan is in better shape than many other sovereigns being flogged about, we are all in this together... Who is Japan going to sell its products to and what reserve currency will it devalue against when the SHTF?
Same goes for China, if things really snowball in the way most of us here conclude, 1.3 billion people sold to the capitalist ideology will be impossible to control even with a standing army of millions (i wonder how many nations China could be divided into haha?)
Call me crazy but I still believe that the U.S. is in the best position when the slate is wiped clean (I know, shock horror) for reasons I won't bother to elaborate on.
Down here in Oz, the general public consensus is that we are immune to future problems as we avoided the worst effects of the GFC. Meanwhile our oil supply peaked in 2000, we run large trade deficits, import tens of thousands of skilled immigrants to prop up our huge housing bubble (everyone in oz is a tradie), are completely reliant on commodity exports to china and have a tiny military incapable of defending our borders...
End of the day we are all in the same boat...
My two cents anyway ;-)...
>Who is Japan going to sell its products to and what reserve currency will it devalue against when the SHTF?
For the first question, read the following.
"Japan's Export Growth Accelerates on Global Rebound "
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAXru8HQldNA
Although Japan is NOT an export reliant country, the export still helps its economy. At least, Chinese and South Asian consumers have lots of money to spend, and Japan is strategically located to the world's fastest growing economies. They probably spend their money on products made in their own country or neighboring countries. Under the hood, they will find Japanese high quality components/parts of which the product is made. Selling components/parts/patents requires no marketing. So, it's a cost efficient way of making money. The more South Koreans or Chinese or South Asians sell their products all over the world, the more Japan makes money. Well, they still need culture to respect patents...
By the way, having the most rapidly aging generation in a society is not so bad. Honda and Toyota and other Japanese makers have been for years investing in applied robotics targeted to elder people who need help for walking/eating/moving. Honda & Toyota are now field testing their applied robotics products by using Japan's elder people. After the field test, they see huge aging baby boom generation markets in US and Europe. If you regard Honda & Toyota simply as car makers, you are totally misled.
Thinking in balance sheet is a good thing. You realize someone's debt is other person's credit. You also understand the concept of flow & stock. Comparing the number in flow to another number in stock does not make sense. It is like comparing car's speed to car's mileage. In economics, it is amazing how people can be easily misled by numbers. GDP is the number in flow. Debt is the number in stock. For example, there are many people who have huge asset, which may or may not be passed from his/her parents/uncle, but have small income. If that person's debt is bigger than that person's income, do you think he is bankrupt? No, absolutely no.
Marc Faber is now bullish on Japan, in fact.
+1 The sun will still be rising in Japan long after it has set in Amerika. The paper is comparing apples to rocks.
I guarantee if you put a graph up how much richer the rich got during this 20 years it would be steadily higher.
Like we can't be Japan?
We know for a fact it is a large Corporate Culture, that dictated to the government how things should go to best benefit them.
And as Dr. Phil would say, "How is that working out?"
now, i don't propose they intentially fucked there own people, yet, that is the outcome, and like I said, you can damned well bet the graph of the rich goes from lower left to upper right.
nuf said
But parabolic...not just diagonal!!
Keyne's awesome possum gift to developed nations! woot!
I wonder if the Koo Koo bird is the National bird in Japan? Anyone Know?
It can't happen here.
I'm telling you my dear,
that it can't...
happen here.
I guess I dont know enough about the great depression, but how did naturally letting the economy fix itself work during that period? I thought that sticky wages prevented a recovery? And basically the only reason things worked out for the US was that the rest of the world was deindustrialized thanks to war so that Americans could go back to making cars for 70 bucks an hour.
Conversely, didnt places like the Baltics or Hungary let the economy work itself out (or were forced) and...things seem kind of stinky for them? Latvia lost what, 20% of their GDP and things dont seem to be picking up...
thx for this easy to understand overview of the Japan misery. Soon becoming a problem to most of the developed countries, but in faster pace.
In general, tax rates went up from 1990 to the present. There were a few cuts, but the trend had been mostly up.
1) Consumption (national sales) tax: 0% 1988% 5% today, likely to go higher in the future.
2) Effective property tax rates: about a 5x-10x increase
3) Capital gains on stocks: effective 0% in 1988, 10% today and likely to go to 20% soon.
4) Taxes on interese income: effective 0% in 1988, apparently taxed as regular income today.
5) Payroll taxes: 13.6% in 2000 (another roughly 13.6% paid by employer), now rising each year to 18.3% in 2017.
6) Capital gains on land: short-term capital gains (under two years) taxed at 90% 1992-1998, also very high rates for longer terms. Somewhat lower now.
Virtually nobody knows nothing about Japan.
http://www.newworldeconomics.com/archives/2009/110109_files/Japan%20Oct0...
Interesting read. Thanks for the link.
Thanks for the link.
WTF? Sribd says the document has been deleted....
Ha ha ha... increase debt, increase spending, reduced tax reciepts... only an idiot would think that kind of policy could work... wait a minute isn't that what we are... oh.
Nice user friendly presentation V.K.!
Nice and simple. Thanks for putting this together.