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Ken Rogoff On Japan's Slow Motion Crisis
Ken Rogoff, in a great summary piece, recaps practically every point presented previously by Dylan Grice, in discussing why Japan is in a very sad economic state and about to get much worse. For all you JGB fans - read this and buy Japan's deflationary blue light specials at your own peril.
Via Project Syndicate.
TOKYO – If you listen to American, European, or even Chinese
leaders, Japan is the economic future no one wants. In selling massive
stimulus packages and bank bailouts, Western leaders told their people,
“We must do this or we will end up like Japan, mired in recession and
deflation for a decade or more.”
Chinese leaders
love pointing to Japan as the prime reason not to allow any significant
appreciation of their conspicuously undervalued currency. “Western
leaders forced Japan to let its currency rise in the second half of the
1980’s, and look at the disaster that followed.”
Yes, nobody
wants to be Japan, the fallen angel that went from one of the fastest
growing economies in the world for more than three decades to one that
has slowed to a crawl for the past 18 years. No one wants to live with
the trauma of the deflation (falling prices) that Japan has repeatedly
experienced. No one wants to navigate the precarious government-debt
dynamic that Japan faces, with debt levels far above 100% of GDP (even
if one factors in the Japanese government’s vast holdings of
foreign-exchange reserves.) No one wants to go from being a
world-beater to a poster child for economic stagnation.
And yet,
visitors to Tokyo today see prosperity everywhere. The shops and office
buildings are bustling with activity. Restaurants are packed with
people, dressed in better clothing that one typically sees in New York
or Paris. After all, even after nearly two decades of “recession,”
per-capita income in Japan is more than $40,000 (at market exchange
rates). Japan is still the third-largest economy in the world after the
United States and China. Its unemployment rate remained low during most
of its “lost decade,” and, although it has shot up more recently, it is
still only 5%.
So what gives? First, things look a lot grimmer
when one gets two hours outside of Tokyo to places like Hokkaido. These
poorer outlying regions are hugely dependent on public-works projects
for employment. As the government’s fiscal position has steadily
weakened, the jobs have become far scarcer. True, there are beautifully
paved roads all around, but they go nowhere. Old people have retreated
to villages, many growing their own food, their children having long
abandoned them for the cities.
Even in Tokyo, the air of normalcy
is misleading. Two decades ago, Japanese workers could expect to
receive massive year-end bonuses, typically amounting to one-third of
their salary or more. Now these have gradually shrunk to nothing. True,
thanks to falling prices, the purchasing power of workers’ remaining
income has held up, but it is still down by more than 10%. There is far
more job insecurity than ever before as firms increasingly offer
temporary jobs in place of once-treasured “lifetime employment.”
Although
hardly in crisis (yet), Japan’s fiscal situation grows more alarming by
the day. Until now, the government has been able to finance its vast
debts locally, despite paying paltry interest rates even on longer-term
borrowings. Remarkably, Japanese savers soak up some 95% of their
government’s debt. Perhaps burned by the way stock prices and real
estate collapsed when the 1980’s bubble burst, savers would rather go
for what they view as safe bonds, especially as gently falling prices
make the returns go farther than would be the case in a more normal
inflation environment.
Unfortunately, as well as Japan has held
up until now, it still faces profound challenges. First and foremost,
there is its ever-falling labor supply, owing to extraordinarily low
birth rates and deep-seated resistance to foreign immigration. The
country also needs to find ways to enhance the productivity of those
workers it does have.
Inefficiency in agriculture,
retail, and government are legendary. Even at Japan’s world-beating
export firms, reluctance to confront the ingrained interests of the
old-boy network has made it difficult to prune less profitable product
lines – and the workers who make them.
As the population ages and
shrinks, more people will retire and start selling those government
bonds that they are now lapping up. At some point, Japan will face its
own Greek tragedy as the market charges sharply higher interest rates.
The
government will be forced to consider raising revenues sharply. The
best guess is that Japan will raise its value-added tax, now only 5%,
far below European levels. But is it plausible to raise taxes in the
face of such sustained low growth?
Investors who have bet against
Japan in the past have been badly burned, grossly underestimating the
Japanese people’s remarkable flexibility and resilience. But the fiscal
road ahead looks increasingly perilous, with political consensus
fraying badly in recent years.
In the end, are foreign leaders
right to scare their people with tales of Japan? Certainly, the
hyperbole is overblown; the Chinese, especially, should be so lucky.
But nor should apologists for deficits point to Japan as reason to be
calm about outsized stimulus packages. Japan’s ability to trudge on in
the face of huge adversity is admirable, but the risks of crisis ahead
are surely greater than bond markets seem to recognize.
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Academic blather. Go grade some papers.
"Western leaders told their people," ...
What about OUR slow motion crisis?
if someone can find my car keys I can drive us ALL out of here.
"the Chinese, especially, should be so lucky"
I'll take Tokyo and Osaka over Beijing and Shanghai any day. At least the air in Japan is breatheable, the water potable and the food edible.
Yes, the article is a little thin, but Japan truly is a puzzle without a solution.
We all get lulled into a sense of false security because Japan hasn't imploded despite a largely forgettable last two decades. We tend to project yesterday on to tomorrow, and assume Japan will get by, perhaps without the panache it exhibited during the Bubble Years, but not so bad all in all.
It might be smart, however, to look at what might have changed that says tomorrow will be different, and what was put off until tomorrow might now have to come face to face with tomorrow's arrival.
So what has changed?
1) the population has gotten older.
2) Japanese are becoming an endangered species. The country's fertility rate of 1.21 has finally resulted in a shrinking population.
3) Japan has gone from a 17% savings rate in 1989 to what may well go below zero in 2010, as that aging population faces up to the fact that a nest egg yielding .001% or even 10-year JGB's at 1.32% does not generate enough to pay the bills. The seedcorn must now be eaten, which makes financing deficits domestically a little more difficult.
4) The Japanese National Insurance (Kampo) and National Savings (Yucho) are about as well funded as an Enron employee's 401K. Wait until retirees try to cash out.
5) The banks have never had to face up to the holes in their balance sheets because Japan invented extend and pretend, and the aforementioned high savings rate never had depositors trying to withdraw. Retired depositors who earn nothing in interest tend to withdraw.
6) The world, especially Asia ex Japan, was booming during the time Japan was trying to survive its crisis. Will the boom come back and save Japan again?
7) Current government debt service eats up 35% of total government revenues, and this is with a yield curve that barely goes above 1.4% anywhere along it. If long rates move up about 150 pips, 100% of revenues go to pay debt service.
Christopher Woods, along with many others, argue that Japan has an advantage because 95% of its debt is domestically held. I do not quite understand why this is positive. Yes, it is better than, for example, Poland having much of its debt owed to external banks and denominated in Swiss francs, but why is this better than the US, owner of the world's reserve currency, who has 100% of its debt held by terrestial investors? A closed system with a single currency is the same whether that means within Japan or in a world where the dollar is ubiquitous. When folks are out of money, they are out of money, no matter where they reside, so funding can be anyone's problem. At least the US can default on outsiders.
Well reasoned and put!
Solution will come when the young people see the old people unable to feed themselves with the savings, then the young people will realize that they have to have more babies just so to not end up like the old people.
Um, that may or may not be true, but even if it is it can't possibly have any positive impact until about 20 years after such a cultural change takes place, and will in fact make dependency ratios even worse prior to that time. That will be a truly sucky 20 years for the Japanese people.
How ironic - kids become a retirement plan again after gov't promises are broken.
Chin, always enjoy your posts.
Does US imperial backing go without saying now?
One reason why having most government debt owed internally is positive is that the danger of IMF intervention doesn't exist. Instead of being forced into punishing austerity and asset-stripping programs, Japan can default without so much as a hiccup from foreign investors.
It is also open to question whether Japan would accept large-scale immigration if really pushed to the edge. I can envision a time when the Monbusho (Ministry of Education) offers a program of study in Japanese language and culture for foreigners; those who pass would be permitted to work in Japan for several years, possibly with a conditional path to permanent residence and even citizenship. Given a shrinking population and (surprisingly) a large and growing amount of arable land lying unused, there is considerable slack in the system. -- Sirius Black
That would mean a cultural popular shift of epic proportions.
I'd not want to be the frst white families relocating there without an enclave of several thousand more. The Japanese feel they are of a superior race, and won't take to enmeshing themselves with gaijin.
Might as well try to get the Israelis to intermarry with Palestinians.
As someone living in Japan myself, I find the Japanese quite welcoming of foreigners, provided we are a) white, b) from a rich country, c) few in number and d) only staying temporarily. Getting the Japanese to accept changes in any combination of the above will indeed be a momentous cultural challenge.
That is why I think a requirement of prior cultural assimilation might be the way forward. Alternatively, a "gastarbeiter" system restricting foreign laborers to certain sectors, such as agriculture, and requiring repatriation afterward, is foreseeable.
But it won't happen till Japan's social welfare system is teetering on the brink. The Japanese are deeply suspicious of immigration, not least because of the high crime rates they see in the World Outside Japan. -- Sirius Black
At least the US can default on outsiders.
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In the final analysis it will all come down to energy and resources.
Yes the US can default on its debt but that would be a better option if the US was in energy surplus which it is not.
This is a reasonable piece on some problems facing the Japanese economy and society, but actually has basically nothing of consequence to say to JGB holders.
Government bond holders are concerned about 2 things only: (1) the possibility of default and (2) the rate of inflation.
Rogoff's own piece on the history of sovereign default on domestic debt(http://www.economics.harvard.edu/files/faculty/51_Forgotten_History_Of_D...) shows that sovereign default on domestic debt (ie debts denominated in the currency for which the country is a sovereign issuer) are quite rare.
The likelihood that Japan will default on any of it's debt is incredibly small. Although there is always some chance it could happen, simply paying debts through issuing currency (or borrowing from the BOJ, to think of it another way) would be far preferable and less disruptive than outright default.
The only scenario that might entice a sovereign nation to default on domestic debt would be if inflation were rampant, as was the case in Russia's default in the late 90s.
The problem in Japan is deflation not inflation. How quickly this could change, is certainly a question worth considering.
Rogoff is certainly right on one thing: many fortunes and careers have been wrecked betting against JGB yields in the past.
Japan did this for, what, 20 years. We're just starting the great deflation event.
I'll probably be near The Great Asset Transfer To The Healthcare System in 20 years.
What, me worry?
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