This page has been archived and commenting is disabled.
Is the World's Second Biggest Economy On the Ropes?
Iceland has approximately the 101st biggest economy in the world.
Dubai is also tiny.
Greece is somewhat bigger, with the 27th biggest economy.
When Iceland, Dubai and Greece tanked, that was horrible ... but not catastrophic.
Portugal - the 37th biggest economy - may be next. It would be horrible if Portugal tanks.
But Spain is also in real trouble. As the 9th biggest economy, a default by Spain could be major.
But none of these are in the same ballpark as Japan - the world's 2nd biggest economy. Only the U.S. is bigger.
So it is newsworthy that S & P cut Japan's sovereign credit rating in January.
And that, as Bloomberg wrote April 2nd:
Japanese
National Strategy Minister Yoshito Sengoku said the country should have
a greater sense of urgency about the nation’s fiscal situation,
comparing it to the plight of Greece. “So far some have been crying
wolf, but Greece’s situation isn’t entirely unrelated to Japan’s,”
Sengoku said at a news conference in Tokyo today. “At the end of the
day, Japan’s situation right now is not that good. There hasn’t been a
sense of crisis about this, including from ourselves.”***
Sengoku
is not the only policy maker to compare Japan with Greece, whose fiscal
woes weakened the euro and forced the government to adopt austerity
measures as its borrowing costs surged. Bank of Japan board member
Seiji Nakamura said in February that Greece’s example shouldn’t be
regarded as “a burning house on the other side of the river.”
And AFP reports today:
Greece's
debt problems may currently be in the spotlight but Japan is walking
its own financial tightrope, analysts say, with a public debt mountain
bigger than that of any other industrialised nation.
Public debt
is expected to hit 200 percent of GDP in the next year as the
government tries to spend its way out of the economic doldrums despite
plummeting tax revenues and soaring welfare costs for its ageing
population.
Based on fiscal 2010's nominal GDP of 475 trillion
yen, Japan's debt is estimated to reach around 950 trillion yen -- or
roughly 7.5 million yen per person.
Japan "can't finance" its
record trillion-dollar budget passed in March for the coming year as it
tries to stimulate its fragile economy, said Hideo Kumano, chief
economist at Dai-ichi Life Research Institute.
"Japan's revenue
is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010,
" he said. "Its debt to budget ratio is more than 50 percent."
Without issuing more government bonds, Japan "would go bankrupt by 2011", he added.
***
The
system of Japanese government bonds being bought by institutions such
as the huge Japan Post Bank has been key in enabling Japan to remain
buoyant since its stock market crash of 1990.
"Japan's risk of
default is low because it has a huge current account surplus, with the
backing of private sector savings," to continue purchasing bonds, said
Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities.
But
while Japan's risk of a Greek-style debt crisis is seen as much less
likely, the event of risk becoming reality would be devastating, say
analysts who question how long the government can continue its
dependence on issuing public debt.
"There is no problem as long as there are flows of money in the bond market," said Kumano.
"It's
hard to predict when the bond market might collapse, but it would
happen when the market judges that Japan's ability to finance its debt
is not sustainable anymore."
In addition, Japan's population is declining rapidly, due to a
combination of delay in age of childbirth, declining fertility and a
society unfavorable to immigration. As Business Week wrote last August:
Japan’s Internal Affairs Ministry published the latest
numbers on the country’s declining population on Aug. 11. The data
doesn’t make for pleasant reading. In the year through the end of March
2009, the number of births in Japan fell for the first time since 2006
to 1.08 million, while there were 1.13 million deaths. Put together,
that adds up to a record decline in the population of 45,914. That
bests (if that’s the right word) the previous biggest decline of 29,119
in 2007. Just as worrying, the number of Japanese 65 or older increased
to a record 28.21 million out of total population of 127 million.
Meanwhile, the current recession—Japan’s GDP may shrink 6% this
year—will likely make things worse as couples decide to delay or have
fewer children.
Japan Times adds some details:
The
population dynamics estimate of the Health, Labor and Welfare Ministry
indicates that Japan's population decline is accelerating. The report,
based on birth and death registers submitted from January 2009 to
October 2009, estimates the number of births in Japan in that year at
1,069,000, or 22,000 less than in 2008, and the number of deaths in
2009 at 1,144,000, or 2,000 more than in 2008. The death figure is the
highest since 1947 and represents the ninth straight yearly increase.
As a result, Japan's population is estimated to have shrunk by 75,000 last year, 1.46 times the decrease marked in 2008.
Japan's
population will continue to decrease at an accelerating rate, the
ministry noted. The number of women able to bear children is on the
decline, and the number of deaths among the nation's graying population
will continue to rise.
The National Institute of Population and
Social Security Research estimates that Japan's population will dip
below 100 million in 2046, below 90 million in 2055 and down to 44.59
million in 2105. If this trend continues, the labor force and consumer
markets will shrink, having a strong impact on the economy.
Here's a visual representation of forecast Japanese population decline courtesy of Alex Dalmady:
Morever, Japan also has very unfavorable age demographics. As I wrote last October:
The following chart
shows that Japan has the worst demographics of all, with a staggering
percentage of elderly who need to be taken care of by the young:
Chart 2: Old Age Dependency Ratios for Selected Countries
Source: http://data.un.org/
![clip_image002[5]](http://www.creditwritedowns.com/wp-content/uploads/2009/10/clip_image0025.gif "clip_image002[5]")
And see this chart from the Statistical Handbook of Japan:
On the other hand, as AFP notes, Japan has some good things going for
it, including a large current account surplus, and the fact that
Japanese are largely financing their debt themselves:
The system of Japanese government bonds being bought by institutions
such as the huge Japan Post Bank has been key in enabling Japan to
remain buoyant since its stock market crash of 1990.
"Japan's
risk of default is low because it has a huge current account surplus,
with the backing of private sector savings," to continue purchasing
bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ
Securities
And, as AFP points out, Greece is part of a currency union with strict exchange rates, while Japan has a fiat currency with flexible exchange rates:
The
likes of single-currency Greece and non-eurozone countries are also
different in that the latter group have flexible currency exchange
rates which are more closely calibrated to their fiscal conditions,
[Nomura Securities economist Takehide Kiuchi] said.
The Bank of Japan is also taking radical measures to keep interest rates low, but I don't think that's a very helpful approach for the long-term.
Of
course, no country can be analyzed in a vacuum. It is - to some extent
- a beauty contest, and bondtraders could change horses when they
decide that the horse they've been backing is a nag.
As Bruce Krasting comments:
Japan sure looks like it is trouble. But some comparisons to the US are more troubling.
From the CIA fact book:
Japan External Debt = $2.13 Trillion
Japan Reserves = ~$1 Trillion
US External Debt = 13.45T
US Reserves = 75b
From this you get the Japanese External Debt/Reserves as 2:1. For
every dollar of debt they owe outside the country they have 50 cents in
a piggy bank in real reserves.
The US External Debt/Reserves is 180:1. Our reserve coverage ratio is 1/2 cent for every dollar of external debt.
GW makes the case that Japan is broke because they owe 200% debt to
GDP. He is right. They are broke. But the real question of solvency
come down to "Who do you that debt to?"
Japan's GDP to external debt is 2:1.
The same ratio for the US is 1:1.
So by this calculation Japan has a much more managable debt load
than the US. They owe it largely to themselves. We owe it to non US
persons.
Please don't tell me that the US has the ability to print reserves.
That argument is not going to fly in 2010. We have a much bigger
problem that does Japan.
And if Exeter is right, then the holders of all nations' bonds might get nervous and flee into cash or gold. This would drive many debt-heavy countries into default.
- advertisements -
During the time of the runaway JPY carry trade I asked why they wer taking on so much notional debt to support their big name exporters. The amounts of the carry trade were many many multiples of what it would take to do the relatively minor adjustments of a mercantilist economy to do a direct support of their temporarily flagging export industries. Why did Japan use their CB to so severely indebt their people when a flat out subsidy for exports would have cost far less than a tenth of their aditional indebtedness during the late 1990'sthrough the mid 2000's?
There will have to be an internal repudiation of the debts, and damn the zombie banks that have so skewed the entire demographics of that people.
The overarching load of thin air debt that hangs over the Japanese has had a huge downforce on the usual procreation rates. The mammoth banking debts that are pressed upon the people made them do the responsible thing in reducing all costs of living including no children. The usual male centered society that treats women as underlings.
How hard is it to figure out that the women are not going to do the entire domestic scene after working the job. They have little regard for the overlords of conventional Japanese heirarchy, those being the smae ones that crippled the nation with phony debts.
95 % of the world may 'want' to live in Japan, but looking at immigration flows, the former British colonies (US, Australia, Canada) outpace the rest of the world.
As with the USSR, look at where people chose to live, not what they say.
Japan is an export dependent country, with a shrinking domestic market, and a political class less than accepting of immigrants. This makes them extremely vulnerable to external shocks and geo-political dislocations.
Keeping immigration to minimal levels is what has saved the Japanese economy from a similar sort of destruction suffered by the US, the UK, and to a lesser extent, the Canadian economy.
US, UK, and Canadian economies are in wage and price death spirals largely due to excessive immigration, with declining standards of living. Japan realizes the wisdom of keeping unneeded foreigners out.
This makes them less susceptible to external shocks, and strengthens the Japanese currency, versus the US/UK/Canadian experience of aggressive offshore remittances by the local immigrant population.
Japan is far from being on the ropes; they are the most economically and fundamentally sound nation in the developed world. They have met their productivity challenges head-on. They have a strong manufacturing and export base, and most JGB debt is held internally. 95% of the world would give their left nut to live in Japan and enjoy the fruits of the Japanese economy, Japanese work ethic, and sound Japanese financial management.
"Problems weakening the Yen" is evidence of the sheer strength of the Japanese economy, not economic weakness. People who claim that Japan is even in the same realm as the PIIGS must live in some sort of fantasyland as the mere comparision is utterly ridiculous if not scandalous.
The demographics that everyone is bleating on about isn't too relevant in this climate. Demographics will have no effect until a long time after the eurozone or the U.S. has collapsed.
In terms of a global collapse, a large part of that 60% food import would be cut also as it is associated with a stable economic and living condition.
Oh, and by the way, for all you genuises jumping on the JPY short bandwagon, note that shorts are at their highest since late 2007, when the GBP was around 250 Y. With VIX etc at similar levels, the next carry trade blow up is imminent.
The reason we geniuses are looking at a long term short scenario is because the BoJ always has and always will scuttle the yen to keep their exporters happy. Ben Graham is exactly right, prior to 04 the Tankan report ALWAYS needed to be read knowing they were doing their best to undermine their own currency. While they haven't done so much since then their exporters are screaming at them to play the game again.
Sakakibara says that the JPY is under valued and will strengthen but I think he is fighting a delaying action for this storm they are in, he is trying his best to keep money from runing away from it too quickly. His comments for years moved the pair in a favorable direction for the JPY. (In those days it was weaker versus the USD) People used to think that HMC were geniuses at hedging to protect the JPY but the truth is that they knew the plays.
For those of us who trade the yen crosses daily this could be a terrific one way trade for a while. Volitility is good in the FX, and better is volitility combined with solid overall direction of a pair. Like printin' money bro.
"It's hard to predict when the bond market might collapse, but it would happen when the market judges that Japan's ability to finance its debt is not sustainable anymore."
"And when that happens, the yen will plummet and a capital flight from Japan's government bonds to foreign bonds will occur," he said.
DUH! This is analysis? How can I get that "job"?
C'mon, ZH--you can do a whole lot better...
Agree with Bruce but I'll add one more component - the Japanese have an explicit lonig term policy to devalue the yen versus the dollar. While the metrics indicate that the US is weaker, the actions of all parties indicate they're dependent on the US for a significant portion of their gdp, otherwise, they wouldn't devalue versus an obviously faulty currency. That's a long winded way of saying that the Japanese are dependent on the US for their economic future. When our economy collapses, Japan will follow.
They are having problems weakening the yen. It is questionable that Japan is truly so dependent on the US. China is now Japan's largest trading partner. That said, old habits are hard to break.
Japan sure looks like it is trouble. But some comparisons to the US are more troubling.
From the CIA fact book:
Japan External Debt = $2.13 Trillion
Japan Reserves = ~$1 Trillion
US External Debt = 13.45T
US Reserves = 75b
From this you get the Japanese External Debt/Reserves as 2:1. For every dollar of debt they owe outside the country they have 50 cents in a piggy bank in real reserves.
The US External Debt/Reserves is 180:1. Our reserve coverage ratio is 1/2 cent for every dollar of external debt.
GW makes the case that Japan is broke because they owe 200% debt to GDP. He is right. They are broke. But the real question of solvency come down to "Who do you that debt to?"
Japan's GDP to external debt is 2:1.
The same ratio for the US is 1:1.
So by this calculation Japan has a much more managable debt load than the US. They owe it largely to themselves. We owe it to non US persons.
Please don't tell me that the US has the ability to print reserves. That argument is not going to fly in 2010. We have a much bigger problem that does Japan.
See what happens to those farms and the food infrastructure if/when people won't take Uncle Ben's Fun Bux for oil.
Japan is a slow motion decline, mostly due to their inverse pyramid demographics and their strict immigation policies. But Japan has massive pension savings, and has weathered the financial storm relatively well. I do not see an imminent collapse here.
Those pensions are now in net balance. They pay out as much as they take in. Because of that, they have notified the government that they will become a net seller of J-bills. This is one reason for the doubling of the personal limits of deposits into the Japan Post Bank.
the trouble is that the us boat is rocking more and more by the day. Soon it will be on the rocks. it may be there sooner than anyone knows, if it isn't there already. how do you spell delusional?
One of my topics of interest in this ongoing crisis is to determine whether or not people can relativize their analytical framework.
Many people lead their analysis through economical tools as if they were natural laws, meaning in a nutshell, same cause, same consequences.
When Japan has not tanked/collapsed, I really wonder if people who led sensible analysis within the context of their economical tools are going to reassess, not their analysis which was correct, but the validity of the economical tools they used.
Once again, Japan's scheme was the following: they borrowed from themselves to lend to the US, nesting their own debt in the US' debt.
As long as the US boat rocks, Japan boat rocks.
I agree, but still is a great time to short the yen long term with the YCS if you don't already trade the yen crosses daily.
Not time yet.
Give it until August, when the USD/JPY pair hit historic lows, then mortgage the house on long greenbacks to yen for the next several years.
:D