I’m amazed that Japan has not yet hit an economic reef. At over 230+%, the country’s debt to GDP is so far out of whack that I keep thinking that something has to give. I’ve been wrong for years.
The trend lines for Japan are awful. A decline in total population coupled with a rapidly aging society is a recipe for slow or no growth. Japan is the world leader in these critical statistics. I don’t think there is anything that Japan can do to reverse its social/economic future. Projections on the critical variables for at least the next ten-years continue to head south.
It's not as if the Japanese are unaware that they are headed for a debt train wreck. They have just passed new tax legislation that could make a meaningful contribution towards stabilizing Japan’s debt to GDP problem. But the new law is a sham. The new taxes will never get paid.
Japan has a consumption tax today of 5%. The new laws will raise the tax to 8% in 2014 and 10% in 2015. Moody’s thought this was a great idea, and said this about the tax hikes: (Link)
"it is an essential component of Japan's fiscal consolidation goal, achievement of which we consider necessary to maintain market confidence in Japanese government bonds."
But here's the joke; in order to get the votes to pass this very controversial legislation, there is a critical stipulation that the new taxes will not come into effect unless the country is increasing GDP at a minimum rate of 2% a year (or nominal growth of 3%).
There is no chance in hell that Japan will achieve the triggers. The folks who passed the laws know that. I think Japan deserves the annual award for the most heinous “kick the can down” tactic. The following chart shows how Japan has limped along for the past 20 years. Note the GDP performance over the past decade. What are the odds that it breaks 2% anytime soon based on the prior track record?
How’s Japan doing today? Is it on it way to achieving the all important 2% GDP target for 2013 (the trigger for the 2014 tax increase)? Not a chance. From the FT this morning:
Moody’s warned about the possibility that the taxes would never be levied:
the gross domestic product growth targets contained in the new law remain an area of uncertainty
How hard do you have to stretch a rubber band before it breaks?
On the Good Efforts by the SEC
The SEC made an important announcement this morning:
The SEC is just now getting around to hiring some people who might have a clue what is going on in the capital markets. Mr. Berman, the head of the office Analytics and Research acknowledged that the SEC had no idea what was actually happening. From the interview with Tradersmagazine (Link):
the SEC learned it was unprepared to sift through the mountains of market data in the current high-speed, rapid-trading marketplace of today. That was evident when it had difficulty understanding what happened in the market on May 6, 2010-the day of the "flash crash."
So two plus years later they get to thinking that they need some “smarts” on board? The SEC gets the award for Rank Incompetence.
Both the Fed and the Treasury have made comments on the tame inflation outlook as the basis for monetary/fiscal policies that potentially have inflationary implications. They have relied on a Cleveland Fed report that measures expectations for the future rate on inflation.
Not surprisingly, the folks in Cleveland are using a measuring stick that says the all-important “expectations” are very low, about 1.25%.
I look at the multi-trillion US Government bond market for a better measure of what those expectations are. The Tips/Coupons spread tells a different story than the nice folks in Cleveland. From Bloomberg – (Link)
The hockey stick higher starts on July 26. That was Draghi saying that he would print to the moon. The second leg higher was Bernanke saying that he was going to act in September.
Like I said, Bernanke ignores the market’s measure on expectations. But I’m absolutely certain that the Chairman, and all of the other Fed Governors, have the market measure of expectations somewhere on their screens. So they are well aware of the fact that the market is now forecasting inflation above the Fed’s target of 2%.