The Endgame: Japan Inc. Plays By Its Own Rules

Wolf Richter's picture

Wolf Richter

The plunging approval ratings of Japanese Prime Minister Yoshihiko Noda continue the tradition of all Japanese prime ministers since Junichiro Koizumi—there were six of them in five years. Public approval is high at the start when voters hope that things will change. As reality sets in, approval skitters down a steep slope that lasts 8 to 15 months. When it drops into the low twenties, the prime minister is kicked out, and a new guy is installed.

Days after being appointed on September 2, Noda reveled in a public approval rating of 63%. Early October, it plunged to 55%. Early November, it plunged to 47%.

The November poll was taken after he’d announced legislation that would raise the national consumption tax from 5% to 10%. Government deficits have spiraled out of control. Gross national debt is 230% of GDP (it makes Greece’s 160% look virtuous). Japanese Government Bonds, rated AA-, are facing further downgrades. Something needs to be done. And Noda asked consumers to do it.

The latest poll, conducted in early December, wasn’t kind either. The ongoing discussion about the consumption tax dragged down his approval ratings to 44.6%. Other issues weigh as well, such as frustration with the disaster reconstruction efforts, response to nuclear contamination issues, and an increasing public distrust in the political parties. The prime-ministerial unpopularity contest continues:

Noda’s disapproval rating jumped by 6 points to 40.3%. More than half of those surveyed want a general election before the new consumption tax is enacted. Only 25.4% supported his plan to hold an election after enacting the legislation.

Even voices within Noda’s Democratic Party of Japan (DPJ), have expressed concern about the tax increase at a time when the economy is fragile. Ironically, to keep the economy afloat, the government just advanced another “supplemental budget” (stimulus package), the fourth this year, unprecedented since World War II. And the tax increase is under attack from the Liberal Democratic Party (LDP) which ruled Japan almost continuously from 1955 until 2009.

After Japan’s bubble burst in 1989, the government resorted to deficit spending to prop up the economy, which accomplished two things: sporadic upticks in GDP and an explosion in government debt. At 230% of GDP, and still growing, that debt can no longer be serviced by a workforce that is shrinking—a result of two demographic shifts: decades of low birth rates and the retirement of baby-boomers.

And cracks have appeared in two other pillars that support the debt: the savings rate has sunk to American levels, and the trade surplus has been replaced by deficits at regular intervals (five months so far this year).

So, is Japan at the brink of an epic collapse? Are JGB yields going to spike? Is it time, finally, after 20 years of false hope, to short JGBs?

Funding hasn’t been a problem: due to Japan’s institutional setup and insular psychology, it has been able to sell 95% of its JGBs within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, one of the largest pension funds in the world; the government-owned Post Bank, the largest deposit holder in the world; financial institutions the government can lean on; and the Bank of Japan.

There is essentially no free market for Japanese debt, and foreigners hold only 5%. Whenever the BoJ, the Ministry of Finance, and politicians say, "Buy these crappy bonds at these ridiculously low yields," buyers fall in line. Example: the planned sale of reconstruction bonds. Those who buy certain amounts and hold them for specified periods get a gold trinket as reward, rather than yield. And it’ll work.

It’s easy to underestimate just how powerful Japan Inc. is, and how powerless elected officials are. Prime ministers are replaced when the public gets frustrated. But the bureaucrats and corporate interests that control a big portion of the economy remain in place.

It’s also easy to underestimate how cohesive and homogeneous Japanese society is, and how willing the people are to sacrifice for a common good, namely Japan, as long as Japan takes care of them in return. So far, that pact has worked. While Japan’s debt will blow up eventually, it’s not clear when, and it’s not clear how. The Japanese might very well make a collective decision to deal with it in a manner that seems incomprehensible to the rest of the world. And anyone who bets against Japan Inc. and its debt should keep that in mind.

But life goes on. 20 supercars were speeding down the Chugoku Expressway, trying to get to a supercar gathering in Hiroshima. At a left-hand bend, the lead Ferrari changed lanes at 90 to 100 mph though the speed limit was 50 mph. The highway was wet. And the rest was very expensive.... Superlative Supercar Pileup (with video).

Wolf Richter

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StychoKiller's picture

What?  NO ONE has any regrets about all the fine automobiles being totaled?  Where are yer priorities, people?

bryanuk's picture

Thanks stychoKiller for nice and valuale nice. 

canon toner cartridges



octafinance's picture


Japan will face a gigantic debt crisis very soon. I'm personally buying OTM yen puts as I do expect that BOJ will finally start monetizing the debt and will risk a collapse of the yen.

In this analysis I answer the following important questions:

1. Why Japan’s crisis will shake the world in few years?

2. Why for many years hedge fund managers betting against Japan lost money and why they were wrong?

3. How can I profit from what is coming? Why position now?

4. Why Japan’s debt and economy are not safe? Most people think Japan is save because: 

-  Japan is net creditor and have huge reserves.

- Japan has trade surplus so it gets more money than spends from outside.

- Japanese government bonds are locally hold so it’s not a target for sudden yield spikes or attacks from foreign bond holders.


FEDbuster's picture

Kyle Bass has been talking about this for a couple of years, I guess he is always ahead of the pack.  Europe is the crisis de jour, but maybe 2012 will be the year of the rising sun crisis?  I kinda of think the whole thing blows up next year, economic collapse worldwide and WW3, and some friends and family think I am a pessimist?  Got two years of food?

octafinance's picture

Japan will face a gigantic debt crisis very soon. I'm personally buying OTM yen puts as I do expect that BOJ will finally start monetizing the debt and will risk a collapse of the yen.


In this analysis I answer the following important questions:


1. Why Japan’s crisis will shake the world in few years?

2. Why for many years hedge fund managers betting against Japan lost money and why they were wrong?

3. How can I profit from what is coming? Why position now?

4. Why Japan’s debt and economy are not safe? Most people think Japan is save because: 

-  Japan is net creditor and have huge reserves.

- Japan has trade surplus so it gets more money than spends from outside.

- Japanese government bonds are locally hold so it’s not a target for sudden yield spikes or attacks from foreign bond holders.

Kina's picture

Japan also has the second largest music industry at some 2.5bn They obviously needed it.

And they make the best TV series I have ever run across. Obviously they have needed that too.



fx_dilemma's picture

what japan has is a classical conspiracy between the government , the local elite and the big business (although I would not nessecarily make a clear distinction between them because it is difficult to see where one ends and the other one starts).The governement uses people's savings to pay it's expenses and prints like crazy at the same time.I think the turning point will be when the exports start collapsing due to collapse of japan's main export markets and at the same time there will be too little savings to use to purchase government bonds.Japan has indeed a very distinct culture and it is somewhat difficult for us to understand but economic laws work for them too , at some point the ever bigger becoming flood of freshly printed yen will result in a currency crisis.And then it's game over...

Augustus's picture

Taxes or worthless bonds.  In both cases the citizen is out the cash.  It all must come from someone, except with taxes they are told that there is no return from the beginning.  Rather than getting a promise with a lie attached.

Vlad Tepid's picture

What are the Japanese supposed to buy?  Greek debt?  US treasuries?  Might as well stick with the home team when all vessels are sinking ships.

golfrattt's picture

Nobody but the Japanese own Japanese debt...?

Jonestown wasn't a suburb of Tokyo, was it...?

It's the Pied Piper walking off the cliff with his flock in tow..'s picture

The Endgame is near for Japan.  The large holders of their JGB's are now sellers and the savings rate has declined to 2% and likely to go negative.  It is specifically because the earnings on their vast savings is so low that principal is withdrawn  for living expenses.  Demographics are poor; insurance companies are having more death claims.  Approximately 30% of bank assets are JGB's.  Japan Post is the largest financial institution in the world and owns mostly JGB's.  The big buyers have turned to net sellers.  The real question is who is going to buy the debt going forward?  Social Security is 55% of spending and liquidating $80 billion of JGB's per year and growing.  Japan is borrowing more than 60% of this years total spending plus they must issue $80 billion more than their deficit to obtain funds for social security benefits.  They were the most indebted country before this at 230% debt to GDP; Greece is about 160%.   Interest at 1.4% uses up 23% of total revenue; at 3% it would approach 50%.  Their  trade surplus has turned negative.  If I had money in Japan, I would move it to gold or out of the country. 

qussl3's picture

They also happen to be the world's largest net creditors if i recall.

I would not be the least bit surprised that as the debt situation worsens, more overseas wealth is converted back to yen and repatriated.

The yen could get MUCH stronger than we expect.

Could the debt go to junk and the yen go to 60 to the buck?

It's not as impossible as most think.'s picture

Repatriation definitely happened during the first crsis but as we have watched the European crisis hit really bad days, the impact to the yen has been small.  It seems as though the flight to safety is more towards dollars than yen.  This may be because of fear of intervention by Japan, a lid on the yen or diversification for Japanese investors.

The key barometer is JGB's and watch for movement.  It could be a credit downgrade, a bad auction or liquidation by one or more Japanese financial institutions.  The banking system is close to 30% JGB's; they are probably at capacity with international rules.  Sovereign debt is the global issue now.  Credit rating agencies seem to be trying to get ahead of the curve.  More and more Japanese investors and financial institutions are likely to shift away from JGB's as they have too much concentration--Japan is running out of JGB buyers.  I understand that the three largest holders are now net sellers; who will replace them?  The declining savings rate is a huge issue because the deficit is so large.  A small shift could cause dramatic changes.  Debt to GDP is so high that it puts Japan on the radar; it is the old story---the bond market works until it doesn't and then the move is dramatic.   Once the Japanese understand that their government is broke and that it will likely break their banks and large government savings/insurance institutions--the money will be leaving Japan.


BigInJapan's picture

This country never has been rich. Outside Tokyo, most live in homes that are laughable by western standards with exposed pipes, no insulation, what amounts to a Coleman stove for cooking on, and no central heating. All of the money was and still is spent on shovel-ready infrastructure spending and nobody thinks that is a problem. There it's zero movement toward fiscal restraint. In a word, hopless.


Also, to Wolf Richter, please keep it up. I'm becoming a fan of your blog.

adr's picture

Really? Have you been to Japan? Nearly everyone in Japan lives in one of the large cities. Tokyo, Osaka, and Kyoto have very high living standards within the confines of the small square footage. There are some rural Japanese areas with less in the way of modern conveniences but the people mostly choose to live that way.

Now the Japanese are a hard headed stubborn xenophobic group of people, I work for them so I know, but they do know how to come together and help each other when needed. If the shit hits the fan I'd rather be in Japan than nearly any US city. A Japanese guy won't shoot his neighbor for a can of soda. If you cut off welfare payments to any large US city, within one day there will be bodies lining the street. Katrina was a warmup.

Monetarily Japan is fucked due to a massively declining younger labor force and downward  wage pressure. The biggest fear of anyone over 40 in Japan is that the younger generation will turn their backs on their heritage and embrace American standards of unexcellence. Taking the mindset that all should be provided for them instead of working for it.

You are talking about a country that has beer vending machines on street corners with no need for ID and not a teenager in sight taking advantage of it.

Vlad Tepid's picture

Central temperature control is rare anywhere in Japan.  Very few houses in Tokyo have central air.  It's an energy/money conservation thing.  Not too sure what you mean by "outside Tokyo" anyway.  The square footage in Tokyo is laughable by Western standards, but premier homebuilders like Panahome, Misawa Home and Sekisui House, put up great houses (fully insulated too) anywhere and those standards are country-wide. 

I can show you some houses in Detroit that are laughable by Western standards, soooo...and I have no idea what you're talking about with a Coleman stove for cooking.  Do you mean the propane space heaters?  Those aren't for cooking...

adr's picture

Yep, the Japanese mostly use Mitsubishi single room climate conditioners. The think it is foolish to heat or cool a room you are not in.

Laughable living standards when most people have a toilet that reads your vitals when you take a piss and cleans itself.

Jimmy Carter was right's picture

Excellent article Mr. Richter,

It may be that Japan's currency blows up first in this global race to the bottom.  Even though it lacks natural resources that the USA has, Japan has a resource the USA could only dream of, a resourceful, calm, courteous population, for the time being.  The USA is in the beginning stages of what Japan has been through for the last 20 years and the Yanks are starting to whine and cry over the loss of their poor monster trucks, giant steaks, and gargantuan utility bills.  The Japanese can fare far better on fewer resources and cash than most think.  Which is why the USA must satiate the sheeple until the last possible moment, when the jig is up it will be ugly.

Vlad Tepid's picture

Good point.

They survived 3 years on water, grass and tree bark, carpet fire-bombing, a total naval blockade, and a despotic, authoritarian regime (note to FDR: that regime didn't confiscate their people's gold).  I think they can survive a currency collapse and a bond implosion just fine.  When the dust settles and people need well-made stuff reliably, the Japanese will be waiting.

Rob Jones's picture

Japan offering gold coin for purchasers of 10M yen reconstruction bonds:

Vlad Tepid's picture

Half an ounce.  For $129,000 at 0.05%.  Not what I'd call the deal of the century.  The gold coin is worth more than the interest you will get back after the three year period.  That can't be lost on most potential investors.  Talk about airing your weakness!

masterinchancery's picture

Japan will hang on for a while, then default.  They can't perform magic.

non_anon's picture

Japan needs to go back to a feudalistic system, that seems to be their way

jm's picture

I miss Koizumi.

Corn1945's picture

So you are saying Ponzi schemes work with more people exiting (dying) than entering (being born)?

Japan's population is now in permanent decline. The Ponzi scheme is ending for them.  

apberusdisvet's picture

Fukushima will lay to rest the plans of the Japanese oligarchs who control the economy.  Hard to rape an economy when the consumers and bond buyers have all died of cancer.

el Gallinazo's picture

Two heads are better than one?

nothing can go wrogn's picture

Escape to Okinawa

As radiation hot spots emerge in Tokyo and nuclear contamination plagues the country, some Japanese are fleeing to the Okinawa island chain to avoid the fallout from Fukushima. But is it too late?

DormRoom's picture

if you want to know if the EuroZone will break up, ask the Costra Nostra if  it holds Euros.  It's that easy.


As for an imminent Japanese implosion, are the Yakuza holding yen, or gold?


think outside the box.

BigJim's picture

All right, I give up... are the Costra Nostra holding Euros? Are the Yakuza holding yen, or gold?

flyr1710's picture

Noda is watching....

max2205's picture

I've seen the future and we are Japan. Only we have to wait 4 freaking years to get rid of our nitwit POTUS

Manthong's picture

I was feeling sympathy for the poor folks in Japan and fortunate to be here until I realized that the half life of the US economy is not much longer than theirs is.. then I started feeling just as sorry for us.

Oh regional Indian's picture

Yeah, I think it's time for general sorriness to abound ManThong. Because we really are all in the same boat. Japan probably has the crown for being THE most manipulated nation of the 21st century. Really sad. Dystopian and like you siad, everyone's future.



LowProfile's picture

The Japanese might very well make a collective decision to deal with it in a manner that seems incomprehensible to the rest of the world. And anyone who bets against Japan Inc. and its debt should keep that in mind.

In the USA's case, what to do isn't that hard to imagine. 

I can't really imagine what Japan will do.  Maybe nationalize a big portion of their large corporations (in order to make good on the debt), devalue the yen, and go on some sort of hard money standard?

Any guesses here would be appreciated.

Vlad Tepid's picture

The keiretsu (formerly zaibatsu) already function as nationalized companies, except that in their case, they own the country.  That's why SO much pressure has and will be brought to bear on keeping the yen weak.  These guys directed trade policy for decades like a puppet on a string.  Corporatism at its friendliest.

The yen was already devalued after WWII which is why it takes 1000 yen to equal $10 (or $7.50 now, darn them fro screwing with my math).  They'd probably have to start over like Argentina if they went that route. 

As far as hard money, I wish it wasn't so but TPTB in Japan will be the last ones to figure out that gold and hard money are the way to go.  They have been playing tag-along to the Western (so-called) leaders since the Meiji Restoration and are enamored with Keynesianism like they were with imperialism and militarism previously.  It will take a massive smack in the face to get them weaned off.  Catastrophic systemic collapse is the only thing that has brought down the status quo that calcifies Japan periodically.  The collapse looks ugly and unsurvivable, and then Japan comes out stronger. 

cathrynm's picture

I assume they monetize some of that debt.    They invented the Zombie bank economy that the USA now enjoys(sic).

The main difference is that in Japan they built a lot of useless construction projects, while in the USA this money fed into profits and bonuses in the Financial insdustry.  That the construction projects, though they don't create capital, do help keep the unemployment down and as a result the arrangement is more sustainable politically there than it is in the USA. 

Georgesblog's picture

It's the same, everywhere you go. People want the candidate that promises the most candy. Unfortunately, such fantasy world expectations produce promises that are impossible to deliver. The world has a problem without a solution, not just Japan. As long as the context of perception is within the confines of fiat currency, destruction is inevitable.

Popo's picture

What a crock of shit.  You're looking at exactly 50% of the equation and concluding the "inevitability" of fiat destruction.

How about this:   As long as food,  commerce,  manufacturing,  transportation  and to a large extent, domestic heating -- are all essentially complex derivatives of oil futures -- the universal destruction of fiat currency is impossible.

There, I said it.  I know, I know... this is ZH and the "all fiats to zero" mantra runs thick here.  But the inescapable corollary to "all fiats to zero" is logically "all commodities to infinite value".  ...And then?

When oil approaches $300 the world grinds to a rather instantaneous halt and (as we have already witnessed) equity markets very quickly  implode.   What happens to currencies when equity markets implode again?   Oh. Right.

And what happened last time the oil market spiked?    Do you believe this time will be different?

Yes, inflation is a politically generated force.   But taking it to the extreme conclusion that fiats are doomed is typical Econ 101, limited-understanding.   It doesn't work like that, and it won't.

Secondly -- unbeknownst to most gold bugs the USD is a partial derivative of the oil market.    It is not,  by any analysis, unbacked fiat.

Oil trades in dollars.  

Demand for oil = demand for USD.

The relationship between oil and dollars is enforced and regulated by the largest military in the world.

(Note that our military mobilizes *specifically* when regimes threaten the oil/USD relationship.)

So not only is the "all fiats to zero" sentiment self-limiting -- but as long as oil remains the primary engine of global commerce (and food supply) -- our "fiat" will continue to have value.

Bicycle Repairman's picture

Your comments raise a lot of questions.  Suppose the USA decides to reset by issuing a new, devalued dollar?  Would that make gold bugs happy?

Ghordius's picture

"the USD is a derivative of the oil market" +1000

perhaps you want to rephrase in "the USD is backed by oil, a commodity"

there is this (ZH? American? NeoAustrian?) simple view that all fiats are going *wham!* to zero at the same time for the same reasons "because fiat is evil" - as if "evil" would ever be in shortage on this world...

add a few "destructionists" in the equations that are convinced that the world has to end and you have the current cocktail: buy tin! buy gold! buy weapons!

fiat currencies have an empirical average lifespan of 70+ years

Popo's picture

For those who don't understand why America goes to war:  (And why the dollar has value):



Ghordius's picture

the us gov's policy of a strong dollar - nobody understands Timmy when he says it...

Popo's picture

And then there was poor Qadaffi, who decided to establish a new pan-African gold-based currency to sell oil.

And then...lo and behold, there was an uprising,  a NATO invasion, and a dollar-based central bank overnight  (set up by "rebels". lol).