The Endgame: Japan Makes Another Move

Wolf Richter's picture

Wolf Richter

It’s a doozie. On December 24, the cabinet approved a draft budget for fiscal 2012 whose headline numbers were horrid enough: ¥90.3 trillion ($1.173 trillion) in outlays, ¥42.3 trillion in tax revenues, and a deficit of ¥48 trillion. 49% of the outlays are to be covered by issuing bonds, a record even for Japan. But it gets worse. Accounting shenanigans gloss over the fiasco by removing two items from the general budget: the reconstruction budget of ¥3.8 trillion and pension payments of ¥2.6 trillion. When they’re included, the deficit jumps to ¥54.4 trillion.

The Japanese government will therefore have to borrow 56.2% of every yen it spends in 2012. But it gets even worse! Japan regularly passes “supplementary budgets” during the year—four of them in 2011, the last one on December 1 for ¥2 trillion. So there may be a few in 2012 as well, which could push borrowing requirements toward a dizzying 60% of outlays.

Despite the near-zero interest rate policy the Bank of Japan has been pursuing for years, interest expense on the debt—at 230% of GDP by far the highest in the developed world—will eat up ¥21.9 trillion in 2012, a stunning 51.8% of tax revenues! If yields on 10-year JGBs were to rise from 1% to 2%.... Better not think that way. Keeping yields near zero is simply a matter of survival.

Funding these deficits and rolling over the gargantuan debt has been made possible by the institutional setup and cohesive psychology of Japan Inc.: 95% of JGBs are held within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, the government-owned Post Bank, financial institutions the government can lean on, and the BoJ. Foreigners hold 5% for decorative purposes.

But two of the strengths of the Japanese economy that have supported the absurd deficit levels—a high savings rate and a large trade surplus—have collapsed. The savings rate is in the low single digits, and the trade surplus has turned into a ¥2.2 trillion ($29 billion) trade deficit in 2011 through November.


2011 Trade Balance in billion ¥

In November, imports grew 11.4% over a year ago, in part due to liquefied natural gas imports—up 21%. Since the Fukushima disaster, utilities have shut down reactor after reactor for scheduled maintenance but have not restarted them. Of the 54 reactors, only six are operating (one was shut down December 26, three more will be shut down in January). To make up for the shortage, utilities have revved up natural gas plants—though reductions in power consumption have also been implemented.

Exports dropped 4.5% from a year ago. Exports to China, Japan’s largest export market, declined 7.7% while imports grew 6.6%. Japan used to have a trade surplus with China. No more. The pace of offshoring is picking up, particularly in the auto and tech industries. While a weaker yen could slow down that trend, it would also drive up the cost of imports, including fossil fuels and raw materials—posing additional strains on the struggling economy.

The strategy for keeping it all glued together for a few more years? An increase in the unpopular consumption tax from the current 5% to 10%. Prime Minister Yoshihiko Noda proposed it in November. The opposition howled. Noda’s approval rating has dropped from 63% to 44.6% in the four months he has been in office (for the whole debacle of weak governments and revolving-door prime ministers, read.... Japan Inc. Plays By Its Own Rules). In pushing the consumption tax, he might run into a buzz saw. And if it passes, it will constrain consumption even further.

"Japan's budget-making processes and its reliance on public debt have reached their limits," Finance Minister Jun Azumi told a news conference on December 24, the winning understatement of the year. And what solutions did he propose? Well, pass the consumption tax “and somehow reverse the falling birthrates."

Reverse the falling birthrates? If that ever happened—doubtful in the current social climate—it would unleash a new wave of government expenditures (schools, healthcare, etc.) for two or three decades before it would generate a boom in productive and tax-paying members of society. But keeping the system glued together for that long would require a miracle. And for a finance minister to count on a miracle seems a bit silly.

Life goes on. A convoy of 20 supercars was speeding down the Chugoku Expressway, entered a left-hand bend at 90–100 mph, though the posted speed limit was 50 mph. The highway was wet. And the rest was very expensive.... Superlative Supercar Pileup (incl. video).

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DaveyJones's picture

They're trying to balance their debt levels with their radioactive

hourglass86's picture

Japan imo is the biggest problem of the world economy alongside ofc UK and USA!

randomwalker's picture

So Japan is officially joining Euroland and the US at the 'Roach Motel'?

Eireann go Brach's picture

US vs Japan! Whose bond market shall burst first is the question?'s picture

The big buyers of JGB's in Japan are now net sellers.  The savings rate has declined from 16% to 2% and headed negative. The trade surplus is now in deficit.  The earthquake has made their fiscal situation worse.  Japan Post Holdings is the largest financial institution in the world ($3.5 T).  It is the largest holder of JGB's and it is no longer growing.  75% of assets are in JGB's and they also want to diversify.  GPIF is the Japanese retirement fund with 70% of assets in JGB's.  They are liquidating $80 billion of JGB's this year to fund benefits and more next year. There is no money behind the JGB's.  JGB Issuance is like 174 Trillion yen ($2 trillion) plus $80 billion of JGB's in the retirement fund must find new owners.  Kyle Bass calls Japan a Giant Ponzi scheme that is running out of time.

There is no exit because it is mostly being caused by demographics.  The old people are very conservative and have placed huge sums in the banks, insurance companies, Japan Post and the Retirement fund.  CD's yield less than 1/2%.  Bank deposits are double those of the United States; yes that is true.  Retirees must withdraw principal to fund living expenses or insurance companies must liquidate bonds to pay death benefits.  Young workers are generally contract workers and are not making enough to save much.  Most all of the banks and insurance companies are going to watch total assets decline and they are already loaded with JGB's.  The Foreign exchange reserves would not fund their deficit for two years. They are running out of options.

disabledvet's picture

It's one of the oddity's of the US Postal Service. They're making it smaller! Say what? Who's gonna buy all that debt you're issuing? NOBODY? Hardy har har! You people really are bought and paid for!

espirit's picture

Systemic takedown inprog.  When debt swaps are no longer fashionable, those with tangible assets held by others will end up holding an empty bag.

Enuf said?

CTG_Sweden's picture

It seems as if Japan has to increase taxes to Western European levels.

That would reduce aggregate demand in the economy drastically and increase unemployment. Perhaps Japan could compensate for that by printing money and let the government invest in wind mills that would reduce the need for imported oil. That would improve their balance of payments and increase domestic demand in the future, not just during the construction phase. In any case this seems like a better idea than building bridges and roads which nobody really needs for money borrowed from the the general public.

CustomersMan's picture


    Japan needs to get to the bottom of who, how and why Fukishima happened and disclose what they know to the world.


   That disaster is beyond comprehension and there's a LOT more to the story than what the world has received so far.


   I think they, JAPAN,  would gain much sympathy and additional help if they came "Clean" on the whole story. But thats just me. There may be lessons there for the rest of humanity, and the rest of the good people around the world would appreciate the TRUTH.


   Any way you slice it the true story will come out. Its to BIG and too painful to be kept secret much longer.


  Stuxnet and how it was introduced into the control systems would be a good place to begin, and what else was in and around the site actually ties for first.

Freddie's picture

WTF? Stuxnet? WTF does to do with Fukishima?   Someone posted here and I read elsewhere (with pictures) that the maintenance was a joke at the plant.  The Yakuza hired lackeys to do the work. Pipes running everywhere, everything jury rigged - a real nightmare.   Nothing gets done in Japan without the Yakuza and they are like the American unions and Chicago Democrat Mafia.

Supposedly the pipes cracked during the earthquake so they were f**'ed before the tsunami hit.  40 to 50 year old General Electric crap technology with FU cast container vessels that were badly cast in Japan.  A whistle blower wrote a book about them and got major aggrivation.  GE/Obama bringing good things to life.  Sh*t technology maintained by gangsters with pipes jury rigged every which way.  Fuel rods stored on the roof.

Clean up and fix the site?  Sort of like cleanup the debt of the rapidly going bankrupt USA.   Sort of like clean up Chernobyl that has an area of exclusion for hundreds or maybe thousands of years.

Poor Japan.  Everything is going wrong there.  Too much debt that is beyond the point of return along with their demographics.  It is like watching a country die.  Very sad.

ZippyDooDah's picture


The unions run America and the Yakuza run Japan.  Hmmm.

You're a moron.

Fred is dead.

Fuh Querada's picture

The current scandal with the Olympus Optical company highlights all that will never change in Japan. Olympus bought 1.7 billion $ of Mickey mouse companies and paid huge fees to non-identifiable recipients in the Cayman islands to cover up stock market speculation losses ("tobashi"). The (British) whistle blower was hounded out and is likely to lose his fight to replace the entire board because no Japanese shareholders support him and corporate Japn will provide loans and new ahareholders to support the old board- business as usual.

non_anon's picture

pachinko anyone?

Winston Smith 2009's picture

"somehow reverse the falling birthrates"

There's a real biggie that wasn't adequately covered in this column. 

Kyle Bass: Japan is Doomed

Zgangsta's picture

They don't have to reverse falling birthrates.  All they have to do is relax immigration rules.  There's plenty of people all over Asia that would come to Japan to work all the low paying jobs that Japanese themselves don't want to do, goosing consumption and tax revenues in the short term.

But if Japan becomes so beaten down that they would seriously consider destroying the social wa by doing this, then that is the point where we really know that they are beyond the point of no return...

vxpatel's picture

This would destroy what little is left of their social structure and these imports would export their savings to their destitute families in other parts of Asia...wouldn't help the economy at all...also, real estate is crazy comers simply can't afford to 'buy' into their society.

gangland's picture

METI Ozawa DPJ LDP Amakudari should all be fired

bunch of bent-over sellouts

the land of the rising sun

more like the land of the sinking corium

really makes me sad, i was going to live there

disabledvet's picture

between you and "zgangsta" above i'm sure the Japanese people were really looking forward to it as well!

Sudden Debt's picture

Don't worry!
The chinese will give us all the money we need and work it off for the next 6000 years. That's the costprice for their lavish lifestyle!

disabledvet's picture

So what's your take on the whole "we don't want to be the dumb money" thing that the Chinese keep yammering about SD? How would you "rate their performance"?
minor injuries in this matter as well?

Schmuck Raker's picture

Two shills' postings in a row at the start of the comments has GOT to be an inflection point of something.

ChasVoice's picture
Two Thirds of U.S. Foreign Aid is Really Military Aid

And Japan is a big part of it along with Israel, of course.

Lucius Cornelius Sulla's picture

Don't forget Egypt, Suadi Arabia, South Korea and the biggest military aid recipients: Europe

Georgesblog's picture

The boom is going bust, all over the world.  Now, it's a question of who picks up the pieces.

Lucius Cornelius Sulla's picture

The question to me, and most investors is WHEN.  The entire market is controlled by the whims of political hacks and their stimulus.  Can kicking goes on and on and ...