How Long Can Japan Play The Endgame?

Wolf Richter's picture

Unlike typhoons, which come and go, the Japanese quagmire has been getting deeper and ever more perilous, but all predictions of a financial cataclysm have been premature. So far.

In fact, every time I return to Tokyo, I am amazed by how much the city has changed. Clusters of high-rise buildings have replaced run-down city blocks. They come with new streets and immaculate metro stations. Train lines have been added, others have been extended. When a crack appears in a street, they repave the street, and they do it in a labor-intensive way with too many workers watching respectfully what the few are doing. The workers aren't low-wage immigrants but Japanese in intriguing uniforms. The healthcare system is universal. Pensions for those who retired some years ago are adequate.... But there is an issue.

Debt. Gigantic amounts. Gross national debt has reached 230% of GDP, by far the highest in the developed world. By comparison, tottering Greece just breeched 150% and the U.S. 100%. Japan's catastrophic level of indebtedness has been made possible by factors that are unique to Japan, but some of them have begun to reverse, and the endgame has started.

When the bubble burst in 1989, government debt was minimal. As the stock market and real estate were crashing, the government passed an endless stream of stimulus packages ("supplemental budgets"). In rural areas, bridges to nowhere are visible everywhere, and so we know where some of the money went. These stimulus packages accomplished two things: minor upticks in GDP and large jumps in government debt.

Funding has never been an issue, however. Due to its institutional setup and insular psychology, Japan has been able to sell 95% of its Japanese Government Bonds (JGB) within Japan.
— Individuals hold over 50% of them in their massive household assets of 1,491 trillion yen, or $19 trillion (Bloomberg).
— Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund (GPIF), one of the largest pension funds in the world; the government-owned Post Bank, largest deposit holder in the world; and financial institutions the government can lean on.
— The Bank of Japan (BOJ) has blobs of JGBs on its balance sheet after years of Quantitative Easing.
— Foreigners hold only 5%.

Internal funding has insulated the government from the discipline of the credit markets. And if there is an uptick in yields, the BOJ goes on a buying spree. Not even the saga of serial credit-rating downgrades has had any impact on budgetary policies or yields, with red ink at record highs and yields near record lows (10-year JGB below 1%).

All this is backed by Japan's foreign exchange reserves of over $1 trillion, a resource most countries can only dream about. Largely invested in US Treasuries, they're the result of decades of steep trade surpluses.

But the fundamentals are changing.

Individuals stopped saving. In the 1980s, the savings rate was 15%. In the 1990s, the air hissed out of the bubble economy, and the savings rate began to descend. In 2007, it bottomed out at 1.7%, though it recovered a bit since. Downward pressure on wages decimated the earnings power of the post-bubble generation. They're cynical about the future, doubt they will ever receive a pension, and no longer believe in the tradition of saving. They're focused on consuming. And they save almost nothing.

"We will be a net seller" of JGBs, said Takahiro Mitani, president of the GPIF earlier this year (Bloomberg). With 30% of the population over 65, and an ever smaller number of young workers, pension payouts are accelerating while contributions are decelerating. Other funds and institutions are in a similar situation. The most reliable buyers of JGBs have become sellers.

Now this: A trade deficit. In August, it soared to ¥775 billion ($10 billion), the highest August deficit ever recorded (Japan Today). Exports were up only 0.3% from last month and 2.8% from August 2010. Ominously, shipments of electronic parts fell 16.4% due to slowing demand worldwide. Imports skyrocketed 19% year over year on a 50% jump in liquefied natural gas. It threatens to be structural, rather than a blip: The nuclear disaster and subsequent opposition to nuclear power plants have made it impossible to power up the remaining 15 nuclear plants that had been shut down before or during the earthquake. Electricity generation is being switched to fossil fuel plants.

Government deficits are on collision course with a tiny savings rate, trade deficits, and an aging population. Funding the debt internally is becoming more difficult, and the BOJ will have to maintain the printing press. There is much talk about selling to foreigners, but they're unlikely to develop an appetite for low yielding, low-rated bonds of a country whose indebtedness is almost twice as bad as that of Europe's punching bag du jour, Italy. And Japan can't afford higher yields.

Efforts are underway to defer the crisis. Unlike Italy where foreign bondholders would pay for a default, Japan can't allow itself to default. A steep price will nevertheless be exacted from the Japanese people. It will come in form of higher taxes on income and consumption (in the works), higher costs (happening), and lower wages (continuing). Entitlements will be whittled down. Some will disappear. Meanwhile, companies will be subsidized or get bailed out (happening). But these measures will only kick the can down the road, though kicking a can on the road is precisely what you don't do in Japan.

Now, for all those who want to short JGBs: It has been a trail of tears. Central banks can do whatever they want to, and when it comes to bonds with limited trading volume, they can out-print even the most fervent shorts.

But Japan isn't all about debt. It's also about a passion for food, and about dying for the perfect fugu sashimi, literally. For more: Don't Try This At Home.

Wolf Richter -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pagan's picture

" But these measures will only kick the can down the road, though kicking a can on the road is precisely what you don't do in Japan."

Why not? They've been kicking the can for 20 years now. Why can't they kick the can for 20 more years?

dalkrin's picture

Well-composed, thought-provoking article on the woes, possibly death throes of this small yet influential island nation.  Bears worthy lessons for all of the world, especially those of us in debt-dependent industrialized societies.  Makes me wonder if Japan would succumb to a hyperinflation malady when confronted with the dissonance between it's planned entitlements to retirees and the current sagging stream of active worker contributions and JGB purchasing.  I guess you have to be one of the Nihon people to feel compelled to place your money in a long-term government instrument that pays laughable interest rates.

johnjb32's picture

This is great -- if isolated -- analysis by Zero Hedge. There's no mention of Fukushima, the radiation poisoning that's killing the country, or Japan's shrinking electrical generating capacity. And Japan is a vital organ of the global economy. -- Michael C. Ruppert

AdahPrice's picture

The Great White Buffalo.

People need food and room for a roof.  Ultimately, only the land and the water can support people.  And when there isn't enough, they destroy the land and water they have, by overfarming, overfishing, overpolluting, and overbuilding.

According to

Japan has 873 persons per square mile, and the USA has only 83 persons per square mile.  So, Japan still has way too many people.  Long-term, Japan, by lessening its population, is doing what it must do.  But it has a long way to go.

In the meantime, when you have 5 people and only 1 job, is it not better to have all 5 people do the 1 job than to have 1 person do the 1 job and the other 4 people sit home watching television?

Now if the Japanese can just switch from those old uranium-type Fukushima-type nuclear plants to safer new thorium-type nuclear plants.  Now, THAT's an infrastructure program which might be worthwhile.

Also, when people stop saving, it is because of inflation.  Why save $2,000 now, if that $2,000 is worth 5 ounces of gold now, but you suspect that by the time you get to retirement age, it will be worth only 1 ounce of gold?  All you would accomplish is giving the government 4 ounces of gold, or 80% of your hard-earned savings.  Any time the people realize that the government/Central Bank is creating huge amounts of debt/fiat-money, they know there is going to be inflation, and they stop saving.

snowball777's picture

The biggest threat to Japan right now is the global (dep|rec)ession...most of their public debt is held internally, but they can only service it with a world to buy their wonderful exports. That world is about to go <poof>.

Apostle of Unknown's picture

Having lived in Japan for a long time, I totally concur with the author. Japan's 20-year Ice Age and "disciplined" buildup of debt has a huge cultural X factor written all over it. The image of legions of public workers in shiny uniforms, intensely communicating over walkie talkies and filling out paperwork on how to best fill a tiny pothole in some cul de sac is Japanese fiscal spending at its funniest, but also at its worst. It's true, Japan-style credit deflation is happening all over the world right now, but don't expect the same outcome. We won't receive slow waterboard torture in some lukewarm outer circle of hell for 20 years like the Japanese did. We will move to our own endgame much, much quicker.

TomJoad's picture

One of the better written and more readable articles to appear on ZH for a while. I realize it is written at the lay level, just wanted to say thanks and "well done."

Bicycle Repairman's picture

"We will move to our own endgame much, much quicker."

What will the USA do differently?

The4thStooge's picture

The whole island is uninhabitable now anyway.

Vlad Tepid's picture

Yeah, that's right.  What the hell is TPit talking about?  Didn't he get the memo that the entire Japanese race is dead <sarc>

Rastadamus's picture

That.... was awesome. Now how about that radiation???

janus's picture

from one of the greatest simpsons episodes ever:



(who ever heard of a poison pork chop?)


snowball777's picture

It's called trichinosis.

janus's picture


janus is a fan of the wit of snowball...a dedication to the same.

Mitzibitzi's picture

You ain't met my mother in law!

dolly madison's picture

It seems like the economy going to crap all over the world might just be what happens this long after the industrial revolution.  There was lots of real work at the start building all this up, but people don't really need the endless streams of crap that constantly growing GDP require. 

besnook's picture

japan has the equivalent of infinity bonds, a finance alternative to greenbacks. the demographics of japan doom it but i bet hardly anyone knows what a sen is. that's what the yen will be in thirty years but by then japan will be another province of china.

Vlad Tepid's picture

This probably isn't the place to get into this demographics argument but I have to rebut it everytime I hear it.  Populations are shrinking across the world and not just industrialized countries...look at Iran's numbers.  A shrinking population is a GOOD thing.  The Japanese will cure their unemployment problem through old age, they will reduce their external demand for energy and food (not to zero but anything less is a bonus), and a smaller population will mean an increased living standard for the remaining Japanese.  Where do you get this idea Japan is screwed because of demographics?  Assuming we aren't ALL screwed by war/famine/economic stupidity at the highest levels, the only negative to a shrinking population level is the inability to feed a social secutiry Ponzi scheme.  Yes that will fall apart in Japan.  And when it does, TPit will still see Japanese workers in funny uniforms paving every crack in the street.

BigJim's picture

A shrinking population is a GOOD thing.  The Japanese will cure their unemployment problem through old age, they will reduce their external demand for energy and food (not to zero but anything less is a bonus), and a smaller population will mean an increased living standard for the remaining Japanese.

Sorry, all things being equal, a nation's wealth is determined by its workers' average productivity. If the average productivity is declining - because a smaller proportion of them are creating wealth - than so is the wealth being created, per citizen.

Of course, this ignores factors like wealth (re)distribution, ability to forestall the pain by borrowing, holding a reserve currency, etc, etc...

VyseLegendaire's picture

This is completely asinine and backwards logic.  The population is getting older and the youth are being disenfranchised specifically because of errant government policies.  If the people really wanted to be free, they wouldn't in their wild nightmares build the long deflation death-trap that they currently have.

What a hilariously pernicious way to try and 'look at the bright side' of a genuinely problematic situation. 

Vlad Tepid's picture

I'm afraid I fail to see your logic, or, more accurately, what you are trying to say.  How is the population of Japan getting older specifically because of errant government policies.  Are you advocating euthanasia or something?  

Deflation is not Japan's problem. Deflation is a boon to an ageing population because it allows greater access to goods on a smaller income and rewards savers, of whom Japan's elderly are some of the most famous.  

Just out of curiousity, can you give me a time in Japan's modern history when they youth were "enfranchised?"

This demographic pig will be passed from Japan's python in 30 years or less and they will come out stronger for the interim? Sure, that economic death-trap thingy you mentioned.

besnook's picture

i agree with the essence of your arguement. increased productivity means lbetter technology needing fewer labor units.  fewer labor units ultimately means less need for production. since japan has always relied on exports the effects of a declining population could possibly mean more wealth if exports remain the same or increase. once the glut of old japanese passes on the the remaining japanese will be extremely wealthy(given a multitude of unknowns being constant). i think the yen will eventually pay for all the stimulus with inflation as the system eventually reverts to the mean. the thirty year lag will and has been a treasure chest for economists and phd candidates.

Vlad Tepid's picture

That is indeed what I'm saying (but you said it better.)  I think many people are using quaterly reports for blinders and failing to see any largerpicture or trend.  Another plus is that Japan will be through the "fogey phase" before just about any other nation and that may accrue in their favor.

snowball777's picture

It's not the size of the population, but the distribution of ages among same that matter; a graying nation has more liability than ability to finance it (unless you're willing to go "Logan's Run" on their geezer asses).

magpie's picture

No one will know what cents are in the near future either.

AnAnonymous's picture

How long? As long as the USD  lasts. Japanese since WW2 deprived them from their capability of direct extortion, are extorters by proxies. They have nested their own debt within the US debt, meaning that as long the US can go deeper into debt, Japan will be able to go deeper into debt. With the bonuses in wealth and standard of life going with it.

John_Galt's picture

Over consumption, pointless jobs, mountains of Government debt etc. all true but Tokyo and Japan as a whole is damn nice place to live! All the fun of London, Paris and NY but with a near zero crime rate, an extremely (and some would say overly) polite and considerate community and the most efficient transport system in the world. its no wonder the rate of Japanese' young leaving to study abroad has dramatically declined over the years, they switch the TV to riots in Europe, repression in China, possibly innocent people being executed in the US. Why would you leave? Sure Japan is on an unsustainable path but who isn't these days?!

Freddie's picture

Tokyo has 4 reactors worse than Chernobyl about 90 miles away. Why would you leave?

Bicycle Repairman's picture

Now you've gone and done it.

Vlad Tepid's picture

Japan's institutional inability to jump on this gold-as-money train is going to be regretted in Tokyo in the future.  Aside from the US and the UK, most other countries are starting to "get it" about gold, even at the CB level.  Japan?  Not so much.  They still seem to be star-struck with the Anglo-American as they have since the Opium Wars and Commodore Perry's "opening."  They should have been moving that $1 tril in foriegn exchange into gold, but instead they are a deer in the headlights. They are certainly not their grandfathers.  Japan went to war with the US after the Roosevelt froze their gold in storage and prevented continuing oil transactions.  Looks like even Chavez learned that lesson.

yabs's picture

an example of why keynesian  economics is claptrap

but did we learn?

matrix2012's picture

Yes, i do care... better care about the japan collapse than care about the american idol, chefs, bitchy housewives, cardassian sentinel (as in start trek??) :D lol

Sequitur's picture

Heh I care. I'd much rather people read this report on Japan, than watch bullshit like Real Housewives or that Kardashian clan -- do they even have a tv show currently? (Rhetorical, I don't know or care.)

Bicycle Repairman's picture

And the elephant in the living room?