How Japan Blew Its Savings Surplus: What A Keynesian Dystopia Looks Like

Tyler Durden's picture

Submitted by David Stockman of Contra Corner blog,

Financially speaking, Japan is fast becoming a Keynesian dystopia. Its entire economy is now hostage to a fiscal time bomb. Namely, government debt which already exceeds 240% of GDP and which is growing rapidly because even the recent traumatic increase in the sales tax from 5% to 8% does not come close to filling the fiscal gap. Moreover, even at today’s absurdly low and BOJ rigged bond rate of 0.6% nearly 25% of government revenue is absorbed by interest payments.

Now comes the coup de grace. Japan’s savings rate has collapsed (see below) and its vaunted current account surplus is about ready to disappear. This means Japan’s accounts with the rest of the world will cross-over into a “financial no man’s land”; it will be forced to steadily liquidate its overseas investments to pay its current bills—an investment surplus built up over the course of 50 years. But this will also reduce foreign earnings and thereby expand Japan’s growing deficit on current account.

Accordingly, to finance its  “twin deficits” it will have to attract massive amounts of foreign capital for decades to come—an imperative which will require a devastating rise in interest rates, perhaps as high as 4% according to one expert :

The yield on Japan’s benchmark 10-year government bond, now around 0.6 percent, could rise to 4 percent – a level unseen since March 1995 — should the current-account balance drop into deficit as public debt eclipses the nation’s savings, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

Needless to say, were the carry-cost of Japan’s towering fiscal debts to rise by even half that much it would be game over. Interest expense would absorb virtually 100% of current policy revenue, forcing the government to raise taxes over and over.  One expert quoted in the Bloomberg article below says that a sales tax of 20%—-nearly tripple the recently enacted level—-would be required to wrestle down the fiscal monster that would result from interest rate normalization.

Unless the government raises the sales tax to 20 percent or makes drastic reform on social welfare spending, this scenario is highly likely,” said Ogawa. “Higher interest rates will discourage domestic capital investment and spur the shift of production abroad, increasing the number of people unemployed.”

The above quote strongly hints why Keynesian dystopia is an apt description of what is emerging in Japan; and why that descriptor is also reflective of the financial horror show that is coming to our own financial neighborhood a decade or two down the road.

As indicated above, the alternative to an economy killing 20 sales tax is “drastic reform of social welfare spending”. But the latter is not even a remote possibility. Japan’s population is both shrinking and also aging so rapidly that its fast on its way to become an archipelago of old age homes.

Japan savings rate as shown below has dropped from in excess of 20% during its 1970s and 1980s heyday as a mercantilist export power to only 3% today. When Japan’s retired population reaches nearly 40% of the total in the years ahead, this rate will obviously go negative as households liquidate savings in order to survive.

What happened to Japan’s huge savings surplus?  The government borrowed it! And wasted it on massive Keynesian stimulus projects that kept the LDP in power for decades but produced bridges and highways to nowhere that will be of no use to Japan’s retirement colony as it ages.

And the adverse demographic tide is indeed powerful as shown by the curve below on Japan’s working age population. In a few short years what was a working age population that peaked at 88 million has dropped to 79 million; and it will plunge to below 50 million persons in the next two decades.

What the Keynesian witch-doctors who advised Japan to bury itself in fiscal stimulation after its financial crisis of 1989-1990 did not explain was how this inexorably shrinking working population could possibly shoulder the tax burden needed to carry Japan’s massive public debt.

Yet there is no other way out of the Keynesian debt trap in which Japan is now impaled. As the current account, also shown below, continues to worsen, the need to import capital to fund the gap will drive interest rates sharply higher. The burden on Japan’s remaining taxpayers will become crushing.

So the graph below should be pasted on every US Congressman’s forehead.  When the debt spiral goes too far—it becomes a devastating financial trap.  And it cannot ultimately be solved with money printing because if carried to an extreme—even for the so-called reserve currency—it will destroy the monetary system entirely.

It should also never be forgotten that the drastic degeneration of Japan’s public finances happened in real time—–within less than two decades after its leadership was bludgeoned into one fiscal spasm after the next by Keynesian officialdom in the US Treasury, the IMF, the OECD and elsewhere.  And this is clearly a case of bad ideas imported from abroad. The generation of officials who lead Japan’s post-war miracle may have been hopelessly addicted to unsustainable models of mercantilist export promotion and currency pegging, but they were not believers in Keynesian borrow and spend.

I know that from personal experience of dealing with Japanese financial officialdom during the early days of the Reagan administration. Quite simply, they were shocked that America was about to take such an immense fiscal gamble by drastically cutting taxes before the inherited domestic spending had been curtailed and the huge defense build-up had been funded.

That was then—at a time when Japan’s debt was under 50% of GDP notwithstanding two decades of government directed internal economic development. Yet just a decade latter— after being bludgeoned to drastically appreciate the yen after the Plaza Accord of 1985—their export mercantilism model broke-down in a vast financial bubble and bust engineered by the BOJ.

Thus, left completely at sea, they were sitting ducks for visiting Keynesian fireman like Professors Bernanke and Summers. Japan then launched upon the greatest experiment in Keynesian fiscal stimulus ever imagined. The catastrophic results speak for themselves and are a potent remainder that bad ideas can wreak immense  damage once they are embraced by the machinery of the state.

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Seize Mars's picture

Every topia is a dystopia.

I was blown away by hearing the 20-yr JGB didn't trade at all yesterday in the am. session.

So Close's picture

Let's screw the kids.. by the time they realize what has happened we will be dead or at least have Alzhiemers.

pauhana's picture

Haven't most of ZH's been waiting for this for years?  I'm almost thinking it will never happen.  How many more rabbits are there in the hat?

thisisjustarandomusernameicreatedforzerohedge's picture

It's a lot more likely than any similar sort of point-of-no-return in the US or China...

the kicker is simple the 'fixed' bond rate. if they lose control of that, their interest will drown them.


why do you think Abe is slowly stirring nationalism and painting China like an enemy?

nothing like a good war to solve your econimic hardship


to be sure, China is playing the same card but it's as a sleight of hand distraction than an endgame solution.

BigJim's picture

 nothing like a good war to solve your econimic hardship

War doesn't solve economic hardship... unless you're selling weapons to the combatants, or bombing them back into the stone age and then lending them the money to rebuild afterwards.

WWII was good for the US but a catastrophe for everyone else - Japan, the UK, Germany, France and Russia had vast amounts of their stock of real wealth destroyed. Yes, they rebuilt, but if the capital that went towards rebuilding had  been spent on new stuff we all would have been commensurately richer.

'War is good for the economy' is the broken window fallacy written in blood.

Seeing Red's picture

Unless you win scarce resources.  NAH -- who am I kidding, the elite wouldn't stoop to that ....

thisisjustarandomusernameicreatedforzerohedge's picture

sorry i misphrase that a bit.... what i meant was it can "solve" the "economic" problem for the policymakers, and by solve the problem i mean make it not threaten their control of power... i didn't mean it would bring economic prosperity to Japan but I meant that Abe could use it to distract the people and get them to continue to support him and keep him in power

headhunt's picture

The problem is they are printing rabbits

ThroxxOfVron's picture

"Let's screw the kids.. by the time they realize what has happened we will be dead or at least have Alzhiemers."

I'm glad that You won't be able to recognize your progeny when they come to dispense with You.

Easier for You and for Them that You believe it is a stranger putting You down like the dog You are...

LostandFound's picture


As a father, what exactly is our legacy to our generations of children? that we stole your future to experiment and better our lives now?

I fear for our childrens future, unless the biggest debt forgiveness / reset is implemented.

NoDebt's picture

Seize Mars- I agree.  The non-trading of JGB in either the futures or cash market for HOURS (article on ZH, where I first heard about it) was creepy in the extreme.  NOBODY wants to play ball with them any more.  They are, quite literally "on an island" now.  Their own central bank being the only buyer of their bonds.  

They are NOT FAR from a muti-generational "event".  Deflation, inflation... I have no idea the manner of their destruction, but it ends in a RADICAL reduction in living standards.

The REALLY creepy part?  We're no different than them, except in magnitude (larger in absolute terms, smaller in percentage terms) and how far down the cruve we are currently.

Luckhasit's picture

Seriously no one? Then wtf are they using to prop up the Yen? Dolphins?

newbie vampire's picture

"Then wtf are they using to prop up the Yen?"


Income from Whale sushi, originally caught for scientific research. And the export of energy from Fukushima./sarc

BringOnTheAsteroid's picture

Unfortunately the question isn't about inflation or deflation, it's about war. Never thought I'd ever entertain the idea of the nuclear WWIII but I'm afraid we are inching closer to this inevitable outcome.

I am convinced one day very soon we are going to wake to news that will leave us immobilized with disbelief and fear.  

matrix2012's picture

I predict the dolphin slaughter at the annual festive of Taiji Cove will increase dramatically to help alleviate the inflation aggression on meat and other food.

ThroxxOfVron's picture

The US isn't a bunch of islands.  

There is more than a century of wood and coal to burn if We have to go back to stoves and steam; not that there aren't good reasons to continue developing solar and led lighting, etc...

Every shitty little yard in suburbia will yield some kind of crop once the lawns are ripped up; -I have more strawberries than I can possibly eat today and I'm giving them away...

Let's stop funding wars, dissolve worthless public bureaucracies, let less-than worthless corporate pollution complexes fail, give up the hummers and mcmansions, default on the medical and educational complexes, charge the foreign nations for their security, etc...


BringOnTheAsteroid's picture

The sad thing is the world would probably be better off with a couple of billion less people and just go back to burning fossil fuels than maintaining the current population and wringing our hands trying to find alternative and green energy resources.

I suppose when we cover the earth like unthinking bacteria until either the resources are consumed or we rot in our own festering waste, what do we expect.

It ain't gunna be pretty.  

Izznogood's picture

This is just a recap of what Kyle Bass has been saying for years ...

Jason T's picture

2015.75  Sovereign Debt Crisis Big Bang

- Martin Armstrong's Computer

Bendromeda Strain's picture

2001.75  World Trade Center

2008.75  TARP Crisis

2015.75  ?? Buckle up, It's going to be a bumpy ride

becky quick and her beautiful mouth's picture

remember when Japan bought Marty mcfly's company and fired him?

newbie vampire's picture

"remember when Japan bought Marty mcfly's company and fired him?"

That was during "the Japan that could say NO" period when they expounded their Japanese superiority over America theory. 

Obviously, they don't say that when they want the US to provide cannon fodder for their rocks.

Spungo's picture

Lowering the cost of exports by 20% then raising the cost of imports by 25-50% improves the trade balance. Paul Krugman said so.

ted41776's picture

"this time it'll be different"

Spungo's picture

Don't worry guys, Mike Norman says Japan doesn't have any problems because they can always print money like Argentina or Venezuela.

The internet seems to think Mike is fucking retarded. About 20% of the votes are up, 80% of votes are down. 

Number 156's picture

That third chart looks like an outline of Godzilla's back.

Uber Vandal's picture

Four percent of one quadrillion is a very large number. Even if it is in Yen.

If my math is correct, 1,000,000,000,000,000 @ 4% = 40,000,000,000,000

Only 40 TRILLION yen in interest.

MrTouchdown's picture

There is great honor in destroying Japan from within.

BovespaBroker's picture

japan is broken !

fukushima will send japan to third world.

i sorry for these whale fishers.


newbie vampire's picture

"i sorry for these whale fishers."

i not sorry for these whale and dolphin fishers. They don't need to kill them because they can't afford to buy food.  So fuck 'em for their sense of entitlement.


RafterManFMJ's picture

One wonders how you feel about deer hunters? Duck hunters?

BringOnTheAsteroid's picture

In Japan we are witnessing in real time another Mayan or Easter Island civilisation. With the interconnectedness of the global financial system though there aren't going to be any spectators in Japans collapse. 

BovespaBroker's picture

piece of crap island,

surrounded by radiation.

gonna have to import water in a little while.

TeethVillage88s's picture

Japanese could be spending Yen (what would be savings) on everyday items OR

1) Electronic Games
2) American Fast Food
3) Hello Kitty Merchandise
4) Gold
5) Bitcoin
6) American Stocks
7) House Hunting outside of radiation cloud area and sea coast
8) Expensive Traditional Japanese Restaurant Food.


Seasmoke's picture

The seed rice, is all gone. 

Wild Theories's picture

Yes they were bludgeoned into the Plaza accord, and it was the most direct evidence that Japan always was a US colony, overtaking your master was simply not allowed.

But now, unfortunately, it really is their own doing this time.

intric8's picture

Its chartalism run amok there in japan, which is worse than mere keynesianism. They also have the keys to the printing press.

cape_royds's picture

A drop in Japan's national savings rate was natural and to be expected.

When the population was mostly in the workforce, they saved a lot.

Now when the population is aging, they draw down their savings. Why not? That was one of the reasons they saved in the first place. It was deferred consumption.

The stupidity was in not simply rolling with the natural rhythym. Their government should have simply accepted the fact that topline GDP was going to decline somewhat.

Bazza McKenzie's picture

The problem is that most of their saving went into government bonds, even more than in most countries.  Like all governments, the Japanese one did not spend that money on income-producing assets that would eventually repay the loans.  It spent it on a myriad of wasteful activities and handouts, all meant to buy votes at the time.

Now when that natural dis-saving state arrives, there is no capacity to repay the bonds from genuine income production, just from money printing which is not attached to real assets.  The fall back for governments in this situation is to increase taxes on the workforce.  But since the workforce is shrinking rapidly, this will never generate enough to keep the older generations, who loaned their money to the Japanese government, in anything like the standard of living they had expected and that they might have attained had their savings gone into private sector assets overseas rather than the maw of the Japanese government.

Central Ohio's picture

We have a similar but smaller population problem.  That is why I support tight borders with LEGAL immigration.  We need the poplulation growth.

Seize Mars's picture

The numbers just don't add up.

Listen, people squawk all the time how a government's debt service will be inadequate if interest rates rise. It's inadequate right now! Look at Japan.

If you think - for a fucking Roppongi minute - that they wouldn't simply selectively welch on certain coupons, so as to keep the shit show going, or to make room for new auctions where they can skim a leetle bitty more, then I've got a Rainbow Bridge I'd like to sell you.

Nothing is as it seems. Nothing.

scuttlebutt's picture

Don't the interest payments to the BOJ just make there way back to the Government? As long as central banks are able to buy government debt, does any of this really matter?

Seize Mars's picture

That's what I'm saying. It's a circus jerkus.

ThroxxOfVron's picture

Sorry to break this to You, Bro; -but, every ragin' hard cock goes limp eventually.

You can do coke, you can gulp viagra, you can rub your anus with ice cubes made outta hot chilies, you can stuff poppers in your snoot, you can pound that meat on the nightstand in front of fuckin' Marilyn Monroe and her freaky nympho friend...but the night is longer than You are...

Every ragin' hard cock goes limp eventually.

-You can quote Me on that.

darteaus's picture

Finally, an analogy I can understand!

And, to continue, no president wants to be standing there holding the "bag" when that happens. So, they try increasingly bizarre magic tricks that simply guarantees an eventual collapse with the only thing extended being an inordinate down time.