From Kyle Bass [12] / Dylan Grice [13] prognostications on Japan as poster-boy for the end-results of a desperate central bank / government cabal to Richard Koo [14]'s perception of the land of the rising sun as a great example of how to get out of a depressionary funk, no one can argue with the facts that Japan's debt situation and total lack of financial flexibility is a ticking debt-bomb (with a fuse varying from 3 months to infinity given market participants' pricing implications [15]). McKinsey provides some clarifying perspective on the Lessons from Japan today suggesting the country provides a 'cautionary tale for economies today'. Noting that neither the public nor the private sectors made the structural changed that would enable growth (a theme often discussed here [16]) with public debt having grown steadily as economic stimulus efforts continue. But, as they note, the price - two decades of slow growth - has been high, and the final resolution of Japan's enormous public debt has yet to come.
[17]
McKinsey [18]- Lessons from Japan
Japan provides a cautionary tale for economies today. In the 1980s, a lending boom fueled a dual asset bubble in real estate and equities.
Household and corporate debt surged; total debt increased from 243 percent of GDP to 387 percent in a decade. The bubbles collapsed in 1989 and sparked a deep recession, but debt has continued to rise, reaching 512 percent of GDP in mid-2011 (Exhibit 16). Even so, Japan has had very little growth—an outcome that no country wishes to replicate.
Japan’s crisis response stands in sharp contrast to those of Sweden and Finland. Private-sector debt reduction did not begin until nearly eight years after Japan’s crash. The very large debt of non-financial businesses meant that companies could not afford to invest in growth, slowing the economic recovery and preventing a stock market rebound. Their impaired loans clogged bank balance sheets, curbing lending and raising uncertainty about the health of the banking system. Neither the public nor the private sectors made the structural changes that would enable growth.
Meanwhile, partly as a result of public investments aimed at stimulating the economy, Japan’s public debt has grown steadily. At 226 percent of GDP, it is nearly double the level of some eurozone-crisis economies. Yet Japan has avoided a sovereign debt crisis, largely because more than 90 percent of the debt is owned by Japanese investors: Japanese banks hold nearly $5 trillion in government bonds, and insurers and pension funds hold $4.5 trillion. But the price—two decades of slow growth—has been high, and the final resolution of Japan’s enormous public debt has yet to come.