Two of the saving features that allowed Japan to internalize 30-some years of failed fiscal and monetary policy (and yes, not one, not two, but now 8 failed iterations of quantitative easing) and to offset one relentless deflationary vortex was i) its demographics coupled with an investing culture that favors deposits and bonds over equities, which incentivized its aging population to invest its savings into government bonds, and ii) its trade surplus which led to foreign capital flows to enter the country. Well, as far as i) is concerned, Japan may have reached its demographic limit, since as reported several months ago, Japan's pension funds are now not only selling JGBs to meet redemption and cash needs, but forced to do truly stupid things like investing in the riskiest of assets to generate a return at any cost. In other words, demographics will no longer be a natural source of demand for deficit funds. As for ii), well... here is what has happened with Japan's trade surplus status in recent weeks following the collapse in the country's foreign relationship with China.
In other words, so much for net exports also being a source of capital. Some more thoughts on this from Sean Corrigan of Diapason:
Far across the Senkaku Islands, Japanese money supply has been decelerating from its recent impressive lick, while small business confidence has plummeted below even the post?Fukushima trough. Meanwhile, the nation’s exports languish at levels first seen in 2004, thanks to the toxic mix of the fallout from the territorial spat with the Chinese and the general Asian weakness ? also evident this week in Singapore (IP ?2.5% YOY), Thailand (manufacturing output off 13.7% YOY to rest where it was in 2007), and the Philippines (exports off 9% YOY to stand no higher than in2005).
All this sufficed to bring about a record trade deficit of close to Y1 trillion in Japan itself last month, at which point it was threatening to swallow the large monthly investment income component whole and, hence, to restrict the growth of the capital pool on which the country so heavily relies.
Nothing daunted, after two decades of blue bottle?against?a?windowpane policy?making, the country is again to be dosed with the same old, ineffective, patent medicine as the BoJ prepares to increase its version of QE by a cool Y10 trillion ($125 billion), some of which will help fund the already over?indebted government’s imminent Y700 billion fiscal injection.
You would think they would long since have have learned the futility of what they are about; the fact that this has eluded them for all these years them should worry us greatly about our own masters’ willingness to draw the correct lessons on that grim tomorrow when their own programmes are undeniably seen to have failed. Can we not admit it is folly always to resort to the crude economics of a Krugman – the macroeconomic equivalent of the château generalship of the Somme – and to whine that we have only failed because we have not thrown enough money or lives into the fray.
And that's two birds with one stone. The only source of "capital" left - BOJ monetization. The only problem, of course, is that Japan already has well over 200% of national debt to GDP. And that's the smaller problem. The bigger problem: even the smallest increase in prevailing interest rates, and the entire Japanese house of cards topples. Recall these charts:
As well as this chart of sovereign interest to revenue, in which Japan is also an outlier:
And certainly this chart showing Japan's straight diagonal line of debt/GDP:
But how many have seen this chart showing global sovereign debt as a percentage of total government revenues?
So - is Europe still the biggest unresolved issue as conventional wisdom would have everyone believe? Or is Japan finally preparing to reclaim its rightful place as the straw that broke the Keynesian camel's back?