Only a partisan two-bit hack economist/liberal rag columnist from an Ivy League University with a Nobel Prize could look at the following two charts and conclude that the Japanese Government failed to revive the Japanese economy over the last twenty years because they spent far too little on fiscal stimulus. Japanese government debt as a percentage of GDP was 52% in 1989, prior to their real estate and stock market crash. Today it stands at 200% of GDP. Current budget projections show the debt reaching 250% of GDP by 2015. Meanwhile, Japanese consumers and corporations have been reducing their debt for the last 16 years. The net result has essentially been a 20 year recession. The pundits who never see a crisis on the horizon point to the fact that Japan has not collapsed under the weight of this debt as proof that the U.S. debt level of 90% of GDP has plenty of room to grow without negative repercussions. This is the same reasoning “experts” used in 2005 when they proclaimed that home prices in the U.S. had NEVER fallen on a national basis, so therefore there was no reason to worry about home prices. A basic economic law is that an unsustainable trend will not be sustained. When the 3rd largest economy in the world implodes, the reverberations will be felt across the globe.
John Mauldin has described Japan as a bug in search of a windshield. Bug meet windshield.
The “nothing bad has happened so far” crowd continues to spout fallacies about the Japanese owing the debt to themselves and their high savings rates as the reason that Japanese debt can continue to grow. About 95% of Japan’s debt is held domestically, which sovereign-debt agencies have said supports the country’s creditworthiness even as borrowings have reached 200% of gross domestic product. In a sign that base is waning, Japan’s public pension fund, holder of 12% of outstanding debt, sold more government bonds than it bought for the first time in nine years. The National Savings rate has declined from 18% in 1980 to 2% today. The days when the Japanese could issue long term bonds yielding 1% and have it all bought by Japanese citizens is over. In 2010, the Japanese government will issue an additional ¥53 trillion in government debt. At the same time tax revenues will drop from ¥46 trillion to ¥37 trillion. Do you see the bug approaching the windshield?
The Japanese government has spent two decades squandering the wealth of its citizens. The New York Times detailed the trillions wasted in a story last year:
Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world while failing to generate a convincing recovery. Between 1991 and 1995, Japan spent some $2.1 trillion on public works, in an economy roughly half as large as that of the United States, according to the Cabinet Office.
Dr. Ihori of the University of Tokyo did a survey of public works in the 1990s, concluding that the spending created almost no additional economic growth. Instead of spreading beneficial ripple effects across the economy, he found that the spending actually led to declines in business investment by driving out private investors. He also said job creation was too narrowly focused in the construction industry in rural areas to give much benefit to the overall economy. He agreed with other critics that the 1990s stimulus failed because too much of it went to roads and bridges, overbuilding this already heavily developed nation. Critics also said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic.
In Hamada, residents say the city’s most visible “hakomono,” the Japanese equivalent of “white elephant,” was its own bridge to nowhere, the $70 million Marine Bridge, whose 1,006-foot span sat almost completely devoid of traffic on a recent morning. Built in 1999, the bridge links the city to a small, sparsely populated island already connected by a shorter bridge. “Roads and bridges are attractive, but they create jobs only during construction,” said Shunji Nakamura, chief of the city’s industrial policy section. “You need projects with good jobs that will last through a bad economy.”
Last year, Moodys downgraded Japan from a AAA rating with the following warning:
The rating reflects the risks of Japan’s high level of debt, which leaves the country’s fiscal position vulnerable to shocks or imbalances that would cause a sharp rise in interest rates. The ratings also reflect the sizable but temporary increase in the government’s budget deficit caused by the severe effects of the global collapse in trade and recession on the Japan’s economy. Further, Japan’s large foreign exchange reserves, although large compared to those of most other countries, are only a small fraction of its liabilities and could not alone eliminate refinancing risk at a time of severe stress.
For the government’s bond rating to move higher, Japan’s economy would need a sustained recovery and the government would need to shrink its budget deficit and lower its debt trajectory. Conversely, the bond rating would be under pressure if the trend in debt increases continues, which could result from demographic pressures on social welfare and pension expenditures, or if the market loses enthusiasm for the government’s new debt issuances.
The Japanese have kept their interest rates under 2% for the last 15 years. With a current rate of 0.3%, there is no room for further decreases. The concept was that these rates would spur businesses to expand and invest. They would spur Japanese savers to become Japanese spenders. Neither happened. Instead, investors throughout the world borrowed Yen at 1% and invested the proceeds in investments that would earn in excess of 1% – the carry trade.
There has been only one reason that investors have accepted virtually no interest income on Japanese bonds. The relentless strength of the Japanese Yen has made up for the lack of interest. The Yen has appreciated 100% versus the USD since 1995. The Yen has stayed strong despite a weak economy because Japan has run a massive trade surplus for decades. That unsustainable trend is also coming to an end. China, Vietnam, Indonesia, and other developing Asian countries can produce the crap that Americans desire much cheaper than Japan. The Japanese trade surplus has begun to plummet. The Japanese politicians are flailing about trying to revive their exports. Yesterday’s intervention in the currency markets to weaken the Yen is a sign of desperation. It will fail. Every Central Bank in the world is trying to devalue their way to prosperity.
The more you analyze Japan’s predicament the more you realize that there is no way out. They are trapped in a boundless morass of uncertainty. If they successfully weaken the Yen, why will foreign investors invest in their debt paying 1%? As the following chart clearly shows, Japan has a bit of an aging problem. By 2050, 40% of the Japanese population will be over 65 years old. Their population will be in a relentless death spiral for decades. Japanese elderly will be selling Japanese bonds in order to survive. Japan’s biggest customer for their debt will no longer be a buyer, they’ll be a seller.
It should be clear that Japan is stuck between a rock and a hard place. A weakening Yen combined with a demographic nightmare would reduce demand for bonds paying 1.0%. This isn’t a positive development when you are running $600 billion annual deficits and desperately need investors to buy your debt. When demand for your debt is weak, increasing the interest rate you pay is the logical next step. Sounds reasonable unless you already have $10 trillion of debt outstanding. Currently, interest rates on 10-year Japanese government bonds are hovering around 0.5%. Even at these extraordinarily low interest rates, debt service already consumes 59% of all Japanese tax revenues.
If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. The near failure of a 3rd world country (Greece) turned the world upside down. The failure of Japan would likely touch off a worldwide crash.
Japan is the Titanic and it has already hit the iceberg. It is taking on water rapidly. Paul Krugman has recommended that the captain speed up and all will be well. There aren’t enough lifeboats. Intervention in the currency markets are on par with rearranging the deck furniture. More stimulus is on par with the band playing while the boat sinks. The destination is certain and time is running out.
LLPOH says:
I talked to my wife last night about the state of the world in general. She is a really smart woman. She changed the subject by pouring me some more wine. Even smart people really do not want to face what is happening.
Compounding Japan’s woes is immigration – or the lack thereof. They would rather commit nationwide harakiri than allow non-Japanese in. They would blow themselves up at the thought of accepting a Congolese refugee. (Not to mention that their birthrate is virtually non-existent.)
Even their vaunted quality of manufacture has turned to shit in recent times. Their service industries are highly uncompetitive internationally (it is inefficient to make a big Mac by committee), and more than a few nations really are enjoying their struggles (Sth Korea for instance. Nth Korea is too screwed to enjoy anything). What will happen, ultimately, when their balance of trade goes down for the final count? They can then rely on their natural resources to pull them through. Oops. I forgot – they don’t have any.
You can say sayonara to Japan, folks, as even the fall-back positions used in the west to kick the can down the road aren’t used in Japan.
One of my first mentors, when we were about to go into a meeting with some Japanese, told me something that has stuck with me ever since. He said, “no matter how polite and agreeable the Japanese seem, it is critical that you remember one thing – they hate your guts”. He was absolutely right. The oncoming windscreen couldn’t happen to a nicer bunch of folks.
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15th September 2010 at 11:09 pm
equus says:
I do not agree with the logic presented in the article.
To me, balance sheet of Japan as a country and that of Japanese government are two different things.
As a country, Japan’s International Investment Position has been the highest for the past 19 years in a row.
http://www.mof.go.jp/english/houkoku/e2009.htm
In other words, Japan will be the last country in the world to bankrupt, and that’s why JPY has been surging when rainy days as safe heaven to preserve fortune.
And, here is the latest balance of payment showing current account surplus.
http://www.mof.go.jp/bpoffice/bpdata/pdf/bp1007.pdf
Japan has almost always had current account surplus. Note that its Income, i.e. return from past investment, is now bigger than trade balance.
LLPOH, a commentator, talked about Japan’s trade with Korea. Here is Japan’s trade statistics.
http://www.jetro.go.jp/en/reports/statistics/data/gaikyo201007e.xls
Note: As for Japan’s trade with mainland China, Japan usually exports goods to mainland China via Hong Kong.but imports goods directly from mainland. As you see, Japan is making huge money from China and Korea through trade. Japan makes roughly between $25bn and $35bn from Korea every year. The more Korea exports, the more it needs to import from Japan. This structure also holds with China. As BBH’s Marc Chandler correctly pointed out, China is not world’s factory, but world’s assembler. The more China exports, the more it needs to import from Japan or other Asian countries where Japanese companies have factories.
Talking about Japan’s saving rate is nonsense, because money does not disappear. When Japanese people withdraw money from their bank account and spend on something in Japan, that money is picked up by someone who is most likely a Japanese company who puts that money into Japan’s banking system. So, the number you should really check is the amount of deposit Japanese banking system maintains. As a matter of fact, that number has always been increasing, which is the real problem of Japan. In Japan, money sticks to banking system, and it is very difficult to kick the money out of the banking system. Under deflation, people and companies know money increases its purchasing power over the time. So, they always try to postpone spending money. Big Japanese corporations do not need to borrow money from banks. Lending to small or medium size Japanese companies could be risky. As a result, Japanese banks have almost no other counter party to lend money than Japanese government. This is why Japanese Government Bond’s yield has been the world’s lowest for the past couple of decades.
Under deflation, I am not so concerned with the aging population. Elder people will have to withdraw money from their bank accounts and spend that money on something. That means they will move money out of banking system. That could be the ultimate cure to Japan’s deflation.
Anyway, if you do not trust the number and logic I wrote here, please read the following FT’s editorial which says Japan’s debt woe is overstated.
http://www.ft.com/cms/s/0/cb125274-14e3-11df-8f1d-00144feab49a.html
I agree with most of the points FT’s editorial wrote.
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15th September 2010 at 12:55 am
Expat says:
I’ll just lurk until some Pearl Harbor Truther posts a comment about how the attack was an inside job. Tell that to Cuba Gooding Jr. and Ben Affleck!
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15th September 2010 at 3:39 am
Expat says:
They truly wasted trillions on bridges and tunnels. Instead, given that Japan is basically a bunch of useless mountains, they should have spent the past twenty years levelling the whole, damn place out, perhaps leaving Fuji as a symbol (or they could have made one out of fiberglass with huge factories, etc. inside it.
Think about the productivity and the possibilities of shoveling all the stupid hills into the sea to create more land. They could have possibly even built a land bridge to South Korea so the next time they felt like going on a genocidal rampage and rape entire cities, they could drive over for the weekend and still be back in time to catch Sunday Night Sumo.
Jim ,you speak of unsustainable trends. But this is because you are a rational, sane, and reasonable (when not attacking Truthers) person. You are not an elected official or a Wall Street banker. They fall back on Keynes’s aphorism about everyone being dead in the long run. Or they ask you to prove that it can’t be sustained. And indeed, why couldn’t it be sustained….until it can’t be any more.
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15th September 2010 at 3:51 am
twinsanity says:
My lord, we’re still on the “Japan will collapse” theme? This is even worse than the ‘gold is going to $2500′ cries the goldbugs have been claiming for years now.
When is Japan collapsing? What’s the trade on this? What’s the timeframe?
These same arguments have been made about Japan since the mid 90′s, yet Japan hasn’t collapsed.
If you’re not giving hard dates with these predictions, they’re bunk. I predict sometime in the next 50 years the stock market with experience a 25% drop. If it happens, remember this post because I was oh so prescient.
I knew you had no idea how a currency sovereign operates under a fiat monetary system when you posted nonsense like this:
“This isn’t a positive development when you are running $600 billion annual deficits and desperately need investors to buy your debt.”
“If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. ”
Japan can keep the rate on its “debt” as low as it wants for as long as it wants. There is no ‘market’ that will force rates higher. If you’re theories were true, we would have seen evidence of this in the 10 year rate which has stayed at low levels for a decade or more. The BOJ can easily buy the bonds if outside demand falls and can continue to do so for as long as needed but here’s the kicker:
JAPAN DOESN’T EVEN NEED TO ISSUE DEBT IF IT DOESNT WANT TO!!!!
That has and always will be a voluntary move. If they stop issuing debt, no problem, they come up with new ways to accomodate the spending without the accompanying reserve drain that debt causes. They simply do this to keep a risk free rate the private sector can base it’s own debt operations on, not to “fund’ anything. Get this right.
Japan will always be able to service its debt. How could it not? It “owes” everything in Yen, WHICH IT CONTROLS AND ISSUES AT WILL. There is no worry of default EVER. AAA ratings mean nothing for currency sovereign, Moody’s could reduce their rating to CCC and it wouldn’t impact yields. The BOJ could always by the bonds to achieve the rate levels it wants to maintain. Even if it required “printing”, so what? You just mentioned the skyrocketing Yen, doesn’t that and the deflationary environment give Japan room to print and inflate?
You folks seriously need to get off your gold standard, currency sovereign governments are like individuals, there are bond market vigilantes mindset. You clearly have no idea how modern monetary operations work for regimes like this and as such, your analysis is pretty laughable as a result.
You guys have continued to maintain your credibility with respect to Japan by continuously trotting out these predictions of doom and gloom, yet the empirical evidence always shuts you down. Japan keeps trotting along just fine. Start rethinking the paradigm by which you analyze these economies and you just might be able to square your predictions with reality.
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15th September 2010 at 7:45 am
Administrator says:
twinsanity
I love when I see people intensely disagree with the facts. You are clearly part of the “it hasn’t happened yet, so it won’t happen” crowd. What was your view on housing in the US in 2005. Be honest big guy.
By the way, gold reached an all-time new high this week and has been rising for 8 straight years. You reveal your desperate hope with posts like this.
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15th September 2010 at 8:17 am
Administrator says:
equus
Doth protest too much. I guess living in Japan makes a man more delusional and unable to see the facts right before his very eyes. Tell me how China’s real estate bubble isn’t going to pop next.
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15th September 2010 at 8:23 am
twinsanity says:
What “facts”?
So now predictions that have proven to be false for over a decade now are facts? You guys have been consistently predicting gloom and doom for Japan, but NOW we’re supposed to take you seriously? Go dig thru the archives of Goldman Sachs research, Economist articles and other business media for the past decade. These same tired themes have been trotted out time and time again and empirical evidence has proven them to be false time and time again.
All the textbook theories about crowding out, and it leading to inflation have been proven to be false. We’ve been hearing stories for years about Japan’s aging population being unwilling to buy debt which will lead to the bond vigilantes skyrocketing rates in Japan. Look at your own chart to see how bogus that argument has been.
I will be honest, I didn’t read every line of your missive as I saw immediately you didn’t know what the hell you were talking about. Now that I’ve read thru it all, I see my fears were not only confirmed, I should be even more worried about you.
You use numbers which are meaningless. Debt service compared to tax revenues? You seriously believe currency sovereign governments service their “debt” with tax collections? Again, a paradigm straight out of the gold era and again,assuming that governments must finance their operations from external sources(debt/tax revenues). This is a false paradigm and one that must be discarded to properly see what’s happening in Japan and here.
Then you have this nugget:
“The Japanese have kept their interest rates under 2% for the last 15 years. With a current rate of 0.3%, there is no room for further decreases. The concept was that these rates would spur businesses to expand and invest. They would spur Japanese savers to become Japanese spenders. Neither happened”
Oh really?
So why the chart showing the savings rate declining over the past 20 years? If you’re not saving, you’re spending!!! What else is there to do with the money? I would say this is exactly what should happen when you’re getting next to nothing on your savings and you need to kickstart an economy. Saving money will not do that, spending will.
Then this classic:
“As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. ”
Japan will never default on its debt. This can never happen unless they chose too for strategic reasons(which don’t exist). Every dime they “owe” is in Yen. They can issue Yen at will to service the debt. The rates will not rise unless they want them too. All that is needed is to have the BOJ buy the bonds to keep the rates low. No one can force the rates higher if Japan does not want them to go higher. Japan could always stop issuing debt, but then there’s a huge problem and it has nothing to do with funding:
- the investment banks which use the risk free rate to price risk for various purposes would be lost
- the banks would not have a safe haven to park money in times of uncertainty
- the money markets would collapse
This is why debt is issued by currency sovereigns, NOT TO FUND GOVERNMENT OPERATIONS.
Please start understanding how modern monetary operations work.
BTW, I live in a bubble area(south Florida). I saw the same warning signs. Here’s the difference:
CURRENCY SOVEREIGN GOVERNMENT DO NOT FACE THE SAME CONSTRAINTS AS PRIVATE CITIZENS.
If everyone had a printing press and could legally print dollars(or use a computer to make money out of thin air) there would have been no housing crash. Since individuals face constraints and have to finance spending in advance, the housing crash was predictable and many did predict it. Analyzing governments is a completely different ballgame. Conflating the two further reduces your credibility on the matter.
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15th September 2010 at 10:01 am
hopium says:
Twinsanity is in the ” Dopish Popularice” part of our society…and he has much company. His quote of “This is even worse than the ‘gold is going to $2500′ cries the goldbugs have been claiming for years now. ” Again he is proven ” Stupid & Dopish ” as again this morning Gold broke a new record high.What say you Twinsanity? Twinsanity is the populace we must all reassure ourselves to avoid at all costs he is not someone who would help you preserve your wealth but someone of the mindset that would destroy your wealth as well as your well being for his own personal benefit.. IE: Buy Bonds, But stocks….avoid the “Dopish ” crowd folks the lies are being exposed daily…one just has to watch the Markets for 1 solid week to see the manipulation and lies has reach a feverish grasping for straws point if there ever was one.
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15th September 2010 at 10:13 am
Administrator says:
Twinsanity
I noticed you are along winded motherfucker. I also noticed you posted the EXACT same post bullshit on Zero Hedge. I guess you can’t think up anything original.
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15th September 2010 at 10:19 am
twinsanity says:
Well it takes a long time to debunk bullshit theories that have been proven false by empirical evidence.
Especially when those who parrot such bullshit continue to do so.
Since this shit was posted on ZeroHedge for the masses to see, had to put it there as well.
I see you just have no rebuttal at all which is typical, your theories and predictions sound great until hard empirical evidence shows them to be complete garbage. Luckily for you, there are plenty of sheep out there who also have not thought outside the box and will lap this shit up because it sounds good.
If there’s one silver lining in all of this is that maybe after its all said and done, the bullshit textbook theories will finally get thrown out and we can start re-educating people how economies actually work under modern monetary paradigms.
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15th September 2010 at 10:46 am
twinsanity says:
As for the gold argument, I’ll let Denninger savage it:
http://market-ticker.org/akcs-www?singlepost=2139375
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15th September 2010 at 11:21 am
Administrator says:
twinsanity
Keep believing in your theories. I deal with facts. My facts are incontestable. You are one of those delusional morons who are convinced that because nothing bad has happened so far, it won’t happen. Go jerk off to some more Paul Krugman columns dickhead.
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15th September 2010 at 11:27 am
Administrator says:
twinsanity
I don’t need anyone to fight my battles for me with links to others. That is an example of a feeble mind.
Gold is up 325% since 2000. The stock market 0%. Are you as stupid as you seem?
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15th September 2010 at 11:35 am
Kill Bill says:
Gloom And Doom Is A Fact!!
Heh.
But what is the consequences of a Japanese collapse?
Will China see a power vacuum and move against Japan? Would Japanese become so cheap as to lure foreign coporations into the country? Would soy sauce drop in price? Would geisha girls become billionaires?
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15th September 2010 at 12:03 pm
hopium says:
Hey Dooosh bags ( Rose colored glasses types )….here is a little reality for you..
http://www.businessweek.com/news/2010-09-16/rock-us-holdings-files-bankruptcy-to-sell-buildings.html
“The New York-based company listed as much as $500 million in debt and assets of less than $50,000 in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware.”
Come on not spin it up…your pathetic twinsanity, and nothing more than a Blog troll.
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15th September 2010 at 12:40 pm
hopium says:
Denninger hahahahh troll he has been wrong for the last 5 years hahahahah Denninger please another book talker….
TROLLLLLLLLL!
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15th September 2010 at 12:41 pm
hopium says:
Sorry administrator just one more comment….anyone, I repeat ANYONE! who follows the like of Karl Denninger is in deep deep trouble.Ya ya I have read Karl he does have some decent posts, but wake up to the fact the only reason Karl has a following is because he says what were all thinking yet revert back to his book as not to lose credibility…remember ” Only tea party types hoard gold “.
Karl is going to be in the long line of bread beggars just like twinsanity, and when he is standing there waiting for his rations he will be saying ” Where did I go wrong ” …Karl is a book talker like Mish.
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15th September 2010 at 12:48 pm
Milw05 says:
No society will continue when 40% of the population is elderly and 8% of the population consist of children. This is a complete demographic meltdown. Either begin to have more children or immigration or continue the economic and social collapse.
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15th September 2010 at 12:49 pm
twinsanity says:
Again, what ‘facts’?
You have predictions.
The same predictions that have been tossed out for over a decade!!
And each time they are proven false, making you guys scratch your heads!!
But now it’s different?
It’s also never happened that the sun has risen in the west and 2+2=5, but maybe that will happen to? Or should all the empirical evidence be used to maybe say, hmmm, the sun does rise in the east, and 2+2 DOES =4.
The “this time it will be different’ crowd always makes me laugh, especially when years of empirical data kill their theories and predictions everytime.
Gold is up 325%. Did you put 100% of your capital in gold? If not, STFU.
No one catches all the corners in such a volatile instrument. That’s a bubble if I’ve ever seen one and that bubble will pop LOOOOOOOOONG before the treasury bubble does. As soon as people realize the world is not ending, you will see a crash in gold that rivals the Nasdaq in 2000.
I used to be a gloom and doomer like you guys because it’s the “fad” these days. While I’m not predicting the go go days are coming back, I’m also done predicting the end of the world.
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15th September 2010 at 1:05 pm
twinsanity says:
““The New York-based company listed as much as $500 million in debt and assets of less than $50,000 in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware.”
Come on not spin it up…your pathetic twinsanity, and nothing more than a Blog troll”
You are not seriously stupid enough to use that as some sort of indication the US is in trouble are you? Thats a private company!!!!
LMAO!!!!!
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15th September 2010 at 1:11 pm
Administrator says:
Twinsanity
Yes I have been heavily in gold since it was $375 an ounce you douchebag. Amazing how you trash gold and then when I again point out a known fact, you get your undies in a tizzy. You are an angry motherfucker. I guess you have been long stocks for 12 years asshole. Keep believing your own drivel. I always wondered what it felt like to be feeble minded. You have provided me the answer.
Your everything is just fine schtick is wearing thin fuckwad. Time to go back to Zero hedge and be pummelled there. You enjoy a good beating, don’t you.
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15th September 2010 at 1:17 pm
equus says:
Hi Administrator,
Thank you for your interest in Japanese economy.
Following is my response to your comment on my post.
I do not think I protested anything in my post. I thought I showed you some basic economic statistics you may be interested in. I just wonder why you think so.
Fortunately or unfortunately, I live in U.S. I am a kind of financial type.
Since I can read Japanese, I regularly check Japan’s economic statistics in Japanese.
In my previous post, I selected a few of them published in English for English readers.
I read your post on ZeroHedge to which I never wanted to post.
Since I thought you have a concept of International Investment Position and understand the balance of payment data, I showed them to you in my post.
Quite contrary to ordinary people’s intuition, having financially healthy government could be a very bad omen in terms of sovereign default. Check the fiscal situation of Iceland’s and South Korea’s government just before they went to IMF, and you will know what I mean. Their governments were very healthy in every financial terms. I suppose it is probably difficult for ordinary people to understand the concept of sovereign government with fiat money under floating exchange system. They can print money from air. They can collect tax on their land. They can even freeze bank accounts for emergency, e.g. denomination. In my understanding, Zimbabwe’s economy is broke, but it is not bankrupt, i.e. defaulted, as a country, because it can still print money. Japan has been under deflation, and its fundamental problem is weak aggregate demand. Unlike Zimbabwe, Japan does have huge supply side machine. JGB’s yield is nothing in nominal term, but you should see it in real term by taking deflation into account. Real interest rate of Japan could be the highest among G7 countries. Official inflation rate is -1.0% or something like that, but true inflation rate might be -4% over there. It’s not easy for outsiders to imagine the world of deflation. Some outsiders noticed that, and recently started buying JGB.
As for China’s asset bubble, I suppose it will go bust at some point, but I have no idea when it will do. I often read Andy Xie, although I am not always convinced by his logic. I also think Australia’s and Canada’s property bubble will go bust at some point. Those are nothing new in human history.
Just before the Great Depression, U.S. accumulated about 5% of world’s fortune.
Just before Japan’s bubble burst in 1990s, Japan accumulated about 4.8% of world’s fortune.
Too good is like too bad.
By the way, Gold has not always been a good investment historically as a matter of fact.
http://www.ft.com/cms/s/0/81552e06-9fe2-11df-8cc5-00144feabdc0,s01=1.html
When JGB’s yield surges, Japanese economy will get out of deflation. If that happens, Japanese government will easily be able to collect lots of tax from Japanese corporations and household. Note that Japan’s VAT is now only 5%.
Thanks for reading my post.
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15th September 2010 at 2:31 pm
Apollo says:
I have not read most of the posts on Japan. Nor conduct detailed financial analysis on Japan. But let me just say this:
JAPAN IS NOT GOING TO COLLAPSE
Sorry Yanks. It is ingrained in US culture that when they see themselves in trouble, delusions and desire to see other countries in trouble multiply.
I have lived in Japan during the 90′s, worked for a top Japanese company, and know reasonable share of friends. So I know a thing or two about the country.
After the burst of 1990 bubble Japan went into a tailspin for about 4-5 years. The initial results were the financial sector was purged of its power, and citizens settled into a sort-of daze. Great deal of government money went into ‘infrastructure’ which received high western attention. But greater investments were made in strategic industries, in education, in R&D, in stocking up strategic material reserves. Little attention about this was paid by the west, because Japan doesn’t want foreign attention.
Since 1995 Japan has actually restructured its economy and expectations. So that the country is on a sustainable path notwithstanding demographics and other challenges. All the talk in America about Japan collapsing is basically a bunch of ‘pundits’ viewing Japan the American way and find many things in danger. These things are not dangerous to Japan.
Japan national strategy is to hook up with China to drive the global export market, shifting more and more exports to Europe and the 2nd world. Americans have little idea how much Japan has invested in China – far more than US and Europe combined. Japan has the ability to drive R&D, to invent, to commercialize entire technological ecosystems (much like the US can do same on aerospace). Which is why China needs Japan more than America. America supplies millions of ‘zombies’ to buy stuff made in China, but in reality invented, designed and produced by Japan.
Japan will be in fine shape partnering with China economy. Japan, however, is dependent on US on military and therefore must play a delicate and smart game. Do not analyze Japan by reading financial statements. Likewise, analyzing China and drawing conclusions about it by looking at published financial data is fantasy. Hundreds of American economists and other pundits have looked at these economies for 2 decades, from their western minds, and ALL turned out to be wrong. Because they have no idea how eastern countries really work.
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15th September 2010 at 3:16 pm
Administrator says:
Equus
Sorry for being too sarcastic. You clearly want to have a worthwhile discussion. I’m not sure I understand your thinking on the surge in yields. If the interest rate goes to 3.5%, the debt service will be more than all tax revenues. Your solution would be to dramatically increase taxes on an elderly population? The economy has been in virtual recession for 20 years. A dramatic increase in interest rates and taxes would destroy the economy and push it into a deep depression.
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15th September 2010 at 3:29 pm
Administrator says:
Apollo
Reading the facts might sometime enlighten you. If you don’t want to read the facts, anecdotal tidbits about your experience in Japan are worthless.
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15th September 2010 at 3:32 pm
Administrator says:
Twinsanity
I notice you didn’t address this response to your blather on Zero Hedge:
by chindit13
on Thu, 09/16/2010 – 15:26
#585999
I might be missing your point.
Japan runs a fiscal deficit every year, adding to the pile they began accumulating after the collapse of the Bubble. They have three ways to pay for this deficit: print yen, sell external assets, issue new JGB’s.
Japan has chosen to issue new JGB’s.
As existing JGB’s mature, they are being reissued, albeit at the current low rate. This is all well and good if Japan has surplus savings. This year (or next) the rate will go negative. The pool of funds available to purchase these JGB’s, both maturing and newly issued, will be in deficit.
Why the negative savings rate? The demographic bubble skewed toward the golden years, coupled with ZIRP. People are not choosing to spend vs. save, they have no choice. Pensions and interest received no longer covers living expenses, so the retirees are dipping into principle or withdrawing from Yucho. Japan’s young are neither a sizeable enough population to make up for what the elderly are cashing out, nor do they earn enough to make up for what is being eaten. From 1989 until this year the rate was positive, so the deficits could be funded domestically. This ends now.
What can Japan do? Attract external capital, allow rates to rise so that funds move from other assets to JGB’s, or print yen. I suppose they could also slash the budget, but there is no political will to do this. Thus they will issue more debt.
In my post I alluded to a conundrum Japan faces (after years of ZIRP) and what the US will face: the system cannot tolerate a rise in rates. Everything is geared toward low rates. Thus, I suspect Japan will first try to attract external capital, perhaps liquidate more non-yen assets, and then print yen. The yen’s recent rise has been a result of corporate Japan repatriating external assets in order to fund themselves and the government’s deficits.
Another of my points was that as the population ages, the holes in pensions, Yucho and Kampo will become clear. The shortfalls are staggering. I suspect the solution to this will also be yen printing. Frankly, I doubt the authorities even know how bad their own situation is, nor do I think they want to know. That is the Japanese style, as I witnessed for more than a decade running money there.
I did not mention default, as I am well aware printing remains the option of last resort. My argument is based on a change in the fundamentals (positive to negative savings rate) which materializes this year or next. Their economy cannot tolerate higher rates, so my belief is that yen printing will pick up steam. In times past a country might be able to get away with endless printing; the last few years have changed that view. Most now realize that there is a marginal unit of currency that once printed, renders every other existing unit of that currency worthless. Orderly declines may no longer be allowed by the market.
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15th September 2010 at 3:40 pm
Administrator says:
by Apostle of Unknown
on Thu, 09/16/2010 – 08:41
#584886
I’ve lived in the Land of A Billion Automatic Sliding Doors for quite some time and can only confirm the crazy boondoggles the Japanese government is involved in to keep the show going. Many, many anecdotes about this… The poor Japanese people, indoctrinated with the ethic of obedience and suffering in silence, pretty much keep their jaws clenched when confronted with these excesses. I think these cultural factors are the most overlooked aspect of the great Japanese Ice Age. Westerners will NOT buy near-zero yield bonds for so many years while the government runs huge deficits. Especially not the average US citizen; too emancipated for that. Only few people understood the negative effects of credit expansion enough to get pissed about it when it was happening; but enough understand the problem of govt deficits. I’d like to meet the PhD who can express that in his equations when comparing the US to Japan.
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15th September 2010 at 3:41 pm
Smokey says:
One of the best interviews I’ve ever watched was done on CNBC
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15th September 2010 at 4:38 pm
Smokey says:
One of the best interviews I’ve ever watched was done on CNBC a month ago. Kyle Bass, an investor who made a fortune from the subprime mortgage collapse, was being interviewed about the global markets. He said that Japan is headed rapidly for a world of shit, and he explained why. He said that Japanese Government Bonds (JGB’s) are currently damn near the biggest market bubble in history. I’ve followed this guy for a year or so, and he is one of the smartest fuckers in business that I’ve ever seen. The case he makes is extremely compelling. He thinks world markets are pretty much fucked, especially Europe.
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15th September 2010 at 4:46 pm
Gaffer says:
Maybe some one personally familiar with Japan could break down the demographic situation in Japan. It seems like their younger generation is drastically different from older generations – more hipster consumers and very like their quiet conformist parents. Seems like a similar dynamic to the GI’s / Boomers.
I still say that being culturally homogenous will be a huge benefit to Japan when global trouble hits. They will have a natural tendency to pull together. If their younger generation is not a Japanese version of the Boomer generation they should pull through in one piece once their top-heavy demographics even out.
They’re the exact opposite of the US, which is a cultural mess. There’s next to nothing connecting American with American. I feel very little kinship with most “fellow Americans” and I iknow I’m not alone.
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15th September 2010 at 6:06 pm
Bruce C. says:
I’m amazed that so many seem to think that Japan isn’t in an unsustainable financial death spiral. I’m not going to repeat what so many have already said, but the trends are clear: ever increasing debt, decreasing exports, static population growth, an aging population, etc. For all of you who dispute the thesis here (that Japan’s collapse is inevitable), no one has explained how it’s going to get it’s finances in order. I don’t know what the true limit of debt-to-GDP is for a country but debt can not rise indefinitely. The recent rise of the Yen due to investors seeking safety and/or cheap money is a traditional move based on pre-crash economics/thinking. Ironically, that will only hasten Japan’s collapse because its exports become that much less competitive and thus are reduced even more.
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15th September 2010 at 6:12 pm
StuckInNJ says:
Gaffer — Oh, come on!!! You feel no kinship with me???
I’m not picking sides in this debate.
However, the Prime Minister of Japan, Naoto Kan, in his first major speech since taking over, said;
“Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets.”
So, if the PM of Japan says there is a risk of collapse ….. I’ll believe that over anything the naysayers here say to the contrary.
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15th September 2010 at 6:53 pm
StuckInNJ says:
There is a Japanese fellow, Michio Morishima, who appears to be very very smart, who feels Japan’s ultimate collapse will happen around mid-century ….. due to its demographics.
http://www.iwanami.co.jp/english/sh0102.html
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15th September 2010 at 6:57 pm
Smokey says:
Stuck—–Where is Daniel? Isn’t he a buddy of yours? Haven’t seen him in a month or two.
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15th September 2010 at 7:06 pm
twinsanity says:
@Smokey, Einhorn from Greenlight has had the same thesis for a while now.
Both of these guys will lose, especially Bass if he think’s govt bonds are similar to subprime mortgages. I wish I had enough capital to goad him into the other sides of those trades.
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15th September 2010 at 8:48 pm
Smokey says:
twinsanity—The interview I referred to is from August 18th, a month ago, and if you google Kyle Bass it is gives a link for the August 18 video at the Market Folly site which has the video. It is 8 1/2 minutes, and I’d be interested in your critique of it, if you feel like checking it out and then posting a comment here today or tomorrow. Thanks.
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15th September 2010 at 9:07 pm
equus says:
Hi Administrator,
Could you please check “Cumulative Current Account Balance from 1980 till 2008″?
http://en.wikipedia.org/wiki/File:Cumulative_Current_Account_Balance.png
As you see, Japan is the top on the list. This is because Japan has almost always had current account surplus in the past 3 decades. As a result, Japan has had the highest International Investment Position for the past 19 years in a row as shown below.
http://www.mof.go.jp/english/houkoku/e2009.htm
In other words, Japan does not need foreign investment at all. They have money and they have been the investor to the rest of the world.
Even after reading your article which you say is the fact, I really cannot figure out how Japan could financially collapse. Since Japan is the net creditor and has very little gross debt to foreign countries and those debt are almost always denominated in JPY, it is very difficult to see how Japan can default to those debt.
You may not be talking about Japan as a county, but Japanese government. if that’s the case, we need to discuss the situation surrounding JGB or Japanse Government Bond. Please note that JPY is a fiat currency, and JGB is issued in JPY.
When JGB’s yield picks up, chances are Japanese banks found better investment opportunity than JGB somewhere in Japanese economy, which is a good thing and could be the sign of getting out of deflation. Like Fed on Treasury’s yield, Bank of Japan has the ability to control JGB’s yield, and has always been doing so. If JGB’s yield climbs up too high, Bank of Japan could and should buy JGB. About 95% of JGB is owned by Japanese institutions and households. Deterioration of JGB price is the last thing they want. I do not think foreigners can play their game on JGB’s price in this situation.
You may think JPY’s exchange rate plunge when Bank of Japan purchased JGB. That cannot happen, because Japan has the highest International Investment Position. To support the exchange rate of JPY, Japan can unwind the position, e.g. sell US Treasury or other foreign financial assets and buy JPY.
In case you are still interested in JGB’s deep world, followings may be interesting to you.
http://www.mof.go.jp/english/bonds/jgb2010_01e.pdf
page 7 JGB outstanding
and
http://www.mof.go.jp/english/bonds/saimukanri/2009/saimu.pdf
page 95 Breakdown of the Outstanding Amount of General Bonds by Remaining Years to Maturity
page 96 Breakdown of the Outstanding Amount of General Bonds by Maturity Types and their Average Interest Rate at the end of FY2008
page 97 Outstanding, Interest payment of general bonds and Average years to maturity
By the way, to cope with aging population problem, Japan’s tax system needs to be updated. Current tax system is too harsh to younger generation. Reducing income tax and increasing VAT will shift fortune from elders to younger generation who will spend that money to revive the economy and get out of the deflation. What I pointed out is that Japan can do that, because of the current low level VAT.
One more thing to write. Americans often compare Japan to Germany, because they assume Japan is export oriented, which is no longer true. The percentage of Japan’s export/import to its GDP is the smallest among G7 except U.S. Checking the balance of payment,
http://www.mof.go.jp/bpoffice/bpdata/pdf/bp1007.pdf
you will notice that Trade balance surplus is smaller than Income. In other words, from the viewpoint of balance of payment, Japan is less like Germany and more like Switzerland.
One of your favorite web sites is Naked Capitalism. So, you may have read the following, in which Yves commented on FT’s Martin Wolf discussing Japan’s balance sheet deflation.
http://www.nakedcapitalism.com/2009/02/martin-wolf-rethinking-lessons-of.html
I think Japan’s lost decade is an exaggeration.
As for myself, I can read Japanese and Chinese, and it is part of my role to regularly check economic statistics of these two countries. They are unique.
Thanks for reading my post.
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15th September 2010 at 1:04 am
equus says:
Hi Administrator,
I have just recalled that FT’s chief economic commentator, Mr. Martin Wolf, discussed Japan’s public debt in his blog some time ago. If you have not already read it, you might want to do so, because his logic was very funny & witty & interesting.
“Does Japan really have a public debt problem?”
http://blogs.ft.com/martin-wolf-exchange/2010/06/13/does-japan-really-have-a-public-debt-problem/
Thanks.
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15th September 2010 at 1:25 am
Jimmy says:
I worked as an english teacher in japan for a year. i thought it was a great time, but when i look back, i get the impression that the japanese are very passive aggressive people, like the chinese, and will have a poker face and be very restrained but do harbour real anger towards you. I guess you can expect this in a country that was essentially turned into an american manufacturing plant. Either way, i had a good time and the japanese i met were friendly.
My diagnosis;
-Japan has a declining population, due to….
-….high cost of living, due to……….
-Highly dense urban areas, due to……
-70% of the country being mountains
And……
It is a massive crude oil user, and its ecological footprint is much bigger than its land area, so high commodity prices are pulling them down, and their culture/geography cannot respond effectively.
Its no coincidence that USA, western europe and japan are suffering greatly, look at their crude oil usage, any increase in the price sends them reeling.
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15th September 2010 at 11:02 am
Barnes says:
Apollo: Japan doesn’t invent much at all actually. The majority of the things lauded as Japanese “Invention” are actually just things invented abroad and then Japan dug in the garbage, found these concepts and expanded upon them. A great example is “Fuzzy Logic” computer systems. It was invented in the USA, like so many things, yet the Americans didn’t get turned on by it. The Japanese have used in in a multitude of ways including house hold air conditioning units. This is just one easy example, there are in fact thousands more.
My point: You are wrong. Japan invents very little and actually manufactures even less.
In addition, if Japan and China are so close, why is China now withholding vital minerals and technological components Japan needs in industry over this ridiculous Captain situation? The answer is that they are not close. There is a deep seeded dislike, present on both sides, which could easily undermine whatever economic benefits either hopes to gain.
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15th September 2010 at 6:53 am
johnny says:
And then…Fukushima.
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15th September 2010 at 7:04 am