I Feel Like Chicken Little: Nobody is Paying Any Attention to Japan
March 20, 2012 14 Comments
The future of Japan.
I started this blog for one reason, and for one reason only: to bring awareness to the macroeconomic problems facing Japan and the consequences if these concerns are not addressed promptly, if not immediately.
I have clearly failed in this respect.
You see, it doesn’t take much to realize how much of a pickle Japan is in. Record trade deficits. Record debt. Record tax rates. The oldest population in the world. Highly restrictive immigration. With fewer people to pay for a growing amount of debt, compounded with greater expense incurred by taxes spearheaded by the Noda administration, the conditions for Japan’s fall from grace are in place, ready to be triggered be the smallest sign of economic uncertainty.
Remember, this is not itsy-bitsy Greece that we’re talking about. This is Japan – the world’s third largest economy. The only reason that it is still breathing is because of how tiny Japanese government bond yields are.
With its current account deficit being the way it is, Japan will have to look outside its borders to finance its debt. That’s when the house of cards will start to collapse. Interest rates will skyrocket in an attempt to attract foreign investors. Increased consumption taxes, combined with flat wages, will push the savings rate through the roof. Consumption will, in turn, fall flat on its face, and investment into Japan will dip as a result of little to no growth prospects. The combined result of all of this? Default.
Despite the horrifying prospect of the world’s third largest economy tanking, nobody seems to be paying attention. The politicians are too focused on attacking each other to do anything else. Some Japanese businesses are toying with the concept of given up on Japan. Many people in Japan remain pessimistic or apathetic about future prospects, while the international community is still pumping money into Greece and counting the number of hairs on Newt Gingrich’s hair.
What gives? Am I, a Hong Kong-born, Canadian secondary school student with an interest in economics and the culture of Japan, the only one who cares about what will happen to the economy of one of the richest nations on Earth? Look at what happened back in 2008 when the US economy hiccuped. Now imagine a full scale, Fukushima-style meltdown of the Japanese economy. Don’t think for a second that you won’t be affected if you’re not living in Japan. We’re looking at a tank greater than the decline and collapse of the Roman Empire. No exaggeration.
I want to do more about the situation than write about it. I really, honestly do. But by the time I come of age and get the necessary experience and education to be remotely useful to Japan, I fear it may be far too late.
“Japan is falling!” the little Asian boy cried. But no one heeded a word and the earth soon stood still.
I don’t want it to fall but I don’t know how to Help Japan either. Man, I’m too focused on Anime and everything good that happens in Japan that I failed to realize the bad stuff. I’m with you dude.
Another issue is Japan is still closed society and still create society on their own and actually being exclusive
Is a sense of arrogance and attitude problem
U.S accepts foreigners without isssues like Japan.
Please Japan knock down your damn wall!
Key to prosperity is not insular and closed mind 島国考え方よくないね
Global Japan is a prosperous Japan simply.
Japan till now had been focused on just Japan, but just Japan attitude will not w
The U.S use to isolate themselves too you know ( The Roaring 20′s) I do not think that Japan is an arrogant country that isolates themsleves from the rest of the world. It is actually the fact thet Japan is in debt with its own people and not other countries that is actually keeping the country from becoming a next Zimbabwe as mentioned in another article on this blog.
I got this from a friend and it helped in clearing up a lot of misconceptions I had about the Japanese economy. I hope you will find it to be similarly enlightening. Good luck.
Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics
Turn words into action Peter! And what happened to the Japanese version?
Get R Done as they say! I am worried about Japan as much as you are!
Japan is at critical crossroads now no kidding! Either be rich prosperous nation or be a poor third world nation it is that simple Peter! World’s third economy or the world”s tenth?
A revolution Peter!
I am feeling that we, Japanese, are worried about future, but few people take an action. I want to change this.
No man is an island. Change needs to be a collective effort.
Absolutely! 頑張ろう日本 should not just be words!
Sunrise Japan not sunset Japan!
Another issue is Japan is still closed society and still create society on their own and actually being exclusive
Is a sense of arrogance and attitude problem
U.S accepts foreigners without isssues like Japan.
Please Japan knock down your damn wall!
Key to prosperity is not insular and closed mind 島国考え方よくないね
Global Japan is a prosperous Japan simply.
Japan till now had been focused on just Japan, but just Japan attitude will not work.
So again I say either a rich dynamic prosperous cool Japan or a poor third world nation Japan that is weak and dark future plus hopeless.
10 Richest nations 2050 prediction
http://www.rediff.com/business/slide-show/slide-show-1-these-will-be-the-10-richest-nations-by-2050/20110309.htm Japan not in top 10 in this site–doesn’t have to be this way!
Another site has Japan at number 4 global ranking of richest nations
http://articles.businessinsider.com/2011-12-07/markets/30484358_1_new-report-richest-economies-top-dog
Honestly a half Japanes e American don’t ever want Japan to fall below third place and never want Japan to be poor nation! If Korea, England, can do it U.S.A can do it why can’t Japan
Want Japan to be first rate and on top!
Apology on website link error, actually this site has Japan at 4th place. 頑張ろう日本！
http://antiworldnews.wordpress.com/2012/01/18/these-economies-will-dominate-the-world-in-2050/
Japan went from rags to riches, don’t reverse riches to rags! And Japan should have zero homeless! That should not happen and kudoku problem too.A healthy balanced birthrate and GDP per capita—wealth is also important!
TPP is the key!
Don’t want Japan to be mostly senior citizen society!
Peter,
Living and working in Japan, I would like to respond to your article from a purely economic standpoint and try to keep emotions out of it.
I agree with your analysis of the Japan state of affairs especially about the yields on the JGB’s and disaster that would ensue should the rates increase. However, I do disagree with you on one point, and that is your conclusion of default. The missing key element of your argument is the Bank of Japan, which unlike the situation in Europe, has the ability to print endless amounts of money. Going back to your assessment of JGSs, once those rates begin to rise, the BOJ will almost certainly begin to purchase JGB and truly become the lender of last resort, effectively monetizing Japans debt. Needless to say this will result in a devaluing of the yen and (quite ironically) possibly hyperinflation if the BOJ becomes the only holder of JGBs. Outright default seems extremely unlikely because of the high percentage of the debt being internal — politicians and voters would be agreeing to not paying themselves!
Monetization (IMO) has already began, when the BOJ stated last month they would conduct QE for a 1% inflation target. In fact if Japan actually ever achieved a 1% inflation rate, they would only speed up their demise since JGB would have to rise for holders to receive a “real” return. Most likely this is a poor guise for the beginning of the the printing press operating in high gear and the end of one of the most stable currencies in the world. If this outcome does play out, the savvy investor would strategically position him/herself by shorting JGBs AND shorting the yen.
This seems like the only outcome given the state of Japan’s finances. The only plan that the Japanese government is even considering to deal with all this is the paltry increase of consumption tax to 10%. To be brutally honest, it really doesn’t matter if the consumption tax bill is ratified or not, Japans days are numbered. With an almost unimaginable debt-GDP ratio pushing 240%, declining tax revenues and a demographic timebomb, a 5% increase in sales tax is much like putting a band-aid on a gunshot wound. The petty bickering of politicians over this insignificant increase in sales tax shows how the government has lost sight of (or chooses to ignore) the glaring massive problems of their finances. Only drastic changes, immediately, would be required to prevent an epic crisis, then again, it may actually be too late.
Excellent article and I personally am a big fan of Richard Koo and his book as well!
- Victor
Peter, Victor’s reply above is spot on. The non-sustainability of the situation should be obvious to all, but seems so seldom talked about, even amongst my colleagues in the Japanese financial community. Interest payments are already more than 60% of tax revenues, and over half of total government expenditures are financed by new bond issuances for a fourth year running. The trigger event is probably when domestic savings (Japan Post being the worst offender) are no longer sufficient to buy excess JGBs. The Bank of Japan then becomes the only buyer of JGBs at low interest rates, which avoids a formal default, but triggers massive inflation. This article is informative: (http://www.marketoracle.co.uk/Article22732.html). Despite a good bit of digging, I have yet to find a proper analysis of the current and historical relationship between total national savings (supposed to be around JPY1,400 trillion) and national debt (currently about 1,000 trillion), so if anyone has seen one, please link it. Watching this relationship will help predict the breaking point.
Thanks, Victor and Scott. Very informative, and I do apologize for not taking that into account in the article.
Wouldnt inflation inflate away the debt? The United States had a large government debt as a percentage of GDP in 1945. It wasnt a problem. maybe that’s not a good analogy… I dont Ok if inflation increases, wont that make it easier to deal with the debt? I agree with the above comments that a default is not gonna happen. The difference with Greece is that Greece doesnt have its own central bank or its own currency and also Greece owes its debt to foreigners, whereas Japan owes its debt to itself. .. Umm, the absolute number, not the percentage, but the absolute number of elderly Japanese (65 and older) will not rise much after 2016 and will decline eventually. The forecasts are probably accurate because all people who will be 65 and older from now until 2077 are currently living. The number of elderly over 65s is not going to rise above 40 million. It will be near peak about five years from now. So, the birth rate just needs to rise a bit. I presume it will. Nobody knows. The TFR could rise