Friday, Jun 11, 2010
Japan smells the coffee
BBC: Japan PM Naoto Kan warns of 'collapse' under debt pile
For a long time I've been wondering how long it would be before Japan came out of denial over its finances.
With deflation, the yields on Japanese debt have been extremely low, yet they have still failed to achieve a balanced budget. Without deflation, their debt servicing costs will rocket, making a balanced budget even harder. The problem is that even if the budget is balanced, deflation makes the debt mountain continue to grow, relative to GDP.
After WWII the Japanese came together as one to rebuild their economy. Can that spirit of unity be re-kindled to defeat their chronic debt problems? With an aging, shrinking population, I'm doubtful. We could be looking at the biggest debt default in history..
Posted by uncle tom @ 10:49 AM (1489 views) Add Comment
25 Comments
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1. Scrooge said...
Being discussed here:
http://www.housepricecrash.co.uk/forum/index.php?showtopic=144859
2. simon68 said...
The Japanese doesn’t care about the nation’s debts problem in the past. It’s because all Japanese government bonds were taken up by its citizens. As Japan is now facing aging population where pensioners is drawing out money from retirement account for spending instead of making contribution to it, it becomes difficult to sustain the current public debts.
Why deflation occurs in Japan? After 1989 Japan became a different exporting nation, not export goods but capital overseas. It’s because of the government measure to stimulate economy and drive down interest rate to almost zero percent, thus it serves to urge Japanese capital flow to overseas countries for better return.
3. jack c said...
Not this Coffee by any chance ? www.youtube.com/watch?v=2AAa0gd7ClM
4. stillthinking said...
How much of this is taken into account with the current yen level? Because if the Japanese PM stops pumping funds into the economy then there is going to be a major shortage of yen, the Japanese won't borrow, and it doesn't look like any takers for overseas borrowers being pretty much busted already, so the banks won't be able to expand the money supply.
Maybe he timed this with the start of the oldies flooding the market.
I can't help but feel that Japan is going to be OK, and that finally, for the workers in Japan, they might be getting a tad richer than they hoped for.
5. bellwether said...
As posted the other day Japan cannot collapse under a debt pile, where it can at will produce the currency with which to pay these debts. so doing would result in a significant devaluation of the Yen but then so what, this would eg have advantages eg more competitive exports.
Japan may collapse but it will be under its ageing population and their insistence on a strong currency
6. titaniccaptain said...
Just a little something on inflation to stir things up a little.....
http://www.economicvoice.com/why-inflation-is-not-a-problem-honest/50010872#axzz0qXqrHR2q
7. Simon68 said...
Thanks to foreign hedge funds… Japanese Yen is a major carry-trade currency where international investors borrow Yen to invest in commodities and US equities. Whenever there is a calamity and risk-aversion attitudes in the market cause funds to liquid long position in commodities/high yield currency/US equities etc and repay the borrowed Yen.
Devaluation can help Japan’s export if there is no China. Taiwanese and Japanese do have large scale production plants in China. Japan has long used robotic machinery to do production because its labor force is too expensive. Another reason for setting up plant in China is to target the internal market there. China does have import control but it won’t apply to those locally produced goods.
8. simon68 said...
Thanks to foreign hedge funds………….Japanese Yen is a major carry-trade currency where international investors borrow Yen to invest in commodities and US equities. Whenever there is a calamity and risk-aversion attitudes in the market cause funds to liquid long position in commodities/high yield currency/US equities etc and repay the borrowed Yen.
Devaluation can help Japan’s export if there is no China. Taiwanese and Japanese do have large scale production plants in China. Japan has long used robotic machinery to do production because its labor force is too expensive. Another reason for setting up plant in China is to target the internal market there. China does have import control but it won’t apply to those locally produced goods.
9. simon68 said...
Borrow Japanese Yen at zero interest rate and use it to invest in Australian Dollars is a good deal if the volatility in both are low.
10. str 2007 said...
Jack C
Nice one very funny, unfortunately you get the impression that sketch is a little too close to reality.
TC
The only problem with this 'temporary blip' on the inflation measure is that there always seems to be 'another' following the first.
As your writer says it was the 'temporary oil price spike', then VAT increase, then weak currency then blah blah blah. The fact is inflation was nearly double target YEAR ON YEAR and that's taking the smaller figure of CPI.
IMO a year is quite along time for a 'temporary' spike.
There always seems to be a reason to keep interest rates rock bottom and never one to raise them while inflation just ticks away.
11. simon68 said...
It is reasonable to expect global inflation rate to rise in view of central banks’ massive QE/money printing across the world.
12. str 2007 said...
Simon 68
How do you actually do that ? And who actually lends money in Jpan at 0% interest rates ? You can't get it here for less than about 4-5% and that with the security of a house with collateral.
And if you did I assume you'd need to use a spread trading account to be able to short the AUD/JPY as a hedge ?
13. simon68 said...
The only reason I can think of keeping base interest at 0.5% is to save mortgage borrowers or property market, indirectly the banks.
14. simon68 said...
To str 2007
FX trading currency account with any one of the high street banks can offer that zero rate. I am talking about Citibank or HSBC in Hong Kong/USA or Singapore.
15. uncle tom said...
Checking the stats, I see that Japan is currently spending 5 yen for every 4 they get in tax - a budget deficit of around 7.5% GDP.
If they shrugged off deflation, and their bond rates rose a couple of percent; that would increase their budget deficit to around 12.5% - the same league as the UK.
The difference is that UK govt expenditure is close to 53% of GDP while Japan's is down at 39%. This means that while the UK can slash and burn in the public sector, in much the same way the Canadians did a decade ago; the Japanese solution would have to focus on major tax hikes; the brunt being inevitably borne by a working population who already feel too stretched to raise a family.
Japan has the makings of a major generational conflict (Italy is in a similar dilemma) Only by inflating their way out of trouble; but at the same time devaluing pensions and savings; can they hope to break free.
16. str 2007 said...
Simon68
These banks will lend you JPY at 0% interest for you to convert it into AUD and put it in an Australian Bank account at 4or 5% ???
What's in it for them ? or have I missed something ?
17. simon68 said...
To: Uncle Sam
Japan situation isn’t too terrible.
Japan is still the world’s 2nd largest economy in the world & government spending is within manageable size. Through raising indirect tax or direct tax from business or individual Japan can easily fill up the budget gap.
The foreign exchange reserve in Japan is 990,513 million US dollars against external debts of 2,132,000 million US dollars. Whereas foreign exchange reserve in UK is just 69,091 million US dollars versus the external debts of 9,088,000 million US dollars.
18. simon68 said...
To: Str 2007
In FX currency trading account you are required to put in a deposit equal to minimum of 1/20 to1/40 of the position size. For instance, if you long 1 million US dollars against Japanese Yen, you need to put in a deposit of 25,000 US dollars. You will receive interest on 1,025,000 US dollars and pay zero/near zero interest on short position of Yen.
19. simon68 said...
The banks will receive charges between bids and asks price in respect of open new position or close existing position.
20. simon68 said...
If BOE stops printing money then UK will face solvency problem. But if BOE keeps on QE measure then rampant inflation is unavoidable.
The other alternative is to cut government spending.
21. stillthinking said...
Japan has 5% sales tax, and is not taxed to the hilt as the UK is i.e. they can raise taxes. They are pre-Maggie in that they have yet to sell off government assets. They have a shrinking labour pool to soak up offloaded state workers. Japan makes desirable high end goods which imo provide a lower bound for the yen. Additionally, nobody in Japan expects their pensions to be honoured, which is why they have a high level of private savings, so they are already braced for impact as it were.
Japan doesn't have to dramatically make state workers redundant like the UK, they just have to stop hiring. If China gets going then they have an opportunity to experience the same export boom of the 60s and 70s. They are nuclear powered for electricity.
What the PM is saying is that they should do now what they should have done twenty years ago, and allow their economy to restructure. You can't compare Japan and the UK. Also, I have noticed that the Japanese perversely love to have the same problems as the west.
22. clockslinger said...
Simon 68 @ 8. I know nothing about this but isn't it the case that when there are falling stock market/growth expectations the panic pushes up yen and hits Aus dollar/ Krona/ Real? How long do you stay in a position on yen/resource currency if volatility is high...hours, a day or two, weeks? Forex really interests me as a slightly more logical alternative to stocks but I have very little idea of the technical indicators used or time you spend in front of a computer watching movements on candlestick charts.
23. clockslinger said...
Stillthinking @ 20, "nobody in Japan expects their pensions to be honoured". Where do you get that from?
24. simon68 said...
The best a man can get: Japan's government bonds given hard sell
By Lindsay Whipp in Tokyo
Published: June 11 2010 03:00 | Last updated: June 11 2010 03:00
The name is Bond, Japanese Government Bond. Stuck with the tricky job of making debt issued by the world's most indebted government an attractive investment prospect, Japan's ministry of finance has hit upon a novel sales pitch.
A high-profile advertising campaign to persuade millions of small-time investors to buy the country's sovereign debt has gone for raw sex appeal: "Women have a thing for men who own JGBs!! . . . right!?"
Owning bonds might not be everyone's idea of the way to a woman's heart but, according to the finance ministry advert, women prefer men who invest insolid government debt because they are sensible investors.
The advert in the free commuter magazine R25 features five women who say they would choose husbands who are "serious about money" and invest for "stability".
The campaign is an attempt by Japan's governing Democratic party to clean up the fiscal mess bequeathed by the free-spending Liberal Democratic party, which dominated power in the country for half a century until last August.
It has a familiar ring. When Naoto Kan, Japan's new prime minister, was finance minister, he urged officials to leave work early so they could "date even on weekdays". That was a revolutionary idea in workaholic Japan.
Finding strategies to reduce the government's $9,500bn (£6,466bn) debt - higher than the US debt level - is a mind-boggling task, particularly given how quickly the population is ageing. The finance ministry, however, is hopeful that individual Japanese who own about 5 per cent of the market will become bigger buyers of JGBs.
Last year, it tried placing ads in Tokyo's taxis, which are more accustomed to selling hair implant products. The strategy was largely unsuccessful. Lacklustre demand meant the government had to halve its retail issuance.
The idea of buying JGBs looks unappealing. Yields on five-year bonds are just 0.4 per cent.But with deflation of about 1 per cent, real yields are more attractive. Households hold more than half their financial assets in bank deposits, which earn a paltry 0.05 per cent.
If the government campaign succeeds, it may not only be the JGB market that benefits. Women drawn to bond-owning men might reverse the country's sharp drop in marriages, which have fallen by a third since the 1972 peak.
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