Sunday, Nov 01, 2009

Japan could be on the verge of a major default; is the UK next?

Telegraph: It is Japan we should be worrying about, not America

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending, and allowing it to push public debt beyond the point of no return. The IMF expects Japan's gross public debt to reach 218% of GDP this year. This has been manageable so far only because Japanese savers have been coerced into lending for almost nothing. "The debt situation is irrecoverable, I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Posted by drewster @ 11:57 PM (1445 views)
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11 Comments

1. paul said...

I'd take this with a moderate pinch of salt.

Top exporters are below break-even cost, says RBS.

RBS. The British company that made the largest loss in corporate history warns of problems in another country. Hmmm. This story sounds like tubthumping to short the yen even though the premise is not completely accurate. Japan still has a huge trade surplus for one, which is not mentioned. It also has more in personal savings than most of Europe put together.

After all, another way of looking at it is that Japan was not so swingeing in their cuts for savers and bungs to reckless borrowers.

Monday, November 2, 2009 08:06AM Report Comment
 

2. drewster said...

Paul,

Your view of Japan is out of date. The 33% rise in the Yen (vs. the dollar) over the last three years has pushed the exporters below break-even. Furthermore, as the article states, "the savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate". There are two reasons why: one is demographic (shrinking workforce), the other is because Japan has had near-0% interest rates for nearly two decades. That was a swingeing cut for savers and a huge bung for borrowers - but it didn't make the slightest bit of difference!

The key point in this article is that the recent change of government in Japan has been poorly received by the credit markets, who now consider Japan's risk of default to be even worse than Britain's. In the UK, our credit rating is only maintained because everyone expects the Tories to win the next election and slash spending.

Monday, November 2, 2009 08:51AM Report Comment
 

3. inbreda said...

if the exporters are below break even doesn't that mean that they will either go bust or raise their prices? Either way the people they export to (us) are going to have to pay more for the goods right?

Monday, November 2, 2009 08:56AM Report Comment
 

4. drewster said...

inbreda,

Raising prices would put them out of business. Going bust is politically unacceptable, at least for the bigger companies. The only option left is cutting costs by giving all employees a 20% pay cut. That's Japan's deflationary problem.

Monday, November 2, 2009 09:14AM Report Comment
 

5. Alan Lubin said...

i guessed exactly who the author was before even clicking on the link.

Monday, November 2, 2009 10:00AM Report Comment
 

6. stillthinking said...

A debt based financial system seems to require debt held by productive workers, not government.

Japan has low taxes which can be raised, and dollar holdings. For all the chat, the yen is going up.

Monday, November 2, 2009 10:41AM Report Comment
 

7. Magol said...

article misinforms public. Japanese government net debt is far lower than gross due to substantial creditor/debtor positions between government departments. Net figure is more like 100% inline with many other nations

Monday, November 2, 2009 11:17AM Report Comment
 

8. mountain goat said...

Having national debt over 200% is a problem for Japan, but it does own $1 trillion of foreign reserves as well. Bloomberg

Monday, November 2, 2009 11:42AM Report Comment
 

9. drewster said...

mg,

Japan's GDP is $4.9 trillion. Their debt is 218% of GDP, so their debt is over $10 trillion. The $1 trillion pot of reserves only offsets 10% of the debt.


stillthinking,

Japan's tax take (27% of GDP) is similar to America's (28% of GDP). That's a lot less than the UK (39%) so perhaps they have more room to manoeuvre. (Warning: these stats are taken from Wikipedia, so may not be accurate or up-to-date).

Monday, November 2, 2009 01:17PM Report Comment
 

10. Soldintime said...

The 218% might be manageable at 1.3% interest what if it goes to 2% due to a rating change. It will start mounting quick. Yen has been stupendously strong before for it to come crashing down in a few months.

Monday, November 2, 2009 02:43PM Report Comment
 

11. Mw said...

The take home is that Japan must have a depression. Whether you "solve" the maths by dropping wages 20% or by increasing taxes by "x"% the effect is the same. Credit is taken out of circulation. If you default you can't rollover your next loan as it falls due .. same result.

The illusion of Keynes (and overleveraging) is that you can at no cost 'magic' effective capital out of nothing. "Don't reduce consumption, borrow or print".

The whole point of 'Keynes' is to smoothly manage necessary contraction not to maintain or regain the status quo. In the old days booms ended brutally, but with Keynes you can make it less traumatic.

We can't use government-borrow/print as a means to having 2007 without 2008 to follow. The whole current assumption that it will all work itself out (the way we'd like) is fantasy. There must now be depression. We've mis-learned the lesson of the 1930's. Maybe by the next GFC we'll get it right. But even group memory fades.

Friday, November 6, 2009 11:23PM Report Comment
 

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