Why the Japanese state is more solvent than you think

Nov 16, 2011, 03:59

Merryn Somerset Webb

Posted byMerryn Somerset Webb

Share with
friends:

Comments (7)

Is Japan bust? Will it be the next Greece? The next Italy? I looked at this very briefly last week (How the euro-crisis could affect your investments) but I think the answer is a pretty clear no. There is a view that it won’t be long before Japan - rather like Greece - buckles under the weight of its enormous debts and defaults via a huge money printing splurge. The result will be hyper-inflation and the total collapse of the Japanese economy. This is, of course, perfectly possible.

After all, Japan’s gross debt is running at around 200% of GDP (yikes), it barely raises enough in tax revenues to cover its financing expenses and at some point, that problem is going to have to be confronted. However, the first thing that makes it less possible than the bald number suggests is that Japan’s net debt is only around half that. Nicholas Smith of CLSA (who does not think that Japan is remotely bust) notes that the asset side of Japan’s balance sheet has a lot going for it.

It has huge foreign exchange reserves, but it is also home to the world’s biggest bank – Japan Post, an organisation that is “bigger than the world’s four or five biggest banks put together.” And Japan Post isn’t the only vast state asset that could easily be sold to pay down debt. There is also Japan Tobacco (which is 50% government owned), NT (33%), Inpex and the Tokyo Metro. It all adds up to a tidy sum - one that could provide a relatively large sum of cash to stave off an immediate disaster.

However, Japan has several other avenues open to it. A senior Japanese banker told me earlier this year that all the country really had to do was double consumption tax and disaster would be averted. The general view is that wouldn’t work - that it would push consumption down too far too fast (as it did back in 2007). But as Japan’s consumption is about as low as one can expect in a developed country, that’s far from a given. Consumption tax in Japan is 5%  - that’s amazingly low in international terms. That said, there are probably easier ways for Japan to increase tax revenues.

Then there is corporation tax. This is very high in Japan - 40%. But it also demonstrates one of the truisms of tax: make the rate too high and no one will pay it. Japan has one of the lowest corporate tax takes in the OECD - despite the fact that corporate profits regularly hit new highs. And the percentage of firms that don’t pay any tax? 75%. That’s partly because so many profitable companies don’t pay at all (is it a coincidence, asks Smith, that “small companies just happen to be the biggest source of political donations for almost all factions of most parties?”).

But it is also because the banks, pressured not to create bankruptcies, are keeping hordes of the "small company undead” going when they should be shutting them down. So companies with no ability to make economic returns are “clogging the arteries of corporate Japan”, says Smith. They need to go, leaving space for Japan’s many great companies to get on with making great returns.

So what should Japan do? Crack down on avoidance and evasion; dump zombie companies; and lower the corporate tax rate to encourage compliance - 25% would make it competitive in Asia. Better that more pay less and that an environment in which economic growth is possible is created.

Finally, Japan can, just as we should in the UK (see this week’s magazine), have a go at cutting its spending properly. Its pension system was put together post-war. Life expectancy was 65. People also retired at 65. It wasn’t an expensive system. Now Japanese men live to 80 and women to 87 and it is an expensive system. Hike the retirement age to 70 or more and not only do you cut the cost of pensions but you up the size of the workforce (useful in itself given Japan’s shrinking population). Japan has defaulted once in its history - in 1942. It has no need to do so again. Britain, by the way, has not defaulted on its debts in over 200 years.

 

Comments (7)

Published in Blog More articles by Merryn Somerset Webb

Share with
friends:

Related articles

Comments

Leave a comment

  • 1. mike

    (17 November 2011, 03:10AM)  Complain about this comment

    Hi, you mention in your article that "And the percentage of firms that don’t pay any tax? 75%. That’s partly because so many profitable companies don’t pay at all".

    Would you please provide a link to your source claiming that 75% of companies don't pay taxes? Also, if you could explain how it is that the profitable companies don't pay any taxes *at all* (ideally, with any sources you have as evidence), that would be useful.

    Many thanks

  • 2. Boris MacDonut

    (17 November 2011, 10:21AM)  Complain about this comment

    Good article Merryn. You do not mention Japan's strong manufacturing and high tech base. Japan still makes stuff the rest of the World wants to buy. Also it's people tend to save , not borrow, so they have lower consumer debt.
    Both of the above also apply to Italy. I have been struck over the years just how similar Japan and Italy are at least culturally. I was recently told there are 220,000 Italians living in Japan and a vice versa. It is one reason why I am convinced the current worries over Italy are wrong in part. The Markets should look at Spain and to some extent France as less able to cope with their debts.

  • 3. bob

    (17 November 2011, 02:24PM)  Complain about this comment

    Is it just me or does MW seem to shift ever further towards the get-rich-quick, trashy end of the financial publication spectrum.

    Whilst I used to buy the mag regularly and often find the articles excellent, I've found my interest waning of late when I see the boiler room trash which turns up in my inbox, the obsession with house prices and sentences like this at the end of a blog entry:
    "We're giving away a gold coin, a sovereign to be precise, worth around £284. All you need to do is like MoneyWeek's Facebook page ........ " Does anyone over twelve have a Facebook anyway?

    Or perhaps I should shut up cos I've made a bob or two from their tips over the years, SSE, GXDX etc..




  • 4. Jack Adams

    (17 November 2011, 06:43PM)  Complain about this comment

    Japan, as Merryn well knows, is a very different culture to ours. You cannot underestimate how powerful it is to have a population who believe in the supremacy of their culture. This has allowed the society's elders (silvers) to save with vigour in institutions which pay an interest rate which has to be a penalty rather than an incentive.

    Over the last two years I have convinced my mother-in-law that her money in the Post Office Savings account was better contained in the yellow metal. This took time because her deeply conservative nature thinks first about security. As a woman who survived the Tokyo fire storm by sitting in a canal for a night at the age of 11, tenacity is ingrained.

    I comment on these issues here because if you do not understand them then, in my opinion, you do not understand the Japanese market.

  • 5. Jack Adams

    (21 November 2011, 03:40AM)  Complain about this comment

    Merryn, I am an admirer of your writing and insight. There, I have said it. The point about Japan is that it is a different mindset. You know this and, as I spend a minimum of 10 weeks a year in Tokyo, I know that. people writing and equating what is happening in Europe with what has happened in Japan simply do not know what they are talking about in my opinion.

    The belief system which underlies the culture operates structurally different paradigms of social behaviour than those which operate in Europe. This directly impacts on the economic performance of the society and how it deals with challenges.

    To use an old worn out analogy, we are talking chalk and cheese and anyone who tries to tell me that chalk is cheese is usually talking about Japan and is almost certainly ignorant of everything that is Japan.

    "Well of course Japan is just a subservient culture to America." CEO of multinational speaking with me in Shibuya February 2011.

  • 6. JC

    (02 January 2012, 02:18PM)  Complain about this comment

    I would encourage any of you who have an opinion on japan to check out the views of kyle bass(just go on you tube) and then form your own opinions!!
    would be interested in hearing your views especially Merryn's!!!

  • 7. Tres

    (17 January 2012, 02:30PM)  Complain about this comment



    Sell the Japan Post to raise assets in the face of a credit crisis? Do you know what the largest asset of the Japan Post is? The largest asset of the Japan Post is Japanese Government Bonds. If (when) the Japanese Government Bond market starts falling apart, then who would the government sell the Japan Post to? Japan is stable? Is that why they change Prime Ministers like I change socks? The situation in Japan is actually far WORSE than in Europe.

    Jot this down somewhere so you won't forget it. YOU CANNOT SPEND MORE THAN YOU TAKE IN. Individuals cannot do it. Companies cannot do it. Governments cannot do it.

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>