Home—Blog—Wondering why Japan hasn’t collapsed yet? Here’s why
Jul 19, 2011, 02:39
Posted byMerryn Somerset Webb
Comments (6)
Now that so many countries are having their sovereign debts so carefully scrutinised, who will be next? Some are in no doubt. Jonathan Allum of Mizuho quotes Ambrose Evans-Pritchard on the subject.
His call? “The shocker will be Japan, our Weimar in waiting. This is the year when Tokyo finds that it can no longer borrow at 1% from a captive audience and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time.”
The “good/bad” news, says Allum, is that the article in which this quote appeared was published in The Daily Telegraph in January 2010. Since then, even as Italy has joined Greece, Spain and Portugal on the bond vigilante list of baddies, the yield on the benchmark ten-year Japanese Government Bond (JGB) has gone down rather than up. It was 1.335% then. It is 1.08% now.
And that has happened at a time when inflation has finally returned to Japan. In January 2010, headline inflation in Japan was -1.3%. Today it is 0.3%. Core inflation is 0.6%. So why haven’t JGBs collapsed and why hasn’t the yen gone with them? I’ve written here about the yen before. It's all about the fact that currency strength is relative, and about the fact that Japan is a substantial creditor nation to the world (Stratton Street analysis shows that it has Net Foreign Assets equivalent to 60% of GDP).
But a note from strategist Max King throws a little more light on the matter of JGB prices. The view that Japan is on the road to insolvency is, says King, “melodramatic”. Sure, its debt looks very high indeed. But add in government assets and it is instantly cut in half. It also comes on very affordable interest rates (around 3%) and is largely domestically owned.
And while it is true that domestic ownership will fall as the population ages, that “isn’t necessarily a problem”. Why? Partly because very low inflation means that the real yield on JGBs is actually relatively generous. Buy a benchmark ten-year bond in the UK and you’ll get a yield of 3.07%. With inflation at 4% or so that means you are making a negative real yield. Buy a Japanese ten-year at 1% with inflation at 0.3% and you’re making a real return of 0.7%.
And partly it’s because “for the central banks of China and other emerging economies, Japanese bonds look a lot more compelling than those of peripheral Europe or the US”. Note that China bought $16bn of Japanese bonds in April and another $6bn in May. The fiscal deficit will have to be cut at some point of course but, while few people believe it to be so, it is entirely possible that Japan will grow its way out of debt. Let’s not forget that in per capita terms Japan has grown incomes much faster than the US over the last decade (I admit this isn’t much of a hurdle but still…) and that it wouldn’t take much growth to push corporate tax receipts way higher.
How might it happen? For that you’ll have to read this week’s magazine. I’m editing the story today. It’s out on Friday. If you’re not already a subscriber you can get your first three issues free here.
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(19 July 2011, 09:14PM) Complain about this comment
Merryn, government debt is simply one form of savings for the private sector, home and foreign.Deficit spending is the endogenous outcome of private saving flows out of income in the home currency.To say Japan's savings are unique misses the point that the same national income accounting modern monetary mechanics work in every economy and truly sovereign floating rate fiat currency issuing government can't run out of money.Japan/UK; current account balance; 2.4/-1.8, private saving; 11.2/7.3 deficits are the sum of domestic and foreign savings; 8.4/9.1.Japan’s positive current account balance funds some of their domestic savings desires whereas the UK current account balance deficit leaks money from the economy so the deficit needs to be larger than private savings desires to fund total private savings...
(19 July 2011, 09:16PM) Complain about this comment
We agree we should look at the assets as well as debts. When interest rates are 3-4% the national capital assets needed to generate that income is 25-33 times the national income. Compare government debt of 1 or 2 times national income then debt is 2/25 to 1/33 that is 3 to 8% of national capital.Many people and companies have and service far higher debt levels than this without any trouble whatsoever, so why the panic, particularly when there's no need to borrow the many at all.
(19 July 2011, 09:18PM) Complain about this comment
Oops, many should read money...
(19 July 2011, 09:31PM) Complain about this comment
Interesting. I currently have about 12% of my net worth in Japan, with my Yen exposure hedged into Canadian dollars. Obviously I'm hoping that the Yen will weaken if one of the risks to the global economy causes double dip given how leveraged to exports the economy is (US slowing/banking crisis that usually reappears several years after balance-sheet recession, China slow-down, Eurozone blow-up, Middle-east instability, higher interest rates to tackle inflation). Moneyweek has indeed suggested shorting the Yen as a trade before so look forward to reading your thoughts.
(20 July 2011, 06:51PM) Complain about this comment
Just wanted to add a point thats individuals and companies can handle higher leverage, even up to ~3x ND/EBITDA for very high quality businesses, but thats because they have higher growth rates. Unfortunately real growth in the West is stagnant, although there has been a pickup I'd argue that Japanese growth remains pretty stagnant (more discussion on that point would be of interest to me ...) and this is why our debt-levels are stagnant. Bill gross of Pimco has just published something to this effect ('Mr Bond' as Nial Fergusson liked to call him in his interesting overview of the history of money ('The Ascent of Money').
(01 November 2011, 03:55PM) Complain about this comment
What if you could put on a position where you could have short exposure to the market but if the market went sideways or higher, you lost nothing? This is the dilemma I have been facing since trying to figure out a way to short JGBs. I may have found a solution for those interested in putting this trade on. Hated just buying puts and having them expire worthless. It is like buying insurance on a car that never wrecks. I think the car WILL have a wreck, but got sick of paying the insurance. I have heard the argument over and over about how the bond marke in Japan will NEVER go down because they finance from within. This is NOT a reasonable argument. There is only one buyer for this garbage. Once the one buyer stops buying, how on earth will Japan finance debt? Internal finance history is not a strength, it is a weakness. Happy to fade the bond market for what I think is a foregone conclusion..........Higher bond rates in the future.
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