Friday, May 27, 2011

Japan's Fiscal Woes


Interesting piece in today's New York Times about Japan.

I wanted to post it because it presents a good counter-argument to my semi-bullish comments earlier this week about the Japanese stock market.

(Let it be noted that Random Glenings tries to look at all sides of an issue!)

While most of the talk in the United States naturally focuses on our fiscal debt woes, Japan's are in some way even worse.

Ever since the Japanese bubble burst in the late 1980's, successive Japanese governments have attempted to reinvigorate their economy through massive fiscal stimulus packages.

Unfortunately, these attempts have been largely unsuccessful, but the debt burden continues to grow.

You wouldn't know it from Japanese interest rates. The 10-year Japanese government bond yields around 1.1%. With Japan trapped in a deflationary spiral, any sort of positive return is attractive to investors.

In addition, Japan is a country of savers. Unlike the U.S. - where spending and credit are viewed as a birthright - the typical Japanese citizen reacts to a slower economy by saving more. 95% of the Japanese fiscal debt burden is held by Japanese citizens, which makes it less vulnerable to outside creditor pressures.

Today's article suggests that this might begin to change:

...the numbers are frightening, especially given Japan’s lack of political leadership around fiscal issues. Government debt stands at about 1,000 trillion yen ($12 trillion), with gross borrowings of around 200 percent of gross domestic product. The productive means to pay off those liabilities are shrinking as Japan’s average age creeps toward 50. Thanks to scant immigration, the country also loses one million people a year.

Could Japan’s Debt Lead to a Crisis? - NYTimes.com

The article goes on to describe a scenario where the Japanese might need to start relying on foreign capital to finance its debt. This in turn could force interest rates higher, and push the Japanese fiscal deficit even higher.

As the Times notes:

If non-Japanese creditors demanded higher yields to compensate for low growth, the country’s dependence on short-term borrowing would quickly lead to spiraling debt service costs. Even a 5 percent haircut on government debt would equate to $600 billion.

Few have pockets that deep. Europe’s resources are tapped out on its problems. America is struggling, and would be even more so if Japan dumped the almost $1 trillion in United States Treasuries that it holds. The only sizable pool of capital available would probably be Chinese.

Sobering thoughts.