Sovereign debt crisis case study: Japan

[Ferrus]

http://www.ft.com/cms/s/0/8c72d612-3025-11df-8734-00144feabdc0.html

Interesting analysis of the Japanese situation, and how it differs to Greece's woes.

[Qfwfq]

may jou post the article for unregistered users?

[Ferrus]

may jou post the article for unregistered users?
I can't yet. I didn't realise work had a subscription, which I don't have at home.

[Oso Mocoso]

Here, I've got a subscription to FT --

Japan's mythical debt crisis

How did the people who sighted the first black swan respond to the shock? After the collapse of the assumption that all swans were white, did they then conclude that swans could be any colour – red, green, or blue?

That's the kind of mistake that investors may be making now. Anyone who lived through the trauma of the global credit crisis will be psychologically primed for financial armageddon for years to come. Hence the appeal of huge “end times’” macro stories like the demise of the dollar, the break-up of the euro, and – most recently – the implosion of Japanese public finances.

The rationale for a Japanese debt crisis is clear. This year, for the first time ever, the Japanese budget will be more reliant on bond issuance than tax revenues. The ratio of Japan’s gross government debt to GDP has breached two hundred per cent. A Godzilla-sized rollover of Y210,000bn – equivalent to the entire public debt of Italy – will take place over the next twelve months. Challenging arithmetic, to say the least.
The ratings agencies have already sounded the alarm, with S&P delivering a downgrade of Japanese debt in January. Celebrated investors and academics are forecasting meltdown, and one excitable financial journalist has described Japan as “our Weimar in waiting.”

The only people who seem relaxed about Japanese public finances are the supposed vigilantes of the bond market.
So far this year, while sovereign debt fears have spooked the European markets, JGB yields have been comfortably quiescent in the 1.2-1.4 per cent range. Only rarely and briefly in the past decade have they drifted above 2 per cent.
Far from the next Lehman or the next Greece, the market is rating the Japanese government as the best credit on the planet. Indeed if Sidney Homer’s classic “History of Interest Rates” is any guide, Japanese government debt commands the lowest interest rate since Babylonian times.

There are only two possible explanations for this extraordinary divergence of views, both of them disturbing. Either the Japanese bond market is simply wrong, or our understanding of debt crises is flawed.

We know only too well that markets can be wrong, but developed country government bond markets are supposed to be sober affairs, and ten years is a long time for a mispricing to persist.]
In fact, ever since the bursting of Japan’s 1980s bubble, there has been an inverse relationship between the debt to GDP ratio and bond yields – the more bonds the Japanese government sells, the easier the terms it gets.

The buyers of these bonds – deleveraging corporates, de-risking financial institutions, individuals turning their backs on equities and real estate – are hardly speculators. They have sound reasons for the choices they made. Not least is the fact that deflation – which is understated by Japan’s outmoded CPI calculations - generates an invisible tax-free gain to holders of cash and bonds.

What this suggests is that debt dynamics are more mysterious than we thought. There is no magic debt-to-GDP ratio that leads inexorably to a crisis.

The eurozone’s sinners got into trouble with far lower ratios - sub-50 per cent in Spain’s case – than Japan. What matters is the financeability of any given level of debt, which in turn depends on the availability of savings and the preferences of the savers.

Over the past twenty years, Japan’s private sector has not just been financing the home country’s bulging public deficit but a considerable proportion of the US’s public deficit too.

The fact that Japan’s savings surplus is now concentrated in the corporate sector rather than the household sector doesn’t matter. With capacity utilisation so low, Japanese companies will be restraining capital investment for years – which means their cashflows will pass to other sectors of the economy via dividends and financial asset purchases.

So does that indicate everything in Japan is hunky dory? Far from it. Japan’s cellar-dwelling bond yields are a product of the deflationary disease that has been gnawing away at the economy’s vital organs. While deflation, persists the debt to GDP ratio is destined to go ever higher.

Bizarrely, Japanese policy-makers have been more concerned with minimising the current interest rate on public debt than reflating the economy and generating higher tax revenues and lower social costs over the long haul. At some point they will have to reverse strategy, and when that happens bond yields will rise.

Far from portending imminent doom, that would signify that Japan’s journey back to economic health had begun. And that really would be a green swan event.

[Skinart]

This is slightly OT, but all the apostrophes in that article are printing as �€™, and there is a �€ before each ending quote. I was wondering if I am alone in this, is there a fix other than cut-n-paste and editing it myself (or Oso going in and cleaning it up, assuming it is visible for others), because while the article is legible, those stray marks break up the flow a bit and make it more difficult to read than it needs to be.


On topic, I can't help remembering: "Japan already went bust". I am keenly aware of it as it significantly effected my life. I lost a shift differential and the ability to pay bills and buy food.

So, it doesn't surprise me that a decade or so later, they would be slowly recovering, or that they would be engaging in practices that make them appear a robust creditor.

[Oso Mocoso]

Hmm ... I tried to clean up the text a little.

Now the text layout looks oddly formed, but the strange characters are no longer coming up when I view the post. I think that's all I'm going to do. If you want to see the article in its full beauty the way FT displayed it originally, you can sign up for a free account over there.

[repo_man]

My sources indicate that Japan's "200% gross government debt to GDP ratio" is a misunderstanding. Japanese governament departments lend money to each other; when Department A borrows $100 from the market and lends it on to Department B, it shows as $200 increase in "gross government debt" when a meaningful number would be just $100.

The same sources indicate that a correct apples-to-apples ratio for Japan's debt to GBP is somewhere around 100%.

[Ferrus]

Even so I think it is an excellent example of how ramified the economic system is, and how blanket mathematical models or metrics do a poor job of tapping into its subtle processes.

[avolkiteshvara]

Didn't Kendo post something about Japanese homelessness and not wanting to make it public. Interesting to see how that correlates w/ intentional deflationary moves.

[ACow]

The article has a lot of lines that no sane person actually should believe...

Who thinks bond markets are sober?
Who thinks understanding of the debt crisis by most wasn't, and still isn't, flawed?
Who thinks 10 years is a long time for "mis-pricing" to persist?

You know, there's something that really shits me about economists and economics in general. They've just got such stupid blinkers on and just continue to print and practice sheer nonsense. Its like living in a bubble.

Its like the line "no one saw the financial crisis coming!" that gets printed all the freaking time, which is clearly why the magazine "THE ECONOMIST" had several articles on how assets and houses were overvalued, were going to crash, with severe repurcussions.

/next they'll be telling me that asset bubbles can't be detected until after they've popped...
//oy vey....