Posts Tagged ‘Japan’

Japan, the next country to fall into sovereign debt crisis?

Tuesday, June 8th, 2010

We all know about how badly indebted the Greek government is. With its national debt at 115% of GDP, everyone sees Greece as a basket case.

If Greece is a basket case, what about the world?s second largest economy, Japan? It?s national debt is fast approaching 200% of GDP this year. It all began in the 1990s, as we wrote in Are governments mad with ?stimulating??,

In the 1990s, when the Japanese bubble economy burst and fell into debt deflation, its banks were crippled with bad debts. In the ensuing decade, the Japanese government embarked on massive government stimulus programs. Roads to nowhere were built and there were even comments about resorting to military spending (which of course was dismissed later as mere rhetoric because of neighbouring countries? sensitivities to Japan?s wartime past). When the first stimulus programs proved to have failed in its objective, a second and bigger one was announced. When that failed too, a third and bigger one was announced. Altogether, the Japanese government had embarked on 10 stimulus programs totalling 30 trillion yen.

For Japan, they are a nation of mighty savers. More than 90% of their government debt are owned by their citizens at pathetically low interest rates. That is the reason why the purchasing power of the yen had not gone down the drain- the Japanese government?s spendthrift ways are financed by the savings of its people.

But now, Japan is facing a problem. It?s population is aging fast and more and more retired/elderly Japanese need access to their savings (that they generously loaned to their government) as they leave the workforce. As this Bloomberg article reported,

?Japan?s inability to finance its debt sales domestically is approaching,? Kusano said. ?And when that time comes, you can?t expect foreign investors to accept Japanese debt with such a low coupon of 1.2-1.3 percent.?

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?If bond yields spike, Japanese financial institutions will take a heavy blow, shaking the nation?s financial system,? Kusano said.

We do not know when the financial wolf packs will turn their eyes on Japan. But you can be sure that hell will break lose when it happens, because Japan is the world?s second largest economy.

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Posted in Looking Forward | 4 Comments »

Currency crisis: UK, Japan and US

Tuesday, January 26th, 2010

Continuing from Currency crisis: first countries in the line of fire- PIIGS, we will discuss more on the next sequence of events to happen. As we said before, we are not ?predicting? or forecasting the future- what we are presenting is just a rough sketch of what may possibly happen.

After the PIIGS countries, the next country to be in danger of public debt default or currency crisis is the United Kingdom. At the current rate of deterioration of its public finance, the national debt of UK will reach 17% of GDP in 2010 and 100% by 2013. Niall Ferguson, author of the famous The Ascent of Money series, said

We?re not Iceland or Ireland, but we?re closer to them than we are to the U.S.

The reason why the UK is in a more vulnerable than the US is because,

The big difference between the two countries is that the U.S. issues the world?s No. 1 currency and is regarded, partly for that reason, as a safe haven,? Ferguson says. ?The U.K. used to be, but we?re not anymore. That means we have much more currency risk here.

Of course, this does not mean that the UK government will default or that the pound will face a currency crisis. But certainly, the risk is increasing as shown by the increase in price for the credit default swaps (CDS) of UK government debt. The time-frame for a currency crisis in UK is around the vicinity of 3 to 5 years.

The next country in the line of fire is Japan. We all know about the demographic time-bomb in the United States (see How is the US going to repay its national debt?). But Japan’s population is ageing earlier than the US. Worse still, they’re ageing at a time when their government debt is twice the size of their GDP. The reason why Japanese government debt could get so high in the first place is because Japan is a nation of savers. Currently, only 6% of their national debt are held by foreigners, whereas it is 57% for the United States. However, the problem for Japan is that as their population ages, their savings rate will have to fall. That implies that buyers of Japanese government debt will turn to sellers. That means that the Japanese government will have to look to borrowing from foreigners. Time-frame: say, 5-10 years time.

Finally, the next in the line of fire is the United States. We had already mentioned about them at How is the US going to repay its national debt?, Is the GFC the final crisis? and America?s balance sheet. The time-frame is around 10 to 12 years. Others believe it is 5 to 10 years time. That’s why President Obama is pursuing health care reforms. As he admitted on TV, if the US does not solve its health care issues, the Federal government will go broke (see Ladies and Gentlemen, the US Is Insolvent).

On that note, Australia is not in better position either. As PM Kevin Rudd warned recently (see Work harder to support ageing Australians: Rudd), Australia’s time-frame is around 15 years time onwards.

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Posted in Currencies, Looking Forward | 8 Comments »

Preserving jobs at all costs leads to economic stagnation

Sunday, May 24th, 2009

In Australia, one of the common political slogans we hear is “Jobs! Jobs! Jobs!” The objective of any politician to win votes is to find ways to create and preserve jobs, either through direct government stimulus spending or subsidies. In this respect, politicians here will have much to admire Japan. It is a country where the culture of lifetime employment is alive and well, with the government playing a major role in preserving it.

But, government interventions to preserve jobs as a sole end have a price to pay. To understand why, let’s revisit Are governments mad with ?stimulating??,

As long as the structural problems are not dealt with, the economic slump will not end. As we quoted Wilhelm R?pk?s 1936 economic classic at Overproduction or mis-configuration of production? in January 2008,

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean. Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced.

The root of the global economic crisis is the structural imbalance between production, consumption, and real capital investment. Government policies to preserve jobs as a sole end without plans to address the structural imbalance will undermine the future competitiveness of the nation.  As this article showed an example from Japan,

When the sheet metal orders coming into his small business, High Metal, fell by half last October, it never occurred to Masaaki Taruki to lay off his workers.

Instead, he set about brainstorming new projects to occupy them. An indoor vegetable garden? A handicrafts workshop?

Because of government subsidies, Mr. Taruki in the last three months installed rows of parsley, watercress and other plants, using factory space that has been empty since the company disposed of unused machinery. High Metal?s staff tend the sprouts religiously, topping up the water supply, adding fertilizer and adjusting the fluorescent lights.

When sales at the machinery maker Shinano Kogyo in central Japan plunged some 70 percent late last year, the company started dispatching its idle workers to sweep the streets and pick up trash in the wider community, while remaining on the payroll.

Such workers’ paradise in Japan must be the dream of politicians. But there’s a nightmare to such a dream,

Companies slash wages, which reduces consumer spending. Businesses become more reluctant to take on new recruits, shutting young people out of the labor force. And productivity plummets, hurting Japan?s competitiveness in an increasingly aggressive international market.

?By helping to maintain excess employment, you face the risk of keeping alive businesses that are no longer competitive, and perhaps whose productive era is over,? said Hisashi Yamada, an economist at the Japan Research Institute, a private research group in Tokyo. ?This could hurt employment in the long run. What you need is more structural change.?

Very unfortunately, in the context of an economic downturn, maintaining employment, and promoting structural change in the economy are opposing goals in the short-term. Structural changes involve creative destruction, which results in loss of jobs and rising unemployment. In countries with excessive private debt levels (e.g. US, UK, Australia, Spain, Ireland, etc), such changes are so painful that any long-term benefits for the economy are currently incomprehensible. But without structural changes, the economy cannot remain competitive and return to a sustainable growth path. If a country loses its competitive edge, the standard of living of its citizens will decline.

In Japan, the result of such lack of courage is economic stagnation for 15-16 years. Today, Japan has fallen into a depression that is the worst since the Great Depression.

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Posted in Market Observations | 15 Comments »

Are governments mad with ‘stimulating?’

Thursday, March 26th, 2009

In the 1990s, when the Japanese bubble economy burst and fell into debt deflation, its banks were crippled with bad debts. In the ensuing decade, the Japanese government embarked on massive government stimulus programs. Roads to nowhere were built and there were even comments about resorting to military spending (which of course was dismissed later as mere rhetoric because of neighbouring countries’ sensitivities to Japan’s wartime past). When the first stimulus programs proved to have failed in its objective, a second and bigger one was announced. When that failed too, a third and bigger one was announced. Altogether, the Japanese government had embarked on 10 stimulus programs totalling 30 trillion yen. Today, the Japanese government’s debt is greater in size than the entire GDP!

Fast forward to today. The Global Financial Crisis (GFC) had prompted many countries to embark on major stimulus programs. This time round, most of the largest economies are doing the ‘stimulating’- US, UK, Japan (again) and China. The Europeans, on the other hand, are shying away from that. Here, in Australia, our government is also doing the ‘stimulating.’

One of the Einstein’s definition of madness is: continuing to do the same thing, hoping for a different outcome. So, it is pretty clear to us that madness is prevailing.

The root reason why all these stimulation will not work is that we have a structural problem in the global economy. Stimulus spending will not solve the structural problem. As long as the structural problems are not dealt with, the economic slump will not end. As we quoted Wilhelm R?pk’s 1936 economic classic at Overproduction or mis-configuration of production? in January 2008,

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean. Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced.

Today, governments see the same thing and simplistically believe that aggregate demand is less than aggregate supply. Therefore, the solution, as they understand the crisis to be, is to ‘stimulate’ the economy in order to boost aggregate demand. But as we explained before in Overproduction or mis-configuration of production?, this idea is fallacious.

The whole point of an economic crisis is to correct the structural flaws in the global economy and clean out the wasteful mal-investments. But government bailouts and stimulus are interfering with the correction process. Therefore, this global economic malaise will be prolonged much longer than necessary. If governments go over the top with ‘stimulation’ that don’t work, the outcome will be hyper-inflation (see Supplying never-ending drugs till stagflation).

For our newer readers, we recommend that you read our guide, What causes economic booms and busts?.

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Posted in Economics/Finance, Looking Forward | 4 Comments »

Business setbacks in the land of the Rising Sun

Sunday, December 14th, 2008

We quoted Marc Faber at Is the Warren Buffett way dead?:

Above I tried to show the existing connectivity between global liquidity (coming from the US current account deficit), asset markets, and currency movements. To navigate successfully between all these volatile and often unpredictable market movements you need to be a genius.

As we explained before in Real economy suffers while financial markets stuff around with prices, volatile movement in prices in the context of market movements will have tangible impacts on the real economy. One of the market movements is currency flow. Over the past few months, there had been a flight towards the US dollar, which in turn had a flight towards the Japanese yen through the reversal of the yen carry trade (we first mentioned the carry trade in Another source of potential financial crisis?reversal of yen carry trade). These currency movements resulted in a rising US dollar relative to all the other major currencies (except the yen) and the rise of the yen relative to the US dollar. Indeed, over the past 3 months, the US dollar had depreciated around 17% against the yen.

The rapidly rising yen is wrecking havoc on the Japanese export sector, which in turn has a serious effect on the Japanese economy. For example, as this news article from the Asahi Shimbun reported, Toyota budgeted a yen exchange rate of around 100 yen to 1 US dollar for the second half of this fiscal year to March next year. But for every 1 yen that appreciated against the US dollar, Toyota loses 400 billion yen of income per year. This unexpected appreciation of the yen is a setback for Toyota. Other Japanese export companies are finding themselves in the same predicament.

Japan was finally climbing out of the 18 long years of economic stagnation when the GFC struck. Now, they are falling back into the hole again. Looks like the Japanese are in the same boat as the Chinese with regards to their export sector.

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Posted in Market Observations | 10 Comments »

Will RBA’s cutting of interest rates help?

Sunday, October 26th, 2008

Recently, Associate Professor Steve Keen made the prediction that interest rates in Australia will be cut to zero by 2010. As this news article reported,

University of Western Sydney associate professor of economics and finance Steve Keen is radically bullish on interest rates, predicting a 2% cash rate by the end of 2009, dropping to 0% in 2010.

Dr Keen said the RBA would become more concerned about high household debt levels than inflation, as deep rate cuts in 2009 failed to stimulate the economy.

”The debt bubble is bursting and when it bursts, people stop spending and borrowing,” he said.

Investors should realise is this: if interest rates is ever cut to zero (i.e. Zero-Interest-Rate-Policy or ZIRP), it will not be good news for the economy. It will reflect the complete failure and impotence of monetary policy in regulating the ‘temperature’ of the economy. In other words, to arrive at ZIRP, it means that the economy is in a very serious trouble.

Japan fell into ZIRP in the 1990s. As we all know, the malaise in the Japanese economy lasted 16 to 17 years before a glimmer of hope was seen at around 2003. Today, due to the global credit crisis, they are falling back into the recessionary hole. With interest rates at 0.5%, they have no more room to cut further.

One thing that is different about the Japanese economy from the Australian/UK/US economies is that Japan had a relatively high savings rate. During their lost decade of the 1990s, the Japanese drew on their savings and retreated to their economic bunkers as their economy and asset prices contracted year after year.

In contrast, Australia/US/UK today have no savings and are heavily indebted.

If the RBA cut interest rates further, it will be in reaction and anticipation to Australians closing their wallets, cutting up their credit cards and shunning debt. As we explained before in Will Australia?s own pump-priming work?, all we need is for Australians to stop borrowing in order to induce a deflationary force of $250 billion. This deflationary force alone will wreck havoc to many Australian businesses, which in turn will wreck havoc to the employment market. Once mass unemployment appears, a lot of prime debt will become sub-prime debt. When debt becomes sub-prime, cutting interest rates to zero will not help.

Dangling pornography in front of a dead man will not induce him to open his dead eyes. Likewise, the RBA dangling free credit to banks (i.e. ZIRP) will no longer induce banks to lend because of the pervasive fear of bad debts. To understand this, we highly recommend that you read What makes monetary policy ?loose? or ?tight??.

Currently, Australians are voluntarily shunning debt (as shown by the rapidly decelerating rate of credit growth) as banks are still willing to lend money (although lending standards are tightening). When this voluntary action crosses over to involuntary, it will be the day when the deterioration will accelerate.

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Posted in Economics/Finance, Looking Forward | 12 Comments »

Another source of potential financial crisis?reversal of yen carry trade

Monday, February 19th, 2007

Interest rates in Japan had been zero for many years. It was only until recently that it had risen to only 0.25%. Such an unusual financial phenomenon sparked an interesting money-making opportunity?the yen carry trade. Basically, in a yen carry trade, you borrow money in Japan (where the interest rate was zero and is now 0.25%) and lend in countries with much higher interest rates. The interest rates differential makes up your profit. There are many ways to play with the yen carry trade. The most conservative way is to invest the borrowed money in US Treasuries. No doubt, there will be some hedge funds who want to achieve higher but more risky returns by investing in more risky assets such as stocks and Shanghai real estate.

What is the risk with this kind of strategy? Well, this strategy counts on the exchange-rate of yen not rising. A rising yen can wipe out your interest rates differential profits, even possible resulting in losses. Thus, the next crucial question is: what can result in an appreciation of the yen? For 16 years, Japan lived under the threat of deflation and economic malaise?that is the reason why the Japanese central bank made its money as cheap as possible (i.e. zero interest rate) in an attempt to counter such an economic threat. It is only until recently that the first lights of economic recovery can be seen. At this point in time, the Japanese economy is still dependent on exports to grow, which means that they have an interest to keep the value of yen low.

What will happen if the Japanese economy finally makes a confirmed recovery back into normality (there are signs that the Japanese economy may be recovering?read this report)? We can bet that Japanese interest rates will rise, thus putting a squeeze in the carry trade profit margins. More importantly, it means that the Japanese are finally willing to allow their yen to appreciate. Any appreciation of the yen will result in massive reversal of the yen carry trade, which in turn will trigger further appreciation of the yen, resulting in a self-reinforcing feedback loop. The danger right now is that a massive amount of yen are being borrowed (some experts says it is worth a trillion dollars), which in effect is a gigantic bet that the yen will not rise. A disorderly reversal of the yen carry trade will almost certainly mean that there will be losses in terms of billions of dollars, triggering yet another financial crisis. We will then see the collapse of many hedge funds.

The bad news is: This is just the beginning.

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Posted in Looking Forward | No Comments »