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>
> I think this is a very serious problem for US beyond the impact it
> might have on global markets. If we can do Japan we can do well with
> a large number of US companies, banks, financial institutions and
> even various funds.
> The Japanese debt disaster movie
>
> By Peter Tasker
> Published: January 27 2011 12:27 | Last updated: January 27 2011 12:27
> Standard & Poor’s downgrade of Japan’s credit rating raises a
> disturbing prospect. Is this stage two of the global credit crisis,
> featuring a chain of sovereign defaults among the largest economies?
>
> No less a figure than Kaoru Yosano, Japan’s new minister for
> economic and fiscal affairs, seems to think so. “We face a dreadful
> dream,” he told the Financial Times last week.
>
> EDITOR’S CHOICE
> S&P downgrades Japan on debt worries - Jan-27
>
> Lex: S&P downgrades Japan - Jan-27
>
> Forex traders send yen tumbling - Jan-27
>
> S&P move holds silver lining for Kan - Jan-27
>
> Japan hits ‘critical point’ on state debt - Jan-20
>
> Japanese exports surge 13 per cent - Jan-27
>
> After the disasters of 2008, such fears are understandable, but
> misguided. The risk is they lead to policies that, far from solving
> the world’s economic problems, make them a whole lot worse.
>
> The case for the prosecution is simple. Japan’s ratio of government
> debt to gross domestic product is above 100 per cent and shows no
> sign of declining. The political system seems gridlocked, with a
> succession of uninspiring leaders coming and going with bewildering
> rapidity.
>
> On this reading, Greece and Ireland were just the hors d’oeuvre. The
> main course is yet to come. Japan is still the world’s third-largest
> economy, and the aftershock from a bond market crash would be like
> the fall of Lehman cubed.
>
> But a key piece is missing from this picture. Unlike the
> spendthrifts of euroland’s periphery, Japan is entirely self-
> financing. The state may be in deficit, but the cash-rich private
> sector saves enough to cover domestic needs and in addition to
> export capital equivalent to around 3 per cent of output every year.
> The result is a vast nest-egg of overseas assets.
>
> In this respect Japan resembles not Greece or Ireland, but another
> small European country. Belgium has sported a government debt-to-GDP
> ratio of more than 100 per cent for the best part of two decades. At
> the same time, it has been in current account surplus year after
> year, 2008 excepted.
>
> Citizens of deficit countries such as Greece , Ireland and Portugal
> – or indeed the US and the UK – are in the reverse position. They
> must pay dividends and interest to foreigners, including Belgians
> and Japanese, who own their liabilities.
>
> Furthermore, Japan’s budget deficit is caused, not by heavy
> government spending, but by steady erosion of the tax base due to
> the long years of deflation. Income, corporate taxes, asset taxes,
> estate duties – all have suffered.
>
> But surely such dizzying levels of government debt are
> unsustainable? If so, nobody has told the markets. As Japan’s
> government debt has snowballed, the interest rate demanded by
> investors has fallen ever lower. Last year as yields on Greek debt
> soared into double digits, Japan’s 10-year bond yields plunged to a
> paltry 0.8 per cent.
>
> Rather than a “dreadful dream”, Japan’s leaders face an enticing
> reality. They have the opportunity to issue more and more bonds at
> the lowest interest rates seen since the Babylonians invented
> accounting.
>
> The smart move would be to copy Britain’s funding of the Napoleonic
> wars and issue perpetual bonds. That would make explicit what
> everyone knows. Government debt is never going to be “paid back” –
> just rolled over ad infinitum. As long as the interest payments can
> be comfortably serviced, no problem need arise.
>
> The way to ensure this happens is not by demand-shrinking austerity
> measures, but by durable economic growth – which requires a
> combination of monetary and fiscal stimulus and structural reform. A
> higher consumption tax, Mr Yosano’s favoured remedy, would probably
> mean less consumption. This is what happened in 1997, in spite of
> the finance ministry’s Polyanna-ish view that consumers would be
> enthused by fiscal rectitude and go on a spending spree. Instead, a
> deep recession eroded tax revenues further and left an even bigger
> budget deficit.
>
> What about Japan’s political instability? Again, Belgium has been
> there and got the T-shirt. In both 1978 and again in 2007, the
> country’s post-election stalemate meant no government could be
> formed for six months. There was no obvious damage; life went on,
> and the beer and frites tasted as good as ever. Perhaps Belgians’
> low expectations of their leaders is a more mature attitude than the
> cycle of hyped-up “change” and inevitable disillusion seen elsewhere.
>
> The reality is that in ageing, high-saving countries like Japan and
> Belgium there is consistent demand for low-risk financial assets
> such as government bonds. Private-sector assets and public-sector
> liabilities are two sides of the same Godzilla-sized balance sheet.
>
> Upsetting this delicate equilibrium could have dire international
> consequences. If major surplus countries squeeze domestic demand,
> there is no hope of righting the global imbalances that contributed
> to the credit crisis. More trouble will follow.
>
> With the deficit countries having used most of their policy bullets,
> the next phase is likely to feature protectionism, a rollback of
> globalisation and a rise in nationalist and nativist political
> movements – a prospect as stomach-churning as a sushi waffle.
>
> Japan needs to forget about the views of the credit agencies, which
> have not had a terribly good track record recently, and concentrate
> on exiting deflation. That’s the only way to wake up from Mr
> Yosano’s “dreadful dream”.
>
> The writer is a Tokyo-based analyst with Arcus Research
>
>