{"id":93044,"date":"2016-07-18T16:08:13","date_gmt":"2016-07-18T20:08:13","guid":{"rendered":"http:\/\/countingpips.com\/?p=93044"},"modified":"2016-07-18T07:09:09","modified_gmt":"2016-07-18T11:09:09","slug":"japan-is-a-bankruptcy-waiting-to-happen","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/07\/japan-is-a-bankruptcy-waiting-to-happen\/","title":{"rendered":"Japan Is a Bankruptcy Waiting to Happen"},"content":{"rendered":"
July 18, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Japan<\/p>\n

Last week, Shinzo Abe won a big victory in Japan\u2019s Upper House elections, which\u00a0gives\u00a0him, together with the smaller Komeito party, enough of a majority to rewrite Japan\u2019s constitution.<\/p>\n

He has decided, instead, to first attempt to revive the Japanese economy with another \u201cstimulus\u201d program of 10 billion yen ($98 billion) in new public spending \u2013 a solution that will only worsen Japan\u2019s already-serious debt problem, and ultimately do nothing to revive Japan\u2019s economy.<\/p>\n

This \u201csolution\u201d will merely push the country closer to bankruptcy. It\u2019s no longer a question of if, but when.<\/p>\n

Falling From Great Heights<\/h2>\n

The Japanese economy was, for decades, the envy of the world. After a variety of missteps and mishandlings, it\u2019s now in sorry shape.<\/p>\n

The producer price index fell 4.2% in the year to June, driven down by the relentless rise in the yen, which is up some 15% against the dollar in the past year.<\/p>

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Thus, even with interest rates on 10-year bonds below zero, the economy is suffering high real rates of interest.<\/p>\n

Productivity growth is running at minus 2% per annum, and productivity levels are below those of 2007. And with a falling population, without a rise in productivity, it\u2019s impossible for Japan\u2019s output to increase.<\/p>\n

Trivial Pursuit<\/h2>\n

Since the financial crisis of 2008, productivity growth has been exceptionally feeble in all countries that have pursued zero-interest rate policies.<\/p>\n

Japan has been most aggressive in pursuing these policies, with the Bank of Japan purchasing assets at about $1 trillion a year, three times the size of Ben Bernanke\u2019s purchases at the height of the U.S. \u201cquantitative easing\u201d policy in 2013.<\/p>\n

Ultra-low interest rates and artificial \u201cstimulus\u201d of this kind are distorting the capital allocation process in Japan and elsewhere, preventing the normal productivity growth that comes from innovation and optimally allocated resources.<\/p>\n

Most dangerously, the Economist\u2019s<\/em> team of forecasters expects the budget deficit to run at 6.2% of gross domestic product (GDP) in 2016 \u2013 and public debt is in excess of 250% of GDP. GDP is not increasing and this is a substantial deficit, meaning that ratio can only spiral upwards.<\/p>\n

Risky Business<\/h2>\n

Only on two occasions in human history has a country\u2019s public debt risen to 250% of GDP without a debt default \u2013 both of which were at the end of major wars by Britain.<\/p>\n

On the first occasion, in 1815, the debt was worked down by rigorous government austerity \u2013 bringing the budget to full balance in only four years after the war ended \u2013 and a pro-growth set of economic policies that brought economic growth rates never seen before. This spawned the Industrial Revolution.<\/p>\n

The second such occasion occurred in 1945, when Britain brought its debt down by inflating the currency over a 30-year period, impoverishing its middle classes as it did so.<\/p>\n

Neither of these possibilities appears open to Japan.<\/p>\n

There simply isn\u2019t an Industrial Revolution awaiting it; Japan\u2019s productivity actually appears to be steadily declining.<\/p>\n

And while every government since the late 1990s has attempted to stimulate inflation, Japan\u2019s deflation appears to be getting steadily worse.<\/p>\n

Default on Japanese government debt thus appears inevitable.<\/p>\n

Abe could possibly help this problem by passing labor reforms, freeing up Japan\u2019s sclerotic labor market, but there isn\u2019t much evidence that even this would work \u2013 and in any case, Abe\u2019s previous attempt to pass such reforms went nowhere after vested interests opposed it.<\/p>\n

His stimulus package initiative of an additional 10 billion yen in government spending could perhaps bring the ultra-high speed train from Tokyo to Osaka forward from 2045 to 2037 \u2013 but it won\u2019t do much else.<\/p>\n

An extra 2% of GDP in government spending will accrue no benefit for over 20 years, and the cost will only be tacked on to the deficit \u2013 already the largest in the wealthy world \u2013 under the assumption that it will magically succeed where over 25 years of such Keynesian stimulus plans have utterly failed.<\/p>\n

Running Out of Options<\/h2>\n

Since 1990, Japan has suffered from ever-escalating government spending. Much of which has indulged infrastructure projects favored by rural areas and large construction companies that are major LDP donors.<\/p>\n

But Japan already has the world\u2019s best infrastructure, with much higher spending than comparable countries. Clearly, this isn\u2019t the solution to the problem.<\/p>\n

In the U.S., Britain, and other Western countries, the solution to the productivity problem is pretty clear: Push interest rates up to \u201cnormal\u201d levels \u2013 about 2% above the inflation rate \u2013 and eliminate the budget deficits that are too high everywhere.<\/p>\n

In the short term, this causes a recession. In the long term, it results in resuming productivity growth and slowing debt growth. Ultimately, this puts a country\u2019s economy on the road to healthy growth and a brighter future.<\/p>\n

However, this won\u2019t work for Japan.<\/p>\n

With the economy already in deflation, the scope for interest rate rises is limited.<\/p>\n

The real need is in balancing the budget, but this is improbable without pushing the economy into deeper recession and escalating Japan\u2019s debt-to-GDP ratio even further. Thus, even with a solid policy, there seems no way to escape Japan\u2019s economic nightmare.<\/p>\n

Japan\u2019s debt default is thus inevitable. It remains a question of \u201cwhen,\u201d not \u201cif.\u201d<\/p>\n

The main losers will be Japan\u2019s savers, who bought government debt under the impression that it provides an adequate haven for their retirement. This will spawn a major loss throughout the country and Japan will likely suffer a very deep recession and decline in living standards \u2013 similar to the U.S. Great Depression or Argentina\u2019s \u201cinfamous decade\u201d in the 1930s.<\/p>\n

What a pity for such a beautiful economy and society.<\/p>\n

Maynard Keynes has a lot to answer for.<\/p>\n

Good investing,<\/p>\n

Martin Hutchinson<\/p>\n

The post Japan Is a Bankruptcy Waiting to Happen<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com Last week, Shinzo Abe won a big victory in Japan\u2019s Upper House elections, which\u00a0gives\u00a0him, together with the smaller Komeito party, enough of a majority to rewrite Japan\u2019s constitution. He has decided, instead, to first attempt to revive the Japanese economy with another \u201cstimulus\u201d program of 10 billion yen ($98 billion) in new public […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-93044","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93044","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=93044"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93044\/revisions"}],"predecessor-version":[{"id":93070,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/93044\/revisions\/93070"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=93044"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=93044"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=93044"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}