The US stock market hit another post-crash high on Friday and it got me thinking not of America but of Japan – one of America’s giant creditors. As the US stock market has been rallying, the Japanese yen has been collapsing. Why might this be?
This time last year, Japan was struck by a tsunami, which shook the country to its very core. Japan flirted with a nuclear disaster as the Fukushima reactor melted down. It is now known that the Japanese interior ministry toyed with the possibility of having to evacuate Tokyo – such was the scale of the threat to civilised life in Japan.
In the end, maybe the lasting lesson of the biggest nuclear near-miss the world has ever seen might be an appreciation of the inherent safeness of Japan’s nuclear reactors. After all, if a nuclear reactor can be hit by an earthquake and a tidal wave and still be controlled by the engineers, it suggests that these installations are pretty robust.
As Japan came to terms with the tsunami, many people also looked anew at the Japanese economy, particularly because the path taken by the rest of the world since the crash has mirrored the road map given by Japan, as it tried to recover from its massive property and credit crash in the early 1990s.
Japan was the first to do quantitative easing; it was the first to expand its central bank’s balance sheet massively and print money. It was the first to engage in real Keynesian counter-cyclical fiscal policy. It was the first to ramp up government spending in the face of a recession. Now its government debt to GDP ratio stands at 225 per cent – by far the highest in the world. In short, Japan is the leading indicator as to how countries tackle debt-induced recession.
It is also the economy which maintained enormous exports throughout its domestic slump and this keeps the economy and its brilliant companies ahead of the rest of the world in all sorts of manufacturing fields. And crucially, in terms of financing, the Japanese have kept long-term interest rates at extremely low levels for nearly a decade and a half, despite the stock of debt skyrocketing.
When you look at the policy of the US and Britain and the EU, some, if not all, parts of the Japanese mix are being used. The EU baulks at the government spending side to the Japanese mix, as does Britain, but on the monetary side the response is identical.
In the US, the mix is more or less identical, except that in Japan they don’t have the constant wrangling between congress and the president over policy.
It is crucial, too, for Ireland to appreciate what happened, because Japan experienced what economists term a ‘balance sheet recession’. This is what is happening here.
The Japanese bet the house on property and lost. So on one side of the balance sheet, Japan had property that was falling in value and on the other side, they had debts, which remained the same.
So Japan was bust.
Its banks were also bust because they were, like the Irish banks, up to their necks in rubbish. Therefore, the people started paying back their debts, if they could. So they were in no mood to spend. The saving ratio rose. Equally, the banks were nursing their broken balance sheets so they were in no mood to lend out money.
The Japanese economy was caught in what Keynes described in the Great Recession as a “liquidity trap” whereby, irrespective of how low the rate of interest went, if people didn’t want to borrow and banks didn’t want to lend, the economy didn’t respond.
In this environment, Keynes dismissed cutting interest rates as being as effective as “pushing on a string”.
He said that when the economy was trapped, the only thing the government could do was replace the spending that the people and the companies didn’t want to do. Otherwise the economy would go into freefall.
By any benchmark, the Japanese have been successful. They managed to prevent the crisis developing into a full-scale depression. They kept the show on the road. But the cost has been a huge increase in their government’s debt position.
Now Japan, two decades after the crash, is at a crossroads. In short, it is running out of money – well, not exactly running out of money, but it has reached the limits of taking the people’s savings and recycling them via government spending into domestic demand.
For the first time in three generations, Japan doesn’t have a current account surplus. It is running out of savings and will either need to sell its overseas assets to keep funding its obligations or it will have to raise interest rates to attract in foreign money to run the shop. This is a totally new dilemma for the Japanese.
For years, Japanese savers, having been nearly wiped out by the stock and property crashes of the 1990s, bought government bonds and as interest rates fell, bond prices rose, giving them a nice return. This reaction is precisely the same one we are seeing all over the western world now as people perceive government bonds to be a safe place to park money. But as interest rates go to zero and debt levels rise, this doesn’t look like something that can go on forever.
Back in Japan, we see that it can’t go on forever. The Japanese current account surplus is being eroded by the fact that the population is ageing. Retirement has come to Japan and the savings they built up for their retirement are now being spent. Savings in Japan as a percentage of household income were 15 per cent in 1992; they are now 4 per cent.
As noted above, Japan is running out of savings. Now this brings me back to the US, because if Japan wants to continue funding itself, it will have to sell some of its overseas investments.
And guess what is the biggest overseas investment of Japan? Why, American government bonds, of course! Japan holds over $1.2 trillion of US treasuries. What will happen when Japan – a huge economy of $5.46 trillion – starts to sell US treasuries to fund its own welfare state and its ageing population?
Bond yields in the US will rise, and one of the central planks of the US stock rally, which is that bullish treasuries and bullish equities complement each other, might begin to look as shaky as a Japanese nuclear reactor in the face of a tidal wave.
DAVID SHOWS WHAT KEYNES MIXED WITH “TOO BIG WILL FAIL” LEADS TO…
-> ASSET STRIPPING.
JAPAN BAILOUT BANK SYSTEM = ZOMBIE BANK VAMPIRES = ASSET STRIPPING DISASTER WRECK.
JAPANESE NIGHTMARES.
As someone who has been living in Japan throughout the entire “lost decades” I was delighted to see David turn his attention to this country and eager to read his observations. Unfortunately I know too little about economics to debate those issues. For the most part the article seems to ring true, though I would say that major, if subtle, social changes have greatly influenced the course Japan has taken over the last 20+ years. There has been a gradual erosion of many of the ties that have held the social fabric together. The way the public handled the aftermath… Read more »
The economy of war David’s archives have some interesting articles, I spent some time there, not a long time I admit, but at a glance I haven’t found anything relating directly to the “economy of war”. The latest SIPRI data is clear evidence for anyone interested enough to understand the greater ideas behind the financial heist that is ravaging our nations. It is all connected. India is one of the strong emerging new economic Asian powers on the planet, and from 2007-1011 it was the worlds largest importer of weapons with a global 10%. In fact, all the major Importers… Read more »
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Ireland differs from Japan in many ways including the following :
It speaks English
Younger population
More undeveloped resources
Mobile Population
More Immigrants
Less Rigid Laws
Non Conformist to Social Systems of Conduct
Quicker to Adapt to Social Mores
Less Import Controls
West
Plato
Exports Music & Dance
52nd State of USA ( economically)
Non Nuclear
Japan is in trouble. Fiscal debts are in a really bad state.
IMO the Fed / Treasury link up in the issuing of bonds and the Fed’s writing of a check with NO deposit, money out of thin air, to use to buy bond is a creditor that even surpasses anyone else.
Russian T,V reports a Russian Special Forces unit has arrived in the Syrian Port of Tartus this evening,with U.S Special forces operating on the Syrian Border advising Syrian opposition Forces,this could get interesting……..!
NYTimes reports on Sunday that Israeli and American Intelligence services are insisting Iran is NOT developing a Nuclear Weapon Capability,they identify “MOSSAD” as one of the intelligence services involved……………..
Pimco,a German Bond Company is preparing For Portugal To go the same way as Greece soon,according to comments made by PIMCO Ceo in Der Spiegel today.
This Financial War just keeps on giving…
Best
RR6
Leading Japanese Economist Names Glass-Steagall, Blasts U.S. and British for Causing and Continuing the New Great Depression March 17 (EIRNS)–Daisuke Kotegawa, former top Japanese Ministry of Finance official and Japanese representative to the IMF, named the takedown of Glass-Steagall as the “main structural cause of the financial bubble in the United States and Europe from 2002 to 2007.” Writing for the Canon Insitute for Global Studies, where he is now the Research Director, Kotegawa also nailed the blundering response by the Paulson/Geithner/Darling team in London and New York to the 2008 financial collapse as severely aggravating the global crisis. He… Read more »
Meanwhile here at home: Dangerous, Irresponsible Journalism —Again! Folks, today we have experienced yet another example of irresponsible and downright dangerous journalism in the mainstream National newspapers. The Irish Independent led today with a story titled “Wave of personal debt swamps the Courts”, in this article, the newspaper firstly acknowledged that the level of Court actions is overpowering the system,” THE courts system is bursting at the seams trying to cope with an avalanche of personal debt cases” it goes on to say that “Our investigation found that people from all walks of life are now ending up before a… Read more »
Another observation:
Irish Public Debt to GDP Ratio has increased by 1% over the past week and stands at 149.1%
Irish External debt to GDP Ratio has also incresed by 1% to a whopping 1233%
To further elaborate on my previous figures:
By contrast to Ireland’s External Debt to GDP Ratio
of 1233%
Greece is 216%
Italy is 157%
Portugal is 255%
Spain is 225%
USA is 101%
and Argentina is 36%
Argentina is the example which is used for the obvious, sensible path we should take of exiting the Euro currency, devaluing and moving on.
We Irish alwasy have to be the best at everything even the bad things.
Interesting article as usual David. I would just like to add to the comments you made at the end that if Japan started selling their US Treasuries that this could send the rates way up. Well it seems this rise in 10 year Treasury rates has already started. In the last two weeks the 10 year rate has gone from 1.9% -2.3% a rise of 20%. Still very early to call this a trend but this is something I have been expecting to happen for a while. Both Russia and China were lowering their exposure to Treasuries throughout last year.… Read more »
I began reading this article and had to stop a few paragraphs in as it was making me quite angry. How can you report that that the Fukushima disaster was ‘controlled by engineers’ when the fact is that no-one had control of the situation in time to stop this disaster from happening. A year on, Fukushima is STILL leaking radiation into the Ocean – where is the control in this? There is over 1 million tonnes of radioactive waste that the Japanese Govt does not know what to do with, seafood shipments from Japan are increasingly affected by radiation and… Read more »
David what happens when Japan starts cashing in it’s bonds will the USA not just print more dollars ,because if they don’t there will be a lot more a steak for the rest of the world as well.
Myself and my pals have arranged a small meeting in our local pub to discuss the Fiscal Compact Referendum. We have decided to canvass our town for a NO vote. Does anybody have any ideas here? We are simple fellows, we are ordinary guys with no political involvement. But we are fired with rage and want see our Government masters embarrassed and beaten low by their German overlords (whom we do not fear). I read David’s column on a regular basis and I am awed by the comments from people by George Bauman and others. My pals and I have… Read more »
http://zfacts.com/p/461.html
Look at this. The US is only 0. 5 Trillion away from the 16 Trillion set by Congress. What will happen in May?
David, David, David…. Para 2&3 completely mis-characterises the Fukushima situation. It is still a nightmare scenario. If this was a “near-miss” I wonder what you think a real disaster looks like. Shame. I know Japan and the reality is that they have run out of road both literally and figuratively, with roads and bridges to nowhere built by Gov. stimulus. The residential property market remains at a third of the 1989 peak with 50 year (generational) mortgages. Debt/GDP at 130%. The only lesson for Ireland is that house prices and stock-market can go down 65% and stay down for 23… Read more »
Here is a 20 minute audio interview of James sinclair of international acclaim on matters financial and gold.
The US has enacted “Nuclear financial war” on Iran and now threatens India with removal from the SWIFT system of wiring money settlement, effectively closing the country’s banking system.Japan could be on the next as it attempts to buy oil from Iran
Well worth listening to David as the ramifications are huge worldwide.
http://www.youtube.com/watch?v=_irgll_wy9I
David. Fascinating and educational stuff from an economics point of view but I have a problem with the third paragraph where you appear to suggest that the Fukushima nuclear disaster is nothing serious and that the Japanese are well in control of the situation. They are anything but according to Jeff Rense
Rense has been researching Fukishima from the day it happened and if you go to his site and just scan the headlines relating to Fukushima it might make you reconsider
The Japanese people have trusted their government and the government has wasted a huge chunk of the substantial savings of the Japanese people. About 25% of total bank assets is comprised of JGB’s. Japan Post is the largest financial institution in the world with over 70% in JGB’s. GPIF is the world’s largest retirement fund with over 70% in JGB’s. The problem for Japan is demographics and the weak economy. The savings rate has dropped to 2% and is projected to go negative as more and more retire and use up their principal. GPIF is liquidating $80 billion of JGB’s… Read more »
Also from Grapes of Wrath
The bank is a monster. Men made it but they can’t control it!
Christmas tree lights remained on while a fragile life which was silently snuffed out, went unnoticed…the little piece of tinsel still in the window of the run-down terraced house which was a storey shorter than its neighbours.
God, if ever there was a metaphor for what this country is experiencing…..a heartrending tale
and your point is David?……
US National Debt forcasted forward to this day 2016 $21,539,281,600,345 and rising.
Hi David Here is a posting from http://www.lemetropolecafe.com It lays out the perilous position we have rapidly moved to with the rapid errosion of civil liberties. Eurocrats and bankers are doing it in Europe and this is the US. It is off the Japanese topic but perhaps you can address this in a future edition. Ireland must vote no to the referendum and then move to regain sovereignty. I fear it is almost the last chance. It’s All About Control 21 March 2012 By Greg Hunter’s USAWatchdog.com Ever since the original Patriot Act was passed by Congress in 2001, American… Read more »