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Japan: Land of the Rising Debt

  
Analysis, Economy, Education
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Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

The prelude to the current crisis began in the early 1990s, after Japan’s housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan’s ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe. (more…)

Emerging markets at risk from a gigantic bubble

  
Analysis, Economy, Education
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From :FT

By orchestrating a massive appreciation of the yen in the mid 1980s, the US condemned Japan to decades of stagnation and ended the challenge to its own economic hegemony. Effectively, Japan was forced to commit financial hara-kiri.

This theory, once confined to Japan’s nationalistic fringe, is now being used by the Chinese authorities to justify their resistance to a substantial revaluation of the renminbi. By so doing they are misdiagnosing Japan’s woes and misperceiving the true threat to their own economy. The threat to China does not lie in an appreciating currency, but elsewhere.

Here’s what happened in the case of Japan. In the Plaza Accord of 1985 the G7 attempted to address global imbalances – worrying then, but small beer by today’s standards – by “encouraging” significant changes in currency parities. They got what they wanted. The yen took off and never looked back.

Japanese policymakers accepted the loss of competitiveness not because they were submissive, but because they were brimming with self-confidence. They believed their economy would survive any downturn with little damage, and they were right: the recession of 1986 was short and shallow.

Furthermore they saw a strong yen as a useful weapon in a world in which Japan’s trading partners were imposing quotas on its most successful companies. Again they were right. The all-powerful yen allowed Japanese auto makers to build up manufacturing capacity inside key Western markets.

They also believed it was high time to shift the Japanese economy from exports to consumption, and that a stronger yen would raise the purchasing power of households. Here, though, they were wrong.

The spending spree of the late 1980s – when Japanese salarymen sprinkled gold-flakes on their noodles and secretaries stayed in the same upmarket Hawaiian resorts as American chief executives – is now a distant memory. (more…)

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