Top
Reference

Japan dashboard

This page highlights a few of the key economic indicators for Japan. The goal is limited to tracking the most relevant data pertinent to a possible government funding crisis, and the main question is how brittle the situation may be.

Summary

17 Feb 2013.

A government funding crisis in Japan is quite likely within the next year or two. Several factors conspire to make the situation difficult to escape:

  • An aging population means that household savings, long a major source of government funding, are likely to be in a shrinking trend soon
  • Real GDP has been approximately level for a couple years; this will make it more difficult to get the deficit under control.
  • Banks have recently provided much of the demand for government bonds, but this is brittle situation – a small rise in interest rates could cause a large sell-off, and a disruptive rise in government interest costs.
  • Shinzo Abe, the prime minister, will soon appoint a new head for the central bank, with the goal of creating inflation; this could cause a selloff in the bond market and raise government debt service costs to unsustainable levels.

Highlights

Japan demographics (13 Aug 2014) The population of those 65 or older is rising strongly while the population of those at a typical working age, 20-64, has peaked and is falling. The ratio of the former to the latter, known as the dependency ratio, is high and will continue to rise.

The most important consequence is that household savings, which used to fund a significant fraction of the government deficit, are unlikely to do so in the foreseeable future. In 2012 household savings were about 4 trillion yen, while the net government bond issuance this year is projected to be 41 trillion (see the MOF budget page). And because of the rising dependency ratio, the household savings rate is more likely to go down than up.

There is also a purely statistical consequence. Many moan about Japan's slow growth and blame policy mistakes, but growth per working person has actually been healthy, that is, slow growth is due to demographics, not policy.


Japan employment (24 Aug 2014) In the short run the unemployment rate reflects the business cycle. Since the financial crisis the trend has been down.

In the long run, the unemployment rate also reflects the transition from most jobs being secure for life to the present situation, where about a third of jobs are temporary or part time.




Japan GDP (26 Oct 2014) GDP growth over the last three years has been a cumulative 2.8%, i.e., right in line with long-term growth of about 1% per year. It is hard to see any positive impact from Abe's policies. Industrial production has been roughly flat, probably in part due to more expensive electricity. Japan is not going to grow its way out of excessive government debt.



Japan government debt (17 Feb 2013) With the population aging, domestic demand (which has been almost all of demand) for Japanese Government Bonds is likely to fall. A crisis could develop very quickly, in that even a small rise in interest rates could cause a large sell off in JGBs owned by banks and foreigners, and a disruptive rise in government interest costs.


Japan inflation (29 Apr 2013) In recent years Japan has alternated between low levels of inflation and deflation. Currently inflation is running at -0.9%. Complacency would be out of place. The situation with government debt is grave and, if the deficit must be monetized, inflation could rise quickly.



Sources

See subsidiary pages. Also the Flow of Funds.

See also

Selected commentary

Clippings

Foreigners do most of the Nikkei trading

8 Sep 2007. Economist p79.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_JSGJPRJ

“So unfair”

“Foreigners own 30% of Japan's listed shares, and typically account for three-fifths of all trading (Japanese institutions tend to sit on their holdings). Huge foreign sell orders—the biggest since the world stockmarket crash of October 1987—sent Japan's blue-chip shares skidding.”

John Hempton compares Japan and Korea

18 May 2009. Bronte Capital.

http://brontecapital.blogspot.com/2009/05/tale-of-two-banking-crises-japan-and.html

“A tale of two banking crises: Japan and Korea. John Hempton”

“1). The bank made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).

2). The loans could not be repaid.

3). The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.

4). The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.

5). Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings. Everything was just rolled.

6). Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people). The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.

7). The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system. [The number of banks – mostly regional banks – that failed during the crisis was not large given the depth of the crisis.]”

“Korea had a much worse recession than Japan. Vastly worse. Japan was just low growth for a very long time. By contrast the Korean economy crashed and burned. But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap. It bounced.

It is my contention that the main difference between the Korean and Japanese crashes (and Korea’s case recoveries) was the funding of the banks. In this view Korea’s was so sharp because the banks simply ran out of money – and that caused massive liquidations across the economy – systemic failures.

The recovery was also sharp because the systemic failure meant that businesses that shouldn’t have failed (because they were profitable worthwhile businesses) got into deep distress. Real companies died not because they deserved to die but because the system in crisis killed them. There was a case for bailing out those companies – and the rapid recovery told you this was something systematic – not business specific. The massive upward movement in the stock market at the end of the crisis was the secondary proof that good businesses were killed. It was also probably the best investment opportunity globally in the last twenty years. …

Investment question: what bits of the USA (and the rest of the world) will wind up looking like Korea and providing the best investment opportunity in two decades? And what bits will look depressed for two decades before going into a bit of a decline?”