September 30, 2012


The Next Panic : Europe's crisis will be followed by a more devastating one, likely beginning in Japan. (PETER BOONE and SIMON JOHNSON, October 2012, Atlantic)

About half of the Japanese government's annual budget now goes to pensions and interest payments. As the government has spent more and more to support its growing elderly population, Japanese savers have willingly financed ever-increasing public-sector debts.

Elderly people hold their savings in the form of cash and bank deposits. The banks, in turn, hold a great deal of government debt. The Bank of Japan (the country's central bank) also buys government bonds--this is how it provides liquid reserves to commercial banks and cash to households. Similarly, Japan's private pension plans--many promising a defined benefit--own a great deal of government bonds, to back their future payments. Few foreigners hold Japanese government debt--95 percent of it is in the hands of locals.

Given Japan's demographic decline, it would make sense to invest national savings abroad, in countries where populations are younger and still growing, and returns on capital are surely higher. These other nations should be able to pay back loans when they are richer and older, supplying some of the funds needed to meet Japan's pension promises and other obligations. This is the strategy that Singapore and Norway, for example, have undertaken in recent decades.

Instead, the Japanese government is using private savings to fund current spending, such as pensions and wage payments. With projected annual budget deficits between 7 and 10 percent of GDP, Japanese savers are essentially tendering their savings in return for newly issued government debt, which is not backed by hard assets. It is backed only by an aging, shrinking population of taxpayers. 

Which is why the main threat to the global economy is the reduction in US debt, at a time when billions of people are becoming increasingly dependent on it.  

Posted by at September 30, 2012 6:46 AM

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