November 14, 2012


Yen Edges toward Brink : Those forecasting a reckoning for Japan's currency have been foiled before, but there are reasons to believe the situation has changed (Andy Xie, 11/12/12, Caixin)

The economic statistics tell the horror story best. Japan's nominal GDP in 2011 was 9 percent lower than in 2007 and 2.5 percent lower than in 1992! In 1992, the national debt was only 20 percent of GDP. It is now 230 percent. Essentially, 200 percent of GDP in fiscal stimulus hasn't turned the economy around.

The depression dynamic begins with declining incomes. People then spend less to cope. Shops and restaurants become emptier. The weak demand depresses business profitability and investment. The former depresses the stock market, and the latter labor income. Both pressure people to spend even less.

Few people pay attention to Japan's problems nowadays. Financial markets pay a lot of attention to the United States' economic problems. But its nominal GDP rose 7 percent between 2007 and 2011 and is likely to rise another 4 percent in 2012. Japan could at best achieve zero growth in nominal GDP in 2012. The performance gap between the United States and Japan is 20 percent in nominal GDP since 2007. America's national debt has doubled since 2007 and reached 100 percent of GDP in 2012. Its trend isn't sustainable either. But Japan's debt problem is more advanced in depth. Its debt crisis should occur before the United States'.

Japan's problem doesn't get much attention because it has funded its debt with domestic savings. The home bias in Japan's national savings is very strong. Hence, the thinking goes that if the Japanese government isn't viable in the long run, the country is. One could assume that Japan can reshuffle its balance sheet and ask its savers to take a big haircut in their savings one day to solve the problem.

Another alleviating factor is Japan's egalitarian economic structure. The economic depression hasn't turned into an employment crisis. The unemployment rate is relatively low. It's just that everyone is getting less pay. A recent survey shows that the Japanese salary earner's pocket spending money from their wives has declined to the level three decades ago, showing the severity in income decline. Japan just spreads the pain evenly to avoid wreaking havoc on part of the population. This is why Japan doesn't look like it is in depression on the surface. [...]

The only sensible market argument for strong yen in the past is that Japan could keep all its problems inside. Maybe it's the wrong policy. But Japanese like it and other people can't do anything about it. That argument no longer holds true. Japan's recent trade deficit is the beginning of a trend. Its savings rate has been declining with an aging population. If the fiscal deficit doesn't decline, there isn't enough money at home to fund it. The emergence of a trade deficit now and current account deficit soon reflect a savings shortage in Japan. What foreign investors think of Japan will begin to matter to its bond market. Foreign investors are unlikely to buy into Japan's crazy policy combination.
Posted by at November 14, 2012 5:26 AM
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