20 years of depression and a stubbon, albeit mild, deflation; Gross debt/ Gdp one of the highest in the world, standing around 200%; shrinking workforce due to a rapidly ageing society; a high yen, making it harder for large japanese exporters to compete on the world markets and, last but not least, the challenges resulting from the triple desaster of 11/3 are just a few of numerous headwinds the japanese economy is facing.
But wait! Can't we see Japan's economic situation from a different perspective?
Isn't it true that Japan's lasting depression is just a cleansing
mechanism, that gets rid of malinvestments and overcapacity in the
country's capital stock, which was build up during the heydays of
Japan's ridicolous boom-era of the 1980's? Why should a mild deflation
be avoided at all cost, while a mild inflation is aspired for by the
mainstream economists? Isn't it the case, that a country as whole is
better off in a mildly deflationary environment? Isn't Japan also the
largest creditor nation in the world? Does the debt situation really
look that gloomy when you add Japan's foreign assets into the
calculation? Is a high yen only a bad thing for Japan or doesn't it have
positive implications for the economy, e.g lower commodity cost in
local currency terms? And couldn't the rebuilding effort after the
devastating triple crisis give the japanese economy a boost?
This post is the first of a series I intend to publish on this blog, with the aim at scrutinizing the prevailing majority view of Japan's inpending desaster.
Government Debt
Everyone is well aware of the japanese debt numbers spreaded around the media and acedemic resarchs for a long time now.
The most widely circulating number that is supposed to show Japan's dismal macroeconomic state is the Debt/Gdp ratio. Currently it stands around 200%. This is truely staggering and even dwarfing the indebtness of good old greece. If taken by face value, as many financially illeterate people are tending to do, its just a question of time till Japan is going to default on its debt, or enter a period of hyperinflation (different outcome not possible, as the dualistic perceptions makes the world so wonderfully easy to comprehend).
But what's the problem with this number, always cited when the discussion comes to the macro economic situation Japan is facing. I'll tell you. The numerator (e.g Debt) is a gross number (e.g. gross debt; a nominal variable). It doesn't take into account Japan's net foreign asset position, e.g. the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners.
Neither does it take into account the japanese goverment`s claim on national assets (Land, Buildings, the NTTs', Japan Tobaccos' and Japanese Postbanks'), and Japan's reserve position ( foreign Currency Reserves, SPDR's with IMF, foreign building and land, etc.).
One should be as excited about this number, as about someone claiming he's an argentine peso millionaire (when it came to describe incredible wealth, my granny used to say: "this guy is as rich as an argentine"; how the world has changed granny. R.I.P).
Well true this guy is a millionaire in a nominal sense. But, with an unofficial exchange rate (e.g. the dollar blue) of around 6,5 peso a Dollar, a price level in Buenos Aires comparable to that of New York and an unofficial inflationrate of around 30%, the implicit riches, which come to mind with the word millionaire, become rather sobering.
In macroeconomic theory it is well known, that people focussing mainly at gross numbers are in danger of falling pray to the so called money illusion, e.g. thinking of beeing wealthier because one's got a buck more in the pocket (nominal increase in wealth) not realizing that all the prices have risen more than a buck (real decrease in personal wealth).
Japan's reserve position
In Japan's case it's the other way around. When debt numbers are only taken as a gross number, there is the risk of underestimating Japan's real financial position in aggregate. Japan and the mainstream media are doing a good job in obfuscating the true picture and its not easy to get official net debt statistic. So lets look to some stats I could get my hands on to counterbalance the stubbonly prevailing view of Japan beeing inbebted up to their eyeball.
Oops. What's that. Japan's foreign currency reserves have been exploding. And that didn't happen in the boom years of the 1970's and 1980's, but rather exactly during the two lost decades. Seldomly have I read about this in the press. By the way, just last week Japan has overtaken China beeing the largest holder of US treasuries again.
http://www.ipolitics.ca/2012/10/16/japan-trumps-china-as-biggest-holder-of-u-s-debt/
Well must be an outlier, this damn currency reserves. Thought Japan was about to being on the IMF dole very soon.
Nop. What the heck.... It's the other way around. Japan has been increasingly doling out money to the IMF. But wasn't I told that Japan is bancrupt? How can a bancrupt country pledge an ever increasing amount to the IMF?
Oky. They must finance the IMF, and also partially their debt, by selling its foreign assets. Given the (unexplicable) strength of the japanese yen that makes sense ( this damn yen! I was told it was about to collapse. So I financed my newly purchased ostentatious mansion in the Hamptons by borrowing in yen. But instead it has been rising against all major crosses; that is sooo wrong); Japan has been selling its foreign assets and repatriating the proceeds to finance their deficits, the rebuilding after the earthquake and tsunami, the rest went to the IMF.
Well. I'm a bit confused. Wasn't I told....
Those years (2007-2011) must be outliers (again!). Would be nice to see the trend in Japan's net foreign asset position during the "lost decades". Ah found it! This is going to be soooo ugly.
Japan's net foreign asset position
(I know this numbers don't add up with the MOF numbers; of main concern should be the trend and not the absolute numbers!; looks like this numbers are not net but Japan's gross foreign assets)
Oh my good. I'm giving up. Can't be bothered to check-out the governments pledge on domestic assets, as I know the government's stake in NTT (an undervalued japanese telecom carrier) alone is worth around 2 bln. Dollars. And when I'm not mistaken did Japan not take part at the deregulation, liberalization and privatization binch of the anglo-saxon and western european world in the 80's and 90's (although this changed with the big bank doctrin implemented beginning of 2000).
Although I was told by the mainstream media, politicians, economists and the rest of the clueless prigs out there, that Japan is the famous bug in the search for a windshield, it doesn't hold the hard, cold facts.(at least concerning government debt).
Taking Japan's foreign- and domestic assets into account, (net) Debt/GDP is very likely significantly smaller than 200% but still (too) high.
To be frank with you, I'm not so sure anymore if it was that brilliant of an idea to finance the mansion in the Hamptons with a yen credit.
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