Japan's public debt approaching 180% of GDP and some analysts predict that the bar of 200% may be taken in the coming years. This represents After nearly 9 times the annual revenue of Japanese government in 2009. Since the explosion of huge real estate and stock market bubbles in the early 90s, especially after the Asian crisis of 1998, the Japanese government has tried to support economic activity going into debt heavily. Before the crisis began, we thought that finally Japanese government would conduct a strategic turning point and began a process. Reducing the risk of deflation and resumption of growth in any case let him think. The crisis hitting Japan is strongly left no choice Nippon THE STATE to resume its old habit. The first change in the history of Japanese democracy is not going to fix the situation. Freshly arrived in power is a new loan of 400 billion euro contemplated by the new government to finance its social policies.
Long a subject of astonishment among Western analysts, the Japanese debt will gradually become a topic of great concern in these times of economic hardship. There are no great mysteries, a failure to pay state almost instantly Japanese sign the death warrant of our clinical system Financial World. This would require reinventing almost every rule with the troubles involved. Such an event would bring the collapse of Lehman Brothers for a very minor detail of history. Yet how can we not worry? Such figures are frightening and it is hard to see what are the loopholes of the Japanese state. For now, the interest on the debt has been limited because, enjoying almost intimate relationship with major Japanese banks, the state could Nippon debt to astronomical sums at rates of less than 1%, sometimes close 0. But they were to increase even if only 1 or 2%, the situation could turn red very quickly because 1% to 220% of GDP is 2.2% of GDP to pay more to creditors. In short, the risk of panic worsens almost daily.
To avoid a catastrophic outcome, there are two solutions: either increase the nominal tax revenues, or monetize the debt.
Let us first solution: the nominal increase in tax revenues. To do this, there are three economic phenomena: growth, inflation and rising taxes. These three phenomena can obviously be combined to improve the finances of Japan. Higher taxes hardly seems possible given the current economic difficulties of the Japanese economy. With a savings rate of only 2%, higher taxes would be charged almost immediately consumption, automatically worsen the situation in the short-term and make it more credible fears of default. Moreover, it would be a dangerous decision for a government from being elected.
A rapid return to strong growth appears to be an unlikely scenario. Even before This crisis, Japan had just experienced more than 15 years of economic lethargy, the famous "lost decades". Following the runaway speculative 80s, households, companies and Japanese banks found themselves overburdened with assets worth more than not much. At the top of the bubble, the Nikkei stood at 40 000 points in the late 80s when he no longer worth it revolves around 10 000 points today. In the early 90's, the land of Tokyo was valued at the same price as the entire state of California. If Japan is not broke Depression is due to Keynesian policies, and Japanese mercantilist state. As we have seen, the State was heavily indebted to, among other finance large public works resulting in a "concrete" of the country. By keeping interest rates near 0% for almost 15 years, the Japanese central bank has made Japan a source of credit "cheap" for the world. This had the obvious effect of lowering the value of the yen and boost Japanese exports. The Central Bank in raising strong foreign exchange reserves has also pushed the yen down. Japan was thus able to preserve strong trade surpluses and focus its growth on external trade. The sharp revaluation of the yen with the crisis and the urgent need to cope with this monstrous debt are many analysts feel that this strategy is breathless. Nominal GDP is now at the same level as 1994 and it is unclear how, with its aging population, Japan could reverse this trend.
remains inflation. Historically, it was the most expedient commonly used to reduce domestic public debt. Indeed, as prices grow, the nominal amount of tax increases in a fairly close, thereby reducing the real burden of debt repayment. If the price level increases from 100%, the debt is then halved in real terms. But contrary to received ideas, inflation can not be decreed. The famous printing money is sometimes not enough to raise the price level. Japan must fight for over ten years to avoid falling into deflation. Policies known as "quantitative easing" implemented by the Bank of Japan since the early 2000s there have done nothing, prices do not increase. The "quantitative easing "Consists of massive redemption of government bonds by issuing fresh money (ie by printing money market). This action results in a substantial increase in bank reserve money.
The following table shows the reserves of Japanese banks. They depend directly injections or withdrawal of money from central banks
Despite the violent changes in surplus bank reserves and hence the monetary base, the money has remained surprisingly stable during this same period increased at a much too small to cause a significant increase in prices. We can see three distinct periods in the diagram above. A period of intense expansion of bank reserves to avoid deflation. In April 2006, Japanese authorities decided to backtrack to the ineffectiveness of their strategy and take the money they had issued. Since the beginning of the subprime crisis in mid-2007, the Japanese central bank has resumed its expansionist policy to avoid a liquidity crisis among Japanese banks. But reading the reports of the Bank of Japan all seem to realize that within the Japanese economy now issue new money is not an effective way to cause a price increase. Who could say they did not go quite strong?! Between 2000 and 2005, bank reserves were increased by 6. The failure of "quantitative easing" is consumed.
The reason for this failure is simple: if the banks do not lend the accumulated reserves, they remain inactive, have not the least impact on prices. In general, under the current monetary system, the amounts outstanding e-money depends on the willingness of banks to lend and the willingness of households, businesses and state. The more prepared, more money in circulation is growing. In the opposite direction, when the loans decrease, the currency in circulation tends to decrease. The central bank may do whatever she wants, if banks stop lending, the currency in circulation will melt and that means strong deflationary pressures. We must understand that this link perverse and contingent between money and credit is essentially absurd operation of our monetary system described in earlier post.
Thus, there is inflation, under the current system must be that households, businesses, government, financial institutions or heavily indebted. Look at the evolution of various economic leverage in Japan for 40 years.
It is clear since the late 90's Japanese private sector debt melting like snow in sunshine. During this same time, the Japanese government debt has grown exponentially. The heavy debt of the Japanese government has compensated the private sector deleveraging. Without this compensation, it is a terrible deflation would hit Japan.
Despite the private sector debt, overall debt levels remain high. Who is going to be able to go into debt to boost inflation? We are looking for a way to reduce Japan's public debt, a debt Supplementary Japanese government is not an option. Expect private sector debt large enough to raise prices is very unlikely given the current situation. Furthermore, additional debt from the private sector is not desirable. It is the indebtedness of the private sector qi is the source of the two lost decades of the 90s and 2000. In short, high inflation is not at all feasible.
short, our three solutions are not relevant in the Japanese case.
A sort of "balance of terror" should probably prevail in Japanese financial circles. You know the famous balance of terror between China and the United States. In Japan, both major players in this delicate balance are the Japanese financial institutions and the Japanese government. For 15 years, the first finance the public debt of the state of interest rates close to 0. With this, the interest payable each year is limited. Obviously, having recourse to debt so cheap is largely responsible for these excesses. Most of the Japanese public debt, contrary to what one sees in the U.S. or Europe, is in the hands of Japanese institutions. The views of the importance of public debt, presumably without access to the figures that a very large part of the balance sheet consists of Japanese government bonds. This puts the Japanese banks in a very complicated situation. Indeed, if they start to deny the bonds issued by the government, interest rates will automatically rise thereby lowering the price of bonds held by Japanese institutions. The consequence is obvious: monumental loss and solvency crisis for Japanese banks. Loans from the central bank there feraientt nothing since it would not a liquidity problem but a solvency problem (liabilities exceed assets). In short, only injections of capital from the state could save banks. But let us remember that the only source of the state is borrowing from banks. One could imagine the Chinese or American banks come swallow Japanese banks to prevent a stampede, but it would be national issues that would be a hindrance.
sum, banks are in a hopeless situation. Although the Japanese government appears increasingly less creditworthy, they can not refuse to buy newly issued bonds plus just signed their death warrant. A sort of financial tragedy of modern times was born from the explosion of a speculative bubble and an unhealthy situation of consanguinity between the banks and the state. The status quo can it last? The fact that the interest payable for the Japanese government are very low can lead us to say why not. The capital payment of old outstanding debts is financed by issuing new bonds. In the absence of interest and with zero inflation, this scenario is theoretically possible. Government debt held by banks would in this perspective an asset to the image of a land whose price will not fluctuate over time.
The balance is fragile. If banks decide to stop funding the free state spending Japanese, the building is very likely to implode. The Japanese government has the duty to pay attention to the sensibilities of the Japanese financial sector. Even if the rational point of view, caution should prevail on both sides, it is well known that rationality is not always the strong man. The situation can only be extremely stretched between the Japanese government and financial institutions. Given the excess with each spark could explode the bomb in Japan. New spending of the first alternative government could emerge as the drop of water that broke the camel's back. The bond rate began to rise and the CDS (insurance on the risk of default, an indicator that, in my opinion should be taken lightly) have soared in recent weeks. The risk exists Financial Apocalypse. Let us remember that the crisis of the 30s has had two major phases. It began with the explosion of speculative bubbles in the U.S., but the bottom of the hole was actually achieved when the financial systems in Austria and Germany (the two biggest losers of the Great War) have collapsed causing the kind of economic Apocalypse we believe impossible today "because we understand better the economy ". Even if the risk is probably low or very low. The objective of economic policy should be silent to avoid making this sort of outcome. Because basically, once reached such levels of production, only the stability and income distribution really matter.
In a future post, I will try to see how the monetization of the debt until reserves reach nearly full could be a useful outcome for the Japanese state.
