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Digital Publisher of the Year | Monday 02 November 2009 | Ambrose Evans-Pritchard feed
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Comments 67 | Comment on this article
The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).
Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.
Related Articles Is this the death of the dollar? G20: Brown and Obama know markets will only stand for so much stimulus Gordon Brown and his cohorts go back to their Keynesian default setting Like it or not, we are all Keynesians now IMF's criticism of Britain's fiscal stimulus package misses the pointSimon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".
The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.
"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.
The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must
By Ambrose Evans-Pritchard Published: 5:33PM GMT 01 Nov 2009
Comments 67 | Comment on this article
The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).
Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.
Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".
The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.
"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.
The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.
Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.
No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.
"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."
Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.
Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.
The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.
"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."
Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.
Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.
It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.
Comments: 67
At least the Japanese had a 15% savings rate when they entered their slump. The Americans and British started with negative savings rates. I therefore worry more about Britain and the USA. We are facing a massive balance sheet recession where QE will be impotent until debt balances have been paid off. If and when that happens, the value of paper money will then be destroyed and with it the credit based capitalism as we know it. It seems that the debt fuelled deflation and inflation will both destroy the real wealth of millions of people. I fear that this could lead to civil unrest and possibly war between countries. Food, water and shelter may be more useful than gold. So maybe we will see a shift in relative wealth to resource rich countries. Canada, Russia, Australia and Brazil spring to mind. These countries have real assets that should allow some preservation of wealth. China does not have enough real assets whereas the UK. USA and other developed economies will be swamped by debt and welfare liabilities. I wish I could be more optimistic. Hopefully, I am wrong but I fear that we are facing an ill wind that blows no good.
@Charles Lee on November 02, 2009 at 08:18 AM Ah, the gold old reliable 'growth' defence of fractional reserve banking. I don't have sufficient historical knowledge or economics knowledge to be able to mount a robust defence, it is not my field of expertise. But as an engineer I understand maths. A system based on perpetual, incessant, exponential growth on a finite planet is doomed to fail. As the gradient of the exponential expansion becomes too great, traction is lost and the cards start to tumble. The demise is necessarily chaotic. As the plates begin to fall off the sticks the first few will be caught but there becomes too many to catch at the same time. Another tactic is required. Let the plates fall and make some preparation to pick up the pieces. You need to admit that it will not be possible to catch all the falling plates. Berating a gold based system whilst the fiat world is collapsing is akin to Nero fidlding whilst Rome burned.
Alan at 6.25 am Keynes had been misrepresented as socialist because, in my view, it suits those who wish to follow orthodox usurious economic policies. In a letter to Hayek, Keynes said that he had no quarrel with The Road To Serfdom, except that he did not consider it true that the market would naturally bring savings and investment into balance at effective full employment. He said in the General Theory that he saw no reason why usury could not be ended gradually without any revolutionary disadvantage to vested interests. Essentially he said better to accept the march of reason gracefully than court socialist revolution due to mass unemployment. I intersperse my economic comments with enough politics for anybody who has read enough of them to know where I stand. Broadly, I am Thatcherite - small state with a minimal social safety net, entrepreneurial free market capitalism rather than corporatism. Meritocracy and effective full employment. The protection of the absolute purchasing power of the means of exchange by keeping real interest rates on the means of exchange at zero over the cycle. Let the market dictate the commercial interest rate that brings savings and investment into balance. Use the central interest rate on the means of exchange as a way to moderate the animal spirits. Ban trade unions which are corporatist and monopolistic and only arose due to usurious monetary policies, and equally fierce policing of monopolistic practices in industry and commerce. Free floating currencies. Free trade. Low taxation. No tax on interest. No tax on dividends. In fact, laisser faire, except, as Keynes said, with regards to interest rates it doesn't work. In fact, nothing anybody could object to unless they want a free ride. The problem is that savers have been conditioned to think they deserve a real return without the work of risk.
The great lie of eternal growth is finally being revealed for what it is - a massive con trick performed through the magic mirrors of fiat money creation. The system which allows our savings to be devalued (or revalued) to suit the political or economic fashion-followers of Keynes, Marx, Friedman or any other economist du jour is coming to its well-deserved conclusion and with it the ambitions and conceits of big government. Let deflation commence.
yet again proving your ignorance with QE t it is not hey dod too little but they did it at all instead of legtting their bust take its natural course they tried to interfere and the stimulus like in the great depression caused the 20 years stagnation/depression this is the lesson the west needs to learn ie do not interfere the cure is the depression no amount of stimulus will work
your analysis is, as usual, penetrating, Ambrose. But your conclusions are bound by your analysis - so, what then becomes important are those factors which have been left out of your considerations. And in this instance, you entirely overlook TO WHOM Japan owes its debt. If, in essence, Japan owes Japan (as I suspect to be the case but do not KNOW - please enlighten us) then where is the problem ? comparing this to the 1930�s - when gold immediately left any given country steeped in problems, thereby exacerbating the problem causing the gold to leave in the first place, is an invidious comparison. Japan has to find a way out of its methods in building an economy - and then continuing the related mercantilist policies when these were no longer necessary - this is the central problem. (Germany is in a similar situation but has skillfully engendered a new currency to mask this.) Try reporting on the problems from this angle. for the rest, as I often say, it�s only money kind regards
back in the 80's a man called michael milken , a true salesman, sold junk bonds 2 raise cash 2 buy numerous large companies such as nabisco. today we have high yielding bonds , exactly the same scenario with a different name. it all came to a sticky end because it was based on risky debt. i cant see any difference with countries doing the same thing . selling junk bonds to fund your own debt can only end in tears. its just a matter of when. interestingly my colleague has been told to get out of equities by his bankers no less due to an expected collapse in markets by jan 2010. u heard it hear first.
All this indicates that Japan will soon assume it's natural position economically and Politically and align completely with Asia. That will mean a complete restructuring not only of Japans debt but the World stage and all Strategic Alliances. It is the biggest economic and Political transformation imaginable and none of us are prepared for it.Certainly not the USA.
For Bill L: "The USD is Dog Food..." But that dog food can be bartered for lovely villas that overlook the Gulf of Mexico, and useful stuff like IPods (2 bought only this last month by my wife and my son), Hollywood films and flights on excellent Boeing aircraft.
Good on yer Alan ! Stick it to Goldsby - the man`s a Socialist dope . But even he will run out of other`s "money". Yours Whiplash
For Jon Livesey: "Well, I don't think you can say that QE is a "waste of money" because by definition, it is new money." QE is an oddity. The Bank of England creates new debt (fiat money) but uses it to buy old debt, government securities held by the banks. The nett effect is to improve liquidity, in the expectation that this will increase their propensity to make loans to businesses and individuals. The evidence is that this isn't happening. The problem is that the all-important split between retail banking and investment banking hasn't been forced on the sector, so it may be that all this juicy extra liquidity is simply finding its way into the hands of the banks' spivs to fund speculation.
I really wonder why Japan is not solving its problem the Weimar way. Simply print money to stoke inflation and thereby reduce the overall debt leve. An inflation rate of -2.4% is just a desaster and the main reason why debt levels have risen so much (nominal GDP falling while nominal debt is rising since 20 years). Why not issue an inflation target of 3% and print money to buy government debt that the Bank of Japan would then delete. In the end one government agency (BoJ) would buy the debt from another (Ministry of Finance). Combined with printing money the BoJ could also slowly increase interest rates to give its citizens, who are good savers, higher incomes from the trillions of euros stashed away in the postal banking system. That would help Japan to increase consumption too, plus it would help to stabilise the yen.
D. Rumsfeld... You are Right On , all the way... Obama is Spending Fiat Money like a crazy... The USD is Dog Food...
"Nothing comes as remotely close to wed-wetting apocalypsiness as AEP in full flower of rhetoric. Doomed, doomed, we're all doomed!" What you have to know, Lord Snooty, is that AEP spent a night at Apollo's temple, at which time the temple snakes licked his ears clean so that he was able to hear the future.
For NorrieC: The problem with a gold-backed currency is that it is inherently a road to economic stagnation. The supply of gold is limited and very unlikely to be expanded at a rate that will accommodate the sort of growth we have enjoyed in the postwar period.
"I'm taking to the hills." Your posts are too good to hurry, Moraymint. Sorry. I think I cracked that joke once before.
Ambrose may be you can find some interest In Mish Shedlock's blog : http://globaleconomicanalysis.blogspot.com/2009/11/is-debt-deflation-just-beginning.html His views are so different than yours I quote your article : "QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy." I quote his blog Real Lesson of Japan's Lost Decades The real lesson is no matter how much money you throw around, economies cannot recover until uncollectible debts and malinvestments are written off. That is why you have �zero interest rates and still nothing�s happening.� The moment fiscal stimulus stops economies are virtually guaranteed to relapse until asset bubbles deflate, and malinvestments and bad debts are written off." ---------------- I think as Mish than throwing money at the problem is a waste, Throwing more money (QE) as you suggered would just be more waste... It will fail and you will still argue that it was still too little and too late. It is false, these policies of QE will always fail, who will invest and develop business in such an environment ?
Arni Highfeld at 06:12 I recognise much of what you say about Japan but the Korea you paint is not the one I know. Korea is a remarkable development success, as was Japan, and as China is now. It does have a vibrancy and a desire to beat Japan. Given its demographics it may well. But Japan is surely the more fascinating culture and the food is far better!
�Mr Bernake,the brand new John Law of 2009, is doing all his best,following Irving Fisher�s advice,to reflate asset, prices and whatever but the sensation is that it won�t be ever enough (deflation) or will be too much (hyperinflation).� You may well be right, Club Med, but it is still very hurtful to indict me (my relation wrecked the French economy and got rich, so not that bad), when I am suffering from the depredations of another Scotsman, not very far from here. I am afraid that Brown�s recipe will be, as it has been in the past, to steal from the future. With an aging population that will be a good short term fix, but will lead to purgatory for people on fixed income (lots of those now) and our future productivity (for who will invest). The only real way out of our problems (not without pain), is to set out a credible plan to reduce, over time, government to it�s essentials, (we all in our hearts know what they are) and encourage private investment in rebuilding our productive economy and infrastructure. Unfortunately, large sections of the UK population will have to get used to having proper jobs again. Our young people will probably appreciate that after the initial shock.
And what sort of impact will Japan in crisis have on China? There is an Asian bubble of that we can be sure. Time to short emerging markets?
@Michael A. Kamperman on November 02, 2009 at 06:18 AM Printing money is the only way out of the world's debt trap. An oxymoron if there ever was one ! Ahem.... The phrase "Printing Money" refers to the creation of new money based on new government debt. So how does more debt get you out of the debt trap? "idolatry of worshipping gold" I'm not sure what you mean here. The odd poster here and on other blogs do indeed believe that once the fiat money has finally crashed then another medium of exchange will have to step into the breach. Gold, historically, is that other medium whether you personally like it or not. However, those people are not the ones running the financial system. The people running the financial system certainly do not idolise gold. They do anything but. They are intensely anti-gold. So when you say... "What's sad is so many are suffering so needlessly in this New Great Depression" You mean the current woes are down to an adherence to a gold based policy? You must be living in some parallel universe.
I'm taking to the hills.
So, reading the article, what is going to happen is that 1. The government will, in the end, be forced to reduce spending. 2. The less-than-break-even widget makers will export their jobs and build widgets wherever it is cheap to do so. 3. The appreciating Yen will make goods and services ultra cheap to import for Japan's army of OAPs and part-time workers. Isn't this deflation actually precisely what is required?
To Jon Livesey: If QE worked, it would show up in the graph below To A Monk of great renown: The graph below tells me that despite the several Trillion Dollars in cash and guarantees and despite all the QE, inflation has not picked up... where do you see inflation? To InEgoVeritas: You say deflation is a hoax because it is the banks that don't want to lend but you end your comment saying borrowers don't want to borrow... that's exactly what deflation is about... ironic is it not? To Nick: The historical record shows that when the governments of the developed world are no longer able to meet their internal obligations (mail delivery, fire fighting, policing, road maintenance... pensions...) nor their external obligations (interest on debt), war is pretty much guaranteed. We are not talking here about wars conducted in backwaters and that engage only the military. Here, we are talking about wars that fully engage the human and material resources of a country. http://research.stlouisfed.org/fred2/series/MULT Guido http://guidoromero.wordpress.com/2009/10/19/the-next-world-war/
@ David Goldsby You seem to know your economics - definitely better than me. However, in your persistent campaign regarding the deflationary effect of 'usuary' and 'inflation targeting', I sense you are making a political economy argument rather than a simple economic one. I say this because you (and Keynes for that matter) seem way too smart to separate Politics and Economics in the childish way that these are presented in the media. Also, you use emotionally loaded words like 'usuary'. Most ordinary people would never associate that word with a real return of ~2% pa - even assuming this is truly on offer (which I seriously doubt as I don't recall ever being offered anything like that as a real risk free return - not to mention the effect of taxation on the GROSS interest on the true real rate of return). Also 'rentier'. Most ordinary people would never associate that term with putting their savings in a building society. Also, your assertion that 'risk' is only justification for 'real return'. What about service, ie enjoying the economic utility of my savings to invest in your money making scheme? Your argument smacks of the Casino - not a Market. So that your readers can truly understand the point you are making, would you be so kind as to share your political argument with us too? For example, I recall that Keynes (whom you cite so often) was in essence persuaded that Socialism was inevitable and even desirable. Is this your opinion too - given your apparent desire to devalue the savings of the ordinary person to nothing? You both seem smart guys to me - I'm even willing to consider you might be right and that this is the only answer! If, as I suspect, that is case please let us know. Also, could you let us know why Socialism is going to work this time? For myself, I cannot believe that an ever expanding money supply and ever rising prices are ever going to end anywhere other than in tears. Regards
The REAL problem exacerbating the International financial/monetary collapse is the debt ridden Fiat System, drowning in Derivatives. Its time to let the collapse move forward, stop propping up a dead horse and return to metals-based Monetary Systems, with zero interest money spent into circulation, not borrowed.
Fascinating article! Is economic leadership and coordination in Japan totally absent? The absolute economic fundamentals of Japan look superb: they have the products, the management, the technology and the R&D capacity. The underpinning of these attributes is the ability to manage and facilitate change. These attributes are transferable to the political process to move the post WW2 Japanese economy from its mercantilist roots to a balanced socio-economic model, by expanding the domestic market. The demographics mean the needs must exist. In the short term, surely the Japanese will buy US treasuries by the billion of dollars to force the yen down but helping to finance the US deficit and economic transition? Monetary easing on a massive scale, with an objective of achieving 1% inflation, should recapitalise the Japanese Banks How? As well as the purchase of monetary assets, purchases should be made of real assets (property etc) as long as the rental income is higher (possibly much higher) than the bank rate. This should stop the collapsing asset prices and boost the value of bank security. A combination of massive cash reserves and liquid markets for bank assets should stop the banks collapsing/ rapidly recapitalise them. Likewise the dollar purchases should be partially into real US assets as long as these assets are income yielding. This should underpin these US markets. The Japanese, by riding the yield curve, helps fund the US balances of payment (and Government) deficits and assists in funding these twin deficits in an adequate manner.
David Goldsby on November 01, 2009 at 10:43 PM - "... the world has suffered economic crisis after economic crisis, and it continues in place because it feeds the established social order with a financial tythe, and they can foist it on the masses because the truth is counter-intuitive to the little rentier mindset which they have foisted on the bourgoiesie with centuries of propaganda [...] Any scapegoat, any action, anything, except admit and change the racket of usury." Precisely. Time for a Babylonian/Judaic style Jubilee (financial-only, puhlease: enough of the dark ages of the soul already) which may well need to last well beyond a traditional year, given the complexity of unravelling the exponential (pace NorrieC) tithing mess without causing far more misery and destruction than that itself engenders, and with a concomitant reconsideration of who owns what and who owes what, to whom, when, how, on what terms and for how long, followed by a resultant major reconstruction of an integrated international financial system on sustainable, non-usurious, and - especially - determinate lines (good for the populace and essential for "the environment"). Probably with a commodities standard at its base, but a new, dynamic one, engineered for a modern world, not an old, static one stuck in some remote, Alaskan riverbed. Cui bono? Absolutely not the long-established and nouveau riche profiteers from the exponential tithing mess of industrial and post-industrial capitalism, who are, even now (especially now), sinking billions of OPM into keeping that disgusting hulk afloat for further deliveries of their ongoing overdose (or fix) of privilege. But until they - and, to the extent that we're all in this together, we - get socially responsible, or are gotten socially responsible, like it or not weaned from the overweening greed of centuries, we are stuck with the mess forever we are stuck with the mess forever we are stuck with the mess forever. Nothing wrong with a right to private property, provided it's accompanied by a greater than infantile understanding of the words "right", "private" and "property". So, is any improvement likely? Is the Archbishop of Canterbury a Roman Catholic? Apparently, almost. Hope springs.
Get out of the big cities in Japan and everybody (read EVERYBODY) appears to be 70 years old. Nowhere on the planet is it more scary than in this country when staring at an agiong population. My own view is that this is a red-herring and that any government can change the demographic question literally overnight. The human fascination with sex and money is the key, pay people to have sex (through child allowances of various descriptions) and the problem is solved. If someone gave me a financial incentive to have a couple more kids, I would certainly think about it.
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