Tuesday, August 17, 2010

Samurai Sunset

Japan’s weakest economic growth in three quarters adds pressure on policy makers to safeguard the recovery by expanding fiscal spending and loosening monetary policy to weaken the yen. Growth slowed to an annual 0.4 percent pace in the three months ended June 30 as consumer spending stalled and exports cooled, Cabinet Office figures showed yesterday. The expansion was less than the estimates of all 19 economists surveyed and pushed the economy into third place behind the U.S. and China. “If the yen strengthens further, the Bank of Japan may have no choice but to ease monetary policy" said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “We could see more fiscal support from the government. The central bank is likely to ease policy at its Sept. 6-7 meeting or sooner should the yen gain and stocks fall sharply" said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

The problem is.. there's really nowhere for the Bank of Japan to go. Rates on the Japanese Government's ten year bond are already at a global low of 0.95%. By comparison, the US ten year bond is at a multi decade low of 2.8%. The Japanese government's debt-GDP ratio has just passed the 200% mark (compared with the 115% figure for Greece and the 80% mark for the US). Japan has so far been able to finance it's government's debt load because the Japanese people are notorious for saving and frugality.. they were happy with loaning their government nearly interest free.. but no more. Their savings rate is now at 1% (compared with our 6%). Simply put, the Japanese people are close to being tapped out.

If the Bank of Japan does another round of "monetary easing" {this if where the Bank of Japan buys Japanese Gov't Bonds} it would drive the yield on those ten year bonds even lower, making them even less attractive to investors. The day of reckoning will come for Japan if and when it needs foreigners (instead of it's own people) to supply money at any spot on that yield curve, because that is not likely to happen at rates this low. If they were forced to increase the interest rates they pay on their bonds, the government would run the risk of sovereign default due to the size of their debt. It's a very tight rope they're walking.

The good news is that Japan still has a strong export economy and so there's the chance that they will be able to dig themselves out. They are an innovative, hard working lot. But they as a nation are getting old very fast; the total number of working adults in Japan decreases every year.. and their pension obligations thusly go ever upward. Between their debt level and their demographics, Japan's Keynesian Armageddon approaches.. and with their demise will come our own.

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