Japan – Dancing on the Edge of Calamity
Duncan Cameron has asked me to post this contribution by Ken Courtis,Â a recognized authority on Japan and world economics. A Canadian academic turned investment banker, he has been resident in Japan for many years.
On 09-11-26, at 19:30, Ken Courtis wrote:
The reality of Japan’s fiscal situation is as close to calamitous as any major economy has ever experienced, in peace time or during war. And it is set to become still more problematic.The on-balance sheet central government gross debt is set to touchÂ 200% of GNP within a matter of a few quarters. With the economy contracting and deflating, economic policy, indeed large parts of the country’s current economic structure are hurtling ever deeper into a complete cul de sac.We do not have a good picture of the off-balance sheet obligations of the Japanese state, but it is significant. Earlier this decade, estimates based on data released by the Ministry of Finance seemed to indicate that off balance sheet claims on the state were then well in excess of 300% of GNP. In the meantime, the on-balance sheet debt continued to soar.Debt, the wrong demographics, and deflation are the most poisonous of economic, political and social cocktails. In addition, Korean, Taiwanese, Chinese competitors are beginning to slice entire sectors off Japan’s global export market share.For the moment, interest rates are ultra low, but imagine the economic and social tumult were government funding costs to rise, say to 2%, which is less than half the 50 yr average. With debt at 200% of GNP, that would mean that it would take 4% of GNP each year simply to service the debt. So if Japan were unable to grow at 4% annually, the debt would keep expanding. That means that Japan would be trapped in the jaws of a vicious debt trap.Is there any potential for Japan to be growing at 4% real, year in, year out, anytime soon? And remember, I have used as an example, a 2% cost of funds. Plug a 4% cost of funds into the equation, and see how daunting the situation would be, and 4% is still less than the long-term -50 yrs– average cost of funds for Japan government paper.There has been some discussion about the budget review which the new government has initiated. The only thing more urgent in this regard is a review of fiscal policy and of the country’s overall economic strategy, which is leading nowhere but to big trouble.Should it become more broadly apparent that Japan is dancing on the lips of disaster, and the recent surge in CDS spreads indicate that at least some are becoming more than jittery, the knock-on effects would be dramatic indeed for a still extremely fragile global financial system, where we have seen in the last 24 months as a result of the worldwide combat to contain the wreckage of the US economy which was the Bush regime legacy to its successor, a surge in public sector debt of some 35% of world GDP!
Tied into this dynamic is the quasi totality of Japanese social policy, economic structure, indeed even its security position, and in particular its relations with America, and the parts of the world economy which will be generating growth in the decade to come. That growth is going to be led by China.Kenneth S. Courtis