By Anthony Harrington
Opinions on the Japanese economy vary wildly, from those like John Mauldin, who is fond of dubbing Japan “a bug in search of a windshield,” to those who think that Japan will muddle through, come what may. The latter camp has been making good ground recently, spurred by the success of Abenomics. However, Citi chief economist and renowned commentator Willem Buiter is not so sure. He believes that the potential sovereign debt crisis in Japan looks even grimmer than those in the eurozone economies if one focuses on the gross general government debt-to-GDP ratio.
According to the OECD, the debt-to-GDP ratio ranged from 90 to 166% in some developed economies in 2012 (“only” 166% in Greece, 140% in Italy, 139% in Portugal, 123% in Ireland, and 91% in Spain—collectively referred to as the PIIGS economies) but was a full 219% in Japan in the same year. Thus, Japan’s gross general government debt-to-GDP ratio is more than twice the OECD-wide average (109 percent) and by far the highest in the developed world. Moreover, the OECD projects that Japan’s gross general government debt-to-GDP ratio will increase even further to 231% in 2014.
So what is stopping Japan from imploding? The stock answer, and Buiter goes there first, is that Japanese debt is held by Japanese savers. Domestic savers, and in recent years corporate savers, have loyally bought Japanese Government Bonds (JGBs). Although household purchases of JGBs are quite low, households are exposed to JGBs through postal and bank deposits; insurance policies; and pension funds. However, Buiter, like many other observers, is highly aware of the fact that people save less as they get older. Japan has a highly skewed demographic with a big aging problem. The logical corollary of this is that domestic savers cannot be expected to prop up the JGB market for much longer. At the short-term end of the yield curve, Japan has become much more exposed to the vagaries of foreign markets, with foreign holdings of JBS rocketing from 11% in 2006 to 30% in 2012. By way of contrast, domestic savers remain firmly ensconced in longer-term JGB debt, so even after the earthquake and tsunami in March 2011, 10-year JGB yields rose no higher than 1.2%. Today, they are back down around 0.6%. As two IMF researchers demonstrate, auctions since the earthquake have seen steady demand and yields have been falling more or less steadily. All is not well, however: Japanese GDP growth in the final quarter of 2013 was just 0.3%, which still gives Japan four straight quarters of growth, but less than the market was anticipating. And one has to bear in mind the fact that the Bank of Japan (BoJ) is engaged in QE on a grand scale.
At its February 18th 2014 meeting, the BoJ decided to continue boosting the money base at an annual pace of around 60-70 trillion yen. Is this worrying for the likes of Buiter? Very!
He points out that Japan's debt-to-GDP ratio is 235% with the general government deficit running at more than 8% of GDP. On the plus side, Japan has a large stock of net foreign assets; a continuing current account surplus on the balance of payments; and a strong but diminishing home bias in Japanese portfolio preferences, which keeps Japanese citizens and corporates funding JGB issuance. But this is not a sustainable situation, he says. It will collapse; we just don't know when the market will lose confidence in the solvency of the sovereign.
Meanwhile, Japan is not exactly sitting on its hands. Under Prime Minister Shinzo Abe's famous Abenomics, the country has been generating a spate of growth plans and ideas. Not least of these is Abe's "Womanomics" - a major effort to encourage women to participate in the country's industrial life to counter the longevity-related demographic crisis. Abe wants the number of women in leadership positions in Japan to rise to 30%, from its current near zero percent, by 2020. The government is still dragging its feet or, more kindly, looking for solutions, on the theme of tax reforms and labor market reforms; but it is considering a reform of the energy and agricultural sectors, including the liberalization of the retail electricity market.
Much is happening, but is it enough? Time will tell...