- Money Morning Australia

Why You Should Be Watching Japan’s Economy


Written on 07 May 2012 by Dan Denning

Why You Should Be Watching Japan’s Economy

The next phase of this ongoing global crisis may take place in Japan’s economy, not in Europe or the US. This may seem unlikely, given what’s still going on in Europe. Youth unemployment is over 50% in Spain. You’re seeing the limits of economic and monetary policy in Europe. People (some of whom admittedly have vested interests in keeping a cheque from the government coming) are resisting the elite’s policy changes and money shuffling.


The next stage of the European debt crisis is political. But the next stage of the world monetary crisis will probably begin in Japan’s economy. It all goes back to last year’s devastating earthquake, tsunami, and nuclear crisis. That sequence of events has turned Japan into a long term net energy importer. And that single change threatens to send Japan into a major debt crisis this year.

Here are the relevant facts about Japan’s situation:

  • Fiscal deficit 10% of GDP
  • Annual revenues of ¥45 trillion
  • Government debt-to-GDP ratio of 230%
  • First full-year trade deficit since 1980
  • Interest expense will consume revenues at higher interest rates

Japan has run a huge government deficit for years. The current debt-to-GDP ratio of 230% is the highest in the developed world. Before last year’s earthquake, this wasn’t a problem. Japan was a nation of savers. And with a current account surplus, it could finance its own deficits with its own savings. Japanese savers were happy to buy government bonds, which, after all, were a lot better than stocks or real estate – especially for a large group of savers approaching retirement age.

Well, retirement age is now upon Japan. That is one complicating factor for Japan’s ability to sustain large deficits. Retirees are starting to live off their savings, instead of socking the money away with the government. But it gets worse.

The single-biggest economic consequence of last year’s three-part tragedy is that Japan is likely to run current account deficits for a long time. Why? It will now have to import energy, which means buying it at competitive prices on global markets (this is good for Australia, actually).

Japan’s fleet of nuclear power plants will stay idle for some time. It may never get back to full capacity. As you know, Japan is not a nation that’s rich in hydrocarbons. But it’s high end manufacturing industry requires tremendous amounts of electricity.

That electricity will have to come from either coal or natural gas.

It’s not hard to see where this story is going. And we’ll get their shortly. But aside from the rather bullish energy picture, the other major economic consequence is that Japan’s fiscal deficit is becoming more unstable by the day. As the figures above show, the interest on public debt has grown so large that it’s nearly consuming all of the government’s annual tax takings. Annual deficits continue to grow.

The Ponzi Finance Phase for the Japanese Economy

When you reach the point where you have to borrow more money just to pay the interest on money you’ve previously borrowed, you’ve reached what Hyman Minsky called the stage of “Ponzi Finance”. Japan is nearly there.

Now, the first consequence of reaching this point is that Japanese interest rates may start going up. That would be disaster. A rise in interest rates would consume even more of the government’s annual tax takings. You’d see a feedback loop in which debt costs quickly spiral out of control.

But that’s only if Japan must borrow in international markets. Keep in mind the Japanese government is not the only government seeking to borrow trillions of dollars (yen, euro) in the next five years.

This demand for credit will crowd out corporate borrowers. And in any event, the borrowing needs of governments exceed the amount of savings the world has accumulated. Something has to give.

What I expect to happen is that the Japanese will simply monetise new debt. Instead of selling the debt to investors, who will demand higher interest rates based on Japan’s deteriorating fiscal condition, the Bank of Japan will print money. This means Japan may be the first Western Welfare State that reaches the endgame phase of Ponzi Finance.

Dan Denning
Editor, Australian Wealth Gameplan

From the Archives…

Why China’s New Consumer Economy Won’t Give You the Trade of the Decade
2012-05-04 – Kris Sayce

Why China Could Be The Next Destination For the Financial Crisis
2012-05-03 – Merryn Somerset Webb

How Did We Get It So Wrong on Australian Housing?
2012-05-02 – Kris Sayce

This Indicator Shows the Copper Price Could Be Set to Soar
2012-05-01 – Dr. Alex Cowie

How Gold Nanoparticles Will Create A New Kind of Gold Rush
2012-04-30 – Michael Robinson



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Dan Denning
Dan Denning is Editor in Chief at The Daily Reckoning and the Publisher of Port Phillip Publishing. Dan is also the investment analyst and editor of The Denning Report. His high-level, macro-economic and stock market forecasts are read by more than 35,000 high-dollar investors and fund managers in over 70 countries. If you're already a subscriber to these publications, or want to follow Dan's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



How Money Morning Can Help You Can Become a Smarter, Better, Investor


Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom


This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…


The plan centres round three specific stocks.


To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'


The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?


Don’t sweat it. Click here for the next best thing…


World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3533.086+45.233 - +1.30%
  • ^FTSE6584.17+42.56 - +0.65%
  • ^AORD5432.500+19.900 - +0.37%
  • ^AXJO5439.900+19.600 - +0.36%
  • AUDUSD=X0.939
  • USDJPY=X102.065

Graphic Ad 1 – Blue Chip Stocks Report


Revolutionary Tech Investor

This report is about TECH MOON-SHOTS


Four of them, to be precise.


It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.


For four more tech moon-shots, click here.

Gowdie Family Wealth

WARNING:
The worst mistake you can make when handing wealth on to your kids


This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.


And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.


Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST


Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.


This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.


You could lock in up to $20,000 a year - and that's just the start. See how here.



Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years


Greg Canavan
doesn't make forecasts like this often.


When he does, it's because he’s found something that could make you money for years to come.


Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted


Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week


In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

Free speech is no longer really a right at all. Governments, vested interests, and lobby groups are [Read More...]

Australian house prices are going to remain high. Perhaps finally, when the last baby boomer retires [Read More...]

Make sure that the changes you make to your financial plan are from a credible source. Otherwise the [Read More...]

It was day two of the World War D conference, and the final session was starting. We were closing th [Read More...]

Services will boom according to the Reserve Bank of Australia. Sales assistants and tour guides are [Read More...]

In the many years since the creation of the US Federal Reserve System as America's central bank [Read More...]

In business, as in other things, we are being roughened up… and toughened up. We promised a grim acc [Read More...]

The worry is that the Russian and Ukrainian economies are suffering badly while politicians enjoy th [Read More...]

During good times, convertible notes behave like debt financing. But if there’s a bank crisis, the b [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery