Look Out - Japan is a Powder Keg

Townhall.com ^ | December 29, 2011 | Mike Shedlock

[Kaslin]

A torrent of bad news hit Japan in November. Please consider some details from the Bloomberg article Japan Factory Output Falls on Global Slump

• Factory output fell 2.6 percent from October
• Exports fell for the second straight month
• Capital spending in the third quarter dropped 9.8 percent
• The Bank of Japan Tankan quarterly index of corporate sentiment fell to minus 4 this month. A negative figure indicates that pessimists outnumber optimists

Japan blames this mess on a strong Yen and Thailand’s worst flooding in almost 70 years. The flooding crippled the output in Southeast Asia of Japanese companies such as Sony Corp. and Honda Motor Co.

Japan created four separate "supplementary budgets" totaling of 20 trillion yen ($257 billion) to deal with the the earthquake and tsunami. In 2012, Japan will create a "separate budget" for reconstruction.

However, no matter how many piles spending is split into, Japanese deficit spending cannot be hidden.

Japan's problems don't stop there. Europe is Japan's third largest export market, and Europe is a basket case. Europe will remain a basket case if Eurozone austerity measures are even modestly implemented.

Land of the Rising Debt

Pater Tenebrarum had some excellent charts and commentary in his post Land of the Rising Debt

Government spending does not 'spur growth'. If it did, Japan would have been the world's growth engine for the past two decades. In reality, every cent the government spends must be taken from the private sector and therefore can no longer be spent or invested by it. We can see what the government's spending achieves (not much) – what we cannot see is what would have been achieved had the government left well enough alone and the private sector had saved, spent and invested instead. This is the 'broken window effect' – one must not only consider the obvious economic effects of a policy, but also the 'unseen' ones. Government spending is a burden, not a boon.

Like its counterparts in Europe, Japan's government tries to get its house in order not by reducing spending – apparently a completely taboo subject in Japan – but by raising taxes. This will predictably - just as it does in Europe - double the burden on the economy. Since these tax hikes are immensely unpopular in Japan, it is not necessarily likely that they will happen. Moreover, there may be no more time to take effective countermeasures against the growing debt load: the death spiral may well begin before such measures can be implemented and take effect.

Not only is Japan's debt-to-GDP ratio uncomfortably high, its tax revenues continue to decline precipitously as a percentage of government spending.



click on chart for sharper image

In such a situation, the level of interest rates becomes an ever growing concern. Right now, Japan's interest rates remain among the very lowest in the world. And yet, in spite of near record low interest rates, the percentage of tax revenue the government must spend on interest expenses is increasing fast.

Powder Keg Waiting for a Spark

The pertinent point is not the sorry state of affairs including a debt-to-GDP ratio of 220%, but rather when it matters. So far Japan has avoided printing on the scale of the Bernanke Fed, but one has to wonder how long that can continue in spite of Japan's dire worst in the industrialized-world demographics.


Tenebrarum points out "At the moment, JGB's trade like 'risk free' debt, in spite of the fact that Japan has lost its 'AAA' rating long ago and has been downgraded again this year, with further downgrades likely. Should the percentage of foreign ownership of JGB's rise significantly, the probability of a 'non-linear' debt market convulsion will rise commensurately. The Japanese government can 'financially repress' its own institutions, but not foreign investors."

"It seems rather like a powder keg waiting for a spark".

Indeed! Moreover, Japan's efforts to kick the can down the road perpetually issuing short-term debt that will need to be rolled over at some point insures the explosion will be massive once the debt-bomb finally ignites. Please see Japan Seeks to Market Record 145 Trillion Yen Bonds in 2012; Kicking the Can Japanese Style for a brief analysis.

[netmilsmom]

70% of Japan’s export are machinery; precision instruments, optical instruments, electric appliances, cars, construction machines and industrial robots.

Besides, they have some of the best entertainment on the planet. Beside the fact that Disney has ruined most of the films with bad dubs, watch anything by Studio Ghibli and you will have a treat.

And Gaki no Tsuaki...seriously. Devote 15 minutes of your life to this and you will be highly amused.

http://www.youtube.com/watch?v=gNanH4xWDPI&list=LL6J5ThQ_82LfmlpT8lRo6Ng&index=13&feature=plpp_video

[Moonman62]

Japan's major stock index has declined steadily since 1990. It's now one third of what it was then.

NIKKEI 225

[Tax-chick]

I should have specified health providers.

Did you notice that you just typed the words "health providers"?

It's really weird that you - that any of us - could do that, without something in our brains screaming, "That's meaningless garble!" A doctor (nurse, physical therapist, radiologist ...) can do a lot of things for a client, but "providing health" isn't one of them, ever.

[GonzoGOP]

Those "cut takers" can actually enhance efficiency. I've created many analytical software systems that help a corporation plan huge expenditures of money

That was kind of the point I was trying to make with transportation and the accountants. Efficiencies are a very real factor. It is more efficient to grow food in Iowa and ship it to New York than it is to grow the food in New York. And to do that you have to keep track of the shipments and inventories.

But it is essential to remember that efficiency is the elimination of waste, not the creation of value. No matter how efficient you are, if you create nothing, you have nothing. Once the amount of wealth being created in a nation falls below a certain level the standard of living begins to fall, no matter how efficiently you distribute the remaining wealth.

[VanDeKoik]

Ok, I will admit I’m a sucker for Japanese game shows. ;^)

I’m am surprised that Japan still manufactures so much. I could have sworn they outsourced all of that to China and SE Asia.

[Travis McGee]

Ping

[painter]

Indeed! Moreover, Japan's efforts to kick the can down the road perpetually issuing short-term debt that will need to be rolled over at some point insures the explosion will be massive once the debt-bomb finally ignites.

Please see Japan Seeks to Market Record 145 Trillion Yen Bonds in 2012; Kicking the Can Japanese Style for a brief analysis.

Add to that The United States will have to refinance OVER $10 TRILLION in debt in 2012 TOO!

[gogogodzilla]

The real issue that wasn’t addressed in this article is demographic. Japan’s population is aging fast and shrinking.

It’s to the point where the Japanese government is encouraging people to move to more populated areas as entire villages being to die off. All the young left for work in the cities and the rest die, one by one, of old age.

And it’s just going to get worse, as their young adults aren’t having children, either.

And without an expanding workforce, they cannot have economic expansion within Japan, as they’ll need to wring more productivity out of fewer workers just to break even.

Couple that with the governmental costs associated with the elderly and retirement... and you end up with a government that pays it’s bills with debt. For they can’t get enough money out of the remaining workers to pay for the costs generated by the elderly.

That said, I think that Japan is banking on the elderly continuing to follow their old habit of buying Japanese bonds into retirement... that way the elderly will pay for the government to care for them. And then die off before the bonds mature.

[gogogodzilla]

I’ll take the exploding lolitas in ‘Hello Kitty’ costumes, please!

:-P

[Elsie]

General Macarthur called Japan a nation of 12 year olds.

In 1951.

They'd be...

...73 now.

[Elsie]

General Macarthur called Japan a nation of 12 year olds.

In 1951.

They'd be...

...73 now.

[Tax-chick]

I suppose most people would, given the options I presented. Can you imagine how a Japanese-girl version of “Occupy Wall Street” would look?

[Attention Surplus Disorder]

“It seems most every industrialized nation that has exported many of its manufacturing plants and jobs to cheap labor nations ends up with a mushrooming debt problem.”

A statement profound in its implications, but (sorry!) not Nobel prize material. It goes back to the creation of true wealth versus credit. Also relates to balance of payments and a whole lot of other things. It works for a while...

[Elsie]

Dem boyz iz NUTZ!!!

[Will88]

Also relates to balance of payments and a whole lot of other things. It works for a while...

And it relates to having productive work available for most all the working age population, work that enables workers to have a minimal, USA standard of living. A country can export manufacturing jobs and outsource many more skilled jobs, and run enormous trade deficits, and unnecessarily import hundreds of billions in crude oil, and then pretend that it's an overall benefit, but when we look at the almost $1 trillion in annual government expenditures for welfare, medicaid, food stamps (and growing), etc., etc., I think we see what these policies actual bring about.

The trade policies that have been followed can have no result but to lower the living standards of a portion of Americans, and then gov't makes it up with more gov't programs and mushrooming budget deficits and national debt. And, NO, those programs are not going to be ended and every citizen assume total responsibility for their own needs. We better relearn how to have an economy that provides work opportunity for most every one who needs to work.

[netmilsmom]

They are. And I love them.

http://www.youtube.com/watch?v=GlUWZT9htW8&feature=related

[netmilsmom]

BTW. that should have a “Not safe for work or children” warning on it. PG-13 for sure.

But the Japanese have a bit of a different idea about right and wrong.

[gogogodzilla]

Probably a scaled-up version of this:

(heh heh heh) :-P

[hinckley buzzard]

basically Japan would love to revert to a norm of feudalism and stagnation

I don't doubt you are right; in the long run, nations don't change their character much. History illustrates, time and time again, that culture trumps politics, every time.

[dennisw]

Farming and industry.... you left out mining. All is built on those three with lots of skimmers trying to get their cut off these three sectors.