Japan: The real crisis?

21st September 2012

The land of the once rising sun is in line for a gut-wrenching loss of confidence in its growth prospects, sovereign debt, and banking system, claims a report on the Atlantic.

While in the west we're focused on QE3, Japan has launched a dramatic eighth round of quantitative easing to weaken the yen and cushion a slide back into recession.

In fact, its sun hasn't shone for some time.

Japan may be the third largest economy in the world, but for the past two decades its GDP growth rates has fallen behind that of its economic rivals, the US and the UK.

And the outlook appears bleak. Japan has halved its second-quarter growth estimate, raising fears of a recession, while the US third round of QE3 threatens to down the US dollar against the yen.

Meanwhile, Japan's recent nationalization of China's Diaoyu Islands ignited a wave of protests forcing some Japanese businesses with operations in China to temporarily close down their plants and offices.

An economic trade war

The Wall Street Journal's Alex Frangos says this could have serious consequences because Asia's two biggest economies are integrally tied together in trade and investment. Total trade between the two is $345 billion and although it's arguable who would be worse hit, both economies would suffer for sure.

Elsewhere, the Economist reports that this summer has seen a succession of maritime disputes involving China, Japan, South Korea, Vietnam, Taiwan and the Philippines.

But whether further, more serious, disputes will happen is debatable given that China is now Japan's biggest trading partner, and the Chinese government has enough problems at home: why would it look for trouble abroad? But it is a fear of the markets.

Walking on a tightrope

Meanwhile, Japan's government now one of the most indebted in the world, with a gross debt that's 235.8 percent of GDP and a net debt that's 135.2 percent of GDP, and the only country comparable in the Eurozone is Greece.

But why? Its success has made it vulnerable, stresses The Atlantic.

Modern financial systems also permit governments to borrow large sums from investors, and as finance has evolved, that borrowing has become easier and cheaper. In the most-advanced countries, governments have increasingly taken advantage of expanding markets for short-maturity debt, whose principal is due soon after the loan is made.

And so Japan's problems have spiralled…

This year, the Japanese government needs to issue debt amounting to 59.1 percent of GDP; that is, for every $10 that Japan's economy generates this year, the government will need to borrow $6.

The demographic decline

Also, let's not forget that about half of the Japanese government's annual budget now goes to pensions and interest payments. As the government has spent more and more to support its growing elderly population, Japanese savers have willingly financed increasing public-sector debts.

However, the Japanese are quick to respond to any challenges.

Andrew Rose, fund manager at Schroders, says: "Since the tsunami early last year, the Japanese authorities responded quickly and aggressively to the disaster, which helped the market recover some of the lost ground. More recently, however, the market has been volatile as the yen hit record highs against the US dollar and concerns about the eurozone debt crisis and the slowing US economy grew.

 "…Domestic politics remain in a state of limbo. However this is not surprising as politics in Japan have always been an issue in recent years, especially with a ‘revolving door' of prime ministers. Prime Minister Noda to his credit did grasp the political ‘hot potato' of the consumption tax but the ‘quid pro quo' was a promise to hold an election, probably in November, the result of which looks unclear."

So Japan faces some hefty hurdles, but has slid out of the spotlight given other global events. Could its sun shine again? What do you think?


More on Mindful Money:

BOJ prepares for negative bond yields as it expands its QE

What has driven the slowdown in Japan?

What happened to the post-tsunami economic recovery promised in Japan?

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The Financialist

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