Thursday, November 12, 2009

The Yen Will Be the First to Fall

I've been wondering about this for a long time and a recent spate of blog postings and articles have rekindled my interest. What's the future hold for Japan and the Yen? I wail and gnash my teeth all the time about how we borrow and spend, but nobody does it like the Japanese. They've blown their debt up to the point where it's about three times the size of ours, per person.

Japan is aging. They haven't had replacement birth rates for a long time and their workforce is retiring faster than new workers are coming in. They don't like immigration and the fact that they live on an island makes crossing their borders illegally in large numbers impossible.

This is all unsustainable. They are borrowing more money all the time and their ability to service their debts is going away. What's going to happen? Here are a few links and excerpts.

Albert Edwards, a top analyst with French bank Societe Generale:
Japan would run into difficulty funding itself next year as demand for Japanese government bonds waned and bond yields rose further, he said.

The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.
Here's the WSJ on Japanese debt:
But Moody's said "a prominent rating concern is whether the DPJ (the party that just won the Japanese elections) can reconcile its policy priorities with the challenges facing the economy, maintain market confidence, and thereby squarely place the economy back on a path of fiscal consolidation."
The DPJ campaigned on a platform of people-first social services, promising to boost domestic demand by easing the financial burden on households with a child-care allowance, health-care changes and the elimination of highway tolls.

The proposals are expected to cost some seven trillion yen, or around $75 billion, in the fiscal year starting April 2010, rising to 16.8 trillion yen in the fiscal year ending March 2014.

To pay for this, the party vows to trim fat from the existing budget, reallocate money for better uses, sell state assets and tap the "buried treasure" of 4.3 trillion yen in special government accounts.
Emphasis mine. Who does that sound like? Anyone want to take a sucker bet that they'll actually reduce their spending? Second verse, same as the first!

Who are the DPJ who just won? It's the Hope and Change crowd!
In a historic result, unofficial results showed that the Democratic Party of Japan (DPJ), a leftist grouping of ruling-party renegades, social democrats and socialists, was heading for a landslide. It is led by Yukio Hatoyama, a mild-mannered career politician likely to be the next prime minister. He promises a government less beholden to the powerful civil service, wants to temper the free market and is keen to dole out cash to the disadvantaged in the economically stagnant and ageing country.
Emphasis mine. They're screwed.

Even the NYT is getting into the act, briefly drawing the clear parallels between the doomed Japanese economy and Obama's economic illiteracy that they passionately support. First, some hilarity:
(T)he finance minister, Hirohisa Fujii, suggested Tuesday that the government would sell 50 trillion yen, about $550 billion, in new bonds — or more.

“There’s no mistaking the budget deficit stems from the past year’s global recession. Now is the time to be bold and issue more deficit bonds,” Mr. Fujii told reporters at the National Press Club in Tokyo. “Those who may call this pork-barrel spending — that’s a total lie.”
Hahahahaha! Here's more.
Tokyo’s new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.

“Public sector finances are spinning out of control — fast,” said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. “We believe a fiscal crisis is imminent.”

One of the lessons of Japan’s experience is that a government saddled with debt can quickly run out of room to maneuver.

“Japan will keep on selling more bonds this year and next, but that won’t work in three to five years,” said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. “If you ask me what Japan can resort to after that, my answer would be ‘not very much.’ ”
Where does this all lead?
In the long run, even Japan’s sizable assets could fall and eventually turn negative. Japan’s rapidly aging population means retirees are starting to dip into their nest eggs — just as government spending increases to cover their rising medical bills and pension payments.
Sort of like when Social Security stops running a surplus and has to start cashing in those Treasuries it bought. Like it did last year. Here's the payoff section.
“The yen is set to enter a long decline” in both stature and value as investors lose confidence in Japan, said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo.

Considering the state of Japan’s finances and economy, Mr. Kumano said, the yen’s recent strength against the dollar “isn’t an affirmation of Japan — it’s the yen’s last hurrah.”
The shape of things to come here?


tim eisele said...

The sad thing is, when I was a kid, Japan was held up as a model - the savings rate was supposedly much higher than the US. That has obviously been flushed down the toilet, and in a very short time, too.

I wonder to what extent that was caused by people in power noticing that there was all this money being saved, and working out how to steal it without being noticed? It seems to me that that's the big hazard of saving money - it is a very, very tempting target, and certain people will spend a lot of time figuring out how to defraud you of it once they find out it exists.

K T Cat said...

Tim, to me this shows that the contagion is global. Keynesian economics are at the heart of this. When Japan crashed years ago, they went straight to the JM Keynes playbook and borrowed and spent like fiends. It clearly has not worked, but globally, we've all implicitly decided that earning what we get is for dummies and we all deserve more rights in the form of goodies.

Keynes predicated his theories on people, companies and governments saving money during good times, but that's not how humans work. We're rationalizing animals, not rational ones. As soon as you give us an excuse to grab pleasure now and pay for it later, we will do it. Hence, monstrous debts.

All of the stuffy, closed-minded institutions that lectured us on strict moral behavior which we wrecked in the 1960s had it right. And now, as a famous preacher once said, the chickens are coming home to roost.