Time Is Running Out For Japan

Imminent financial crisis of Japan

Japan is the country with the highest Debt/GDP and is currently running a fiscal deficit. How long will it be able to withstand?

Currently, Japan has the highest Debt/GDP and is running a fiscal deficit. As per the table below, Japan is similar to other countries that are facing serious financial problems: Venezuela, Egypt, Brazil and Greece (countries that are in the most left-upper quadrant have high debt / GDP and are running fiscal deficit)

Japan

The Bank of Japan blindsided global financial markets Friday by adopting negative interest rates for the first time ever, buckling under pressure to revive growth in the world’s third-largest economy. http://www.cnbc.com/2016/01/28/bank-of-japan-adopts-negative-interest-rate-policy-reuters.html

However, will it work?

Refer to https://www.quora.com/Why-does-Japan-have-so-high-debt-GDP-ratio-Will-it-default-like-Greece

  1. Japan has a very high debt to GDP partially because it has attempted to use fiscal stimulus (i.e. paving roads) to jump start its economy over the last two decades. In addition, up until this point most Japanese Government Bonds (about 90%) are held by citizens of Japan, and this has allowed it to take advantage of extremely low interest rates. Low interest rates mean that Japan does not have very high interest payments in relation to it’s level of debt.
  2. The two factors which are likely to most significantly impact the Japanese ability to repay its debts in the future are it’s demographics and it’s economic growth
  3. The Japanese population peaked in 2010 and is now declining. In addition, an increasing proportion of its population is elderly. This, of course, means fewer working age people which means more difficulty growing GDP. More significantly, though, this also means that there are fewer people to finance Japan’s massive debt within the country. In particular, much of Japan’s debt is financed through Japanese citizens’ savings which are channeled through things like pension funds and life insurance.
  4. As the Japanese populace ages, people are going to start withdrawing from these funds making it increasingly difficult to finance the debt within the country. At the same time, the savings rate for younger people in Japan is also falling indicating that the fewer younger people in Japan will also not be contributing as much per person to financing the Japanese debt as in the past. Instead, Japan will have to venture out into the broader world in order to roll over it’s massive debt. This is likely a gradual process, but it seems likely that at some point enough debt will be held by non-Japanese citizens that Japanese Government Bonds will become susceptible to interest rate fluctuations similar to many other countries. At that point, Japan may start having difficulties paying back it’s debts.

In terms of technological innovation / competitiveness, is Japan falling behind Korea? We see Japanese firms folding up, whilst Korean companies are fast exporting their products globally.

Key Implications

Time to short Japan?

 

 

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Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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