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Stupid Stuff: Japan Skirting An Economic Reef!

  • Written by Syndicated Publisher No Comments Comments
    August 15, 2012

    I’m amazed that Japan has not yet hit an economic reef. At over 230+%, the country’s debt to GDP is so far out of whack that I keep thinking that something has to give. I’ve been wrong for years.

    The trend lines for Japan are awful. A decline in total population coupled with a rapidly aging society is a recipe for slow or no growth. Japan is the world leader in these critical statistics. I don’t think there is anything that Japan can do to reverse its social/economic future. Projections on the critical variables for at least the next ten-years continue to head south.

    It’s not as if the Japanese are unaware that they are headed for a debt train wreck. They have just passed new tax legislation that could make a meaningful contribution towards stabilizing Japan’s debt to GDP problem. But the new law is a sham. The new taxes will never get paid.

    Japan has a consumption tax today of 5%. The new laws will raise the tax to 8% in 2014 and 10% in 2015. Moody’s thought this was a great idea, and said this about the tax hikes: (Link)

    “it is an essential component of Japan’s fiscal consolidation goal, achievement of which we consider necessary to maintain market confidence in Japanese government bonds.”

    But here’s the joke; in order to get the votes to pass this very controversial legislation, there is a critical stipulation that the new taxes will not come into effect unless the country is increasing GDP at a minimum rate of 2% a year (or nominal growth of 3%).

    There is no chance in hell that Japan will achieve the triggers. The folks who passed the laws know that. I think Japan deserves the annual award for the most heinous “kick the can down” tactic. The following chart shows how Japan has limped along for the past 20 years. Note the GDP performance over the past decade. What are the odds that it breaks 2% anytime soon based on the prior track record?


    How’s Japan doing today? Is it on it way to achieving the all important 2% GDP target for 2013 (the trigger for the 2014 tax increase)? Not a chance. From the FT this morning:

    Moody’s warned about the possibility that the taxes would never be levied:

    the gross domestic product growth targets contained in the new law remain an area of uncertainty

    How hard do you have to stretch a rubber band before it breaks?

    Images: via Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.