It’s a desperate gamble but Japan’s Democratic Party government, headed by Prime Minister Yukio Hatoyama, doesn’t have much choice.
To break the hold of deflation on the Japanese economy, the country has to spend money—lots of money—it doesn’t have to stimulate an economy that threatens to turn in a third straight year of negative growth in the fiscal 2011 year that begins in April 2010.
The government’s new budget calls for a record $1 trillion in spending for the fiscal year. But it’s not the size of the budget that’s so shocking. Government projections say that tax receipts next year will come to just $405 billion. For the first time since World War II Japan’s government will borrow more than it takes in from taxes.
That new borrowing—an estimated $485 billion—will bring the country’s total debt to $9.4 trillion by the end of fiscal 2011 in March 2011. That will be equal to 181% of the country’s GDP (gross domestic product) by March 2011. In other words Japan will owe almost two year’s worth of the activity of its entire economy.
How big is that debt burden? Let’s look at a few comparisons.
Just for context, Greece—the country that all the credit rating companies are rushing to downgrade now–is projected to finish 2009 with debt equal to 112% of GDP. The United States, according to the International Monetary Fund (IMF) will finish 2011 with gross government debt equal to 98% of GDP. (Before you feel too smug about that remember that this ratio was at just 71% in 2008 and in Korea the ratio is at 35%.)
If you follow Japanese politics and economics, where the government proposes to spend its stimulus is shocking too. Japan has launched stimulus packages before in an effort to get its economy growing. The problem with those packages, I’d argue, was that they were too small and too focused on buying votes for the Liberal Democratic Party governments that ruled Japan in an almost uninterrupted string until their defeat by the Democratic Party of Japan in September’s election. Much of the stimulus money went to under-populated but politically influential rural districts where it was spent on infrastructure to nowhere. It’s hard to stimulate an economy if year after year the stimulus keeps being shoved into unproductive projects.
Now rather than building cultural resort villages in districts that tourists never visited or on road, water, and sewer infrastructure for industrial parks that never attracted any tenants, the Hatoyama government has proposed jump starting the consumer economy by increasing spending on welfare and education. The idea is that things like cutting or eliminating fees for public school education will free up money in household budgets that could go into consumer spending.
If the Hatoyama stimulus doesn’t work, of course, the country will wind up with an economy that’s going nowhere and a government debt that is massively higher.
For investors outside of Japan, the gamble means that the Japanese government will be issuing a truckload of new debt at the same time as the governments of the United States, the United Kingdom, Spain, Germany, and the rest of the developed world will be carting their own mountains of new debt to the bond market.
Sounds like a lot of upward pressure on interest rates, downward pressure on currencies such as the yen and the dollar, and increased demand for gold in 2010, no?
Jim, I would like to know what is the tendency of the ‘developing’ world to use our debt (specifically China) as an assett in their banks allowing them to lend out the economy as a whole? And what will happen to that form of stimulus when mountains of low interest debt in those foreign banks suddenly lose their value because new debt will have increased interest rates?
But does Japan or any country facing deflation have any other choice besides a Great Depression? I ask this in the context of the article in Barron’s, “A Japanese Rx for the West: Keep Spending”, January 4, 2010, pp. 28-30.
It seems to me that Japan by default has sent it’s productive economic base to China, and the only way out is debt.
Debt to nowhere. It appears that they are attempting to borrow their way to prosperity.
mp3106,
It all depends on whom you tax and whom you stimulate. We have stimulated the supply-side for the last 30 years and continued to tax the demand side. Look what we ended up with. Maybe we should reverse the course…
For those who are in the mood for more depressing news…:
The risks in 2010 from John Bougearel, Director of Financial and Equity Research for Structural Logic:
Domestic Risks and Uncertainties
1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”
Global Risks and Uncertainties
12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts
13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures
14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis
15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on
16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.
17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.
18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.
19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.
yes and also a drag on there economy in the form of higher taxes which will come due sooner or later.