Japan facts of the day

by on September 6, 2017 at 2:25 pm in Current Affairs, Economics | Permalink

The real interest rate Japan pays on its debt has fallen steadily. With short-term interest rates now negative, the country gets paid to borrow for short periods. The interest bill is even more manageable after factoring in revenues from Japan’s foreign exchange reserves and other public financial assets. As a result, economic stimulus under Mr Abe has finally stabilised Japan’s debt after years of relentless increase. It was 237 per cent of GDP in 2012. The International Monetary Fund forecasts 232 per cent of GDP for 2022.

Low interest rates mean the existing debt simply does not matter that much for fiscal sustainability. More importantly, and belying its reputation for wasteful public works, Japan has made a series of tough decisions on healthcare and pension spending. Real per capita outlays on the elderly have fallen. Tax revenues are up by six percentage points of GDP since 2000. “If this approach continues,” write Mr Weinstein and Mr Greenan, “Japan may very well avoid either a financial crisis or a major inflationary episode.”

That is from Robin Harding at the FT.

1 msgkings September 6, 2017 at 3:02 pm

It’s good to see Japan showing how a wealthy country with a declining, aging population can muddle through, because that’s all of us someday.

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2 Goliard September 6, 2017 at 3:38 pm

Except for the homogeneity.

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3 Jan September 6, 2017 at 6:43 pm

In spite of it.

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4 Jen September 7, 2017 at 9:58 am

Or because of it

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5 Jon September 7, 2017 at 2:43 pm

Or in spite of it.

6 Abelard Lindsey September 6, 2017 at 11:11 pm

Yes. I lived there for 10 years and may well live there again. I call it benign decline and, if they can navigate their way around either the financial crises or inflation, it is no bad thing either. It would certainly be good for my wife (who is Japanese) and myself if they can accomplish this.

It is worth considering that the average home space for Japanese people has increase from 700 square feet (I think) in 1991 to 1,400 square feet today.

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7 msgkings September 7, 2017 at 12:07 am

Sure, less people = more space

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8 JWatts September 7, 2017 at 12:11 am

No that’s not it. The population is higher today than it was in 1991.

https://tradingeconomics.com/japan/population

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9 mulp September 7, 2017 at 1:46 am

But the same today as in 2000. In 1990, the population was about 124, 127 in 2000, and 127 today, declining from a peak around 2010 of about 128.

But gdp continues to grow.

10 Careless September 8, 2017 at 4:27 am

mulp: try to make one post without making yourself look stupid/unsentient. Just one.

11 Todd K September 7, 2017 at 12:53 am

What evidence is there that Japan is in a “benign decline”? One area I can think of is the ability of those in their 20s today to both read and especially write kanji compared to when I first lived there in the early 90s. In 1992, Japan’s GDP per capita (ppp) was $31,000 but today at $38,000, up almost 25%. Japanese also work 15% fewer hours than in 1992 with the unemployment rate today at 2.8%.

What financial crisis? And why are journalists and even at times economists using gross debt and not net debt as a measurement?

There is much less pressure for both men and women in their 20s to marry before 25 or 30 if at all. There is much more equality today in the workplace compared to 1992 even if some gaps remain. The crime rate is still much lower than the U.S. There is still very little obesity at a 3% rate versus a 33% rate in the U.S.

(The quality of beer isn’t in decline either but that is only because it can’t get worse.)

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12 joe September 6, 2017 at 3:32 pm

Got to love the declining population. The U.S. should be so lucky.

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13 indeeed September 7, 2017 at 7:31 am

+1 Hard to see a gentle decline in population as anything but a positive. Less taxing on the environment and natural resources, investment in robotic tech taking up the slack in human resources.

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14 Grog September 7, 2017 at 10:01 am

Smaller market, less researchers = less innovation

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15 Todd Kreider September 7, 2017 at 5:37 pm

Sony has captured 50% of the virtual reality market so far so somebody in Japan is innovating. And there are 7 billion potential innovators around the world so where it happens isn’t that important.

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16 Careless September 8, 2017 at 4:29 am

At some levels of population, I’m quite happy to make that tradeoff.

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17 stan September 6, 2017 at 3:35 pm

“debt simply does not matter that much”

… not to national governments and their central banks that can create endless amounts od “money”

on 27 August Bank of Japan announced ut would continue its ‘stimulus’ of hundreds of trillions Yen each year

U.S. government will very soon raise its “Debt Ceiling” again, as usual. Massive government debt apparently has no downside … to government actors

(anybody recall why the formal U.S. “National Debt Ceiling” was created ?)

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18 Cock Piss Partridge September 6, 2017 at 6:02 pm

So what.

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19 spencer September 7, 2017 at 4:11 pm

It was first passed in 1917 as a measure to ease or simplify debt management in WW I.

Prior to 1917 Congress authorized each individual borrowing by the Treasury so they controlled total debt indirectly.

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20 Yancey Ward September 6, 2017 at 4:00 pm

You just have to love this part:

As a result, economic stimulus under Mr Abe has finally stabilised Japan’s debt after years of relentless increase. It was 237 per cent of GDP in 2012. The International Monetary Fund forecasts 232 per cent of GDP for 2022.

So, tell us- what is the level i 2017, 2018, 2019, 2020, and 2021? Seriously, haven’t these IMF fund forecasts always shown stabilization five years out? What is actually new here?

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21 other derek September 6, 2017 at 4:12 pm

It’s been steady at about 250% since 2014, and even the 237% in 2012 compares to 216% in 2010. So they already have stability, and the IMF is projecting a significant decline. You may or may not believe this projection will be accurate or is justified, but this is not just saying, “Oh, things will kind of be about the same.”

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22 Yancey Ward September 6, 2017 at 5:25 pm

Is it really stabilized? I just looked it up and from 2015 to 2016, the debt to GDP went from 248% to 250.4% while the actual annual deficit in terms of GDP has changed very little. I think even this modest “stabilization” is the result of some sort of redefinition of what is considered a debt.

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23 other derek September 7, 2017 at 11:12 am

https://tradingeconomics.com/japan/government-debt-to-gdp

I don’t know how you look at this series and not think, “It kind of looks like it stopped climbed dramatically after 2014.”

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24 Ray Lopez September 6, 2017 at 9:54 pm

Keep in mind that due to Japan’s current account surplus, if you back out ‘public savings’ the Debt-to-GDP figure goes to something like 120% of GDP. Compare to the USA which has a deficit. So Japan is better off on a number of fronts.

Bonus trivia: money is largely neutral, so by and large interest rates don’t really do much, though there is some seigneurage for the JP central bank.

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25 rayward September 6, 2017 at 4:23 pm

Bubbles hurt. The Japanese learned a hard lesson. Did America?

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26 Abelard Lindsey September 6, 2017 at 11:12 pm

Of course not! Silly goose.

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27 Grog September 7, 2017 at 10:03 am

What lesson?

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28 chuck martel September 6, 2017 at 4:47 pm

“Low interest rates mean the existing debt simply does not matter that much for fiscal sustainability.”

That must mean that the debt never has to be repaid, right?

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29 Thorfinnsson September 6, 2017 at 5:50 pm

With the exception of perpetual bonds (e.g. the famed British consol), government bonds must be repaid.

But it’s very rare for principle repayment to be financed out of revenue. This is nearly always financed through new debt issues. Thus it’s rare to see government debts in absolute terms decline. Functionally this has a similar impact to the debt never needing to be repaid, though the government does need to maintain credibility with financial markets so as to maintaining financing capability.

A look at current JGB rates suggests that indeed the existing debt does not matter much: https://www.bloomberg.com/markets/rates-bonds/government-bonds/japan

Of course if rates ever rise substantially things could get painful in Tokyo.

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30 None September 6, 2017 at 10:32 pm

Yeah, the JCB is currently capping yields which they can do indefinitely due to their ownership of a printing press. Kind of strikes me as an interesting proposition if one could predict an end to the buying, if it ever does. I am kind of interested in this since I think markets are waking up but this may be better left to academics to argue over.

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31 Thorfinnsson September 7, 2017 at 10:38 am

People overestimate the ability of central banks to control yields.

There has been a real increase in the demand for safe assets and a real decline in inflation.

Neither factors are well understood, though I think demography plays a major and unexplored role (population aging).

If anything markets are adjusting to reality. Many, many commentators (and not just Zero Hedge commenters) predicted that Quantitative Easing and ZIRP would spur inflation and spending. Neither happened. The only real change was that assets became more expensive, which makes sense in that their net present value has increased in an ultra-low rate world.

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32 Adrian Turcu September 6, 2017 at 6:08 pm

Doesn’t this mean that if the extraordinary circumstance of negative interest goes away, it’s back into trouble?

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33 Thorfinnsson September 6, 2017 at 6:19 pm

Not necessarily.

The United Kingdom had comparable public debt to GDP ratios after the Napoleonic Wars and the Second World War.

The former case is interesting in that there was no income tax in the UK from 1816-1842, and the country was on the gold standard. Of course the central government didn’t have many major expenditures beyond the Royal Navy in those days.

All accounts are Britain did well economically in this period.

Postwar Britain is infamous as a period a period of decline, but public debt to GDP (helped by steady inflation) declined rapidly and living standards continuously increased. There was also full employment until the late 60s.

World War One is also interesting as while public debt to GDP didn’t reach 200%, interest on the debt reached nearly 10% of GDP while the government ran eye-watering primary surpluses of 4% of GDP. There was also an unfortunate decision to return Sterling to its prewar gold peg in 1926. The interwar period was one of slow growth, large-scale unemployment, and labor strife (including the only general strike in British history).

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34 Cooper September 6, 2017 at 9:14 pm

1. Britain inflated away most of its post WW2 debts and imposed severe fiscal repression. Negative real interest rates cut government debt by 3%-4%/GDP per year in Britain.

2. Britain experienced rapid economic growth in the 19th Century. Total GDP at market prices increased by 200% between 1830 and 1890 (roughly 2% growth/year). Does anyone expect Japanese growth to average 2%/year over the next 60 years?

If Japan gets neither high inflation + negative interest rates nor solid economic growth over the next century, we should expect to see debt levels stay elevated.

Then the question becomes, will the BOJ simply write off these debts?

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35 Todd K September 7, 2017 at 1:07 am

“Does anyone expect Japanese growth to average 2%/year over the next 60 years?”

Of course not. It will grow much faster than 2% a year from 2020 to 2080.

Japan’s GDP per capita ppp is almost identical to Britain’s at $38,000 U.S 2010 dollars.

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36 XVO September 7, 2017 at 7:26 am

Why would they have to write them off? Just leave them as they are.

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37 Thorfinnsson September 7, 2017 at 10:50 am

Two percent economic growth is not particularly remarkable, but leaving that aside the policy choice of elevated debt levels (yes, policy choice), brings up another question:

What will the impact of public debt being over 200% of GDP be over the long haul? Are there any? This is completely uncharted territory.

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38 Thiago Ribeiro September 6, 2017 at 6:08 pm

The Japanese regime is at the brink of collapsing.

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39 Thiago Ribeiro September 7, 2017 at 12:10 am

And so is the American regime.

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40 Thiago Ribeiro September 7, 2017 at 12:22 am

Yep, impersonator, but Japan will fall first because their regime is savage. They tried to conquer Brazil and failed.

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41 Thiago Ribeiro September 7, 2017 at 2:04 am

Of course, America tried to conquer Brazil and succeeded in the 19th century, but that’s not important.

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42 Thiago Ribeiro September 7, 2017 at 8:50 am

No, it did not. You lie, boy.

43 Thiago Ribeiro September 7, 2017 at 11:29 am

Prophet Bandarra has said the savage American regime will fall like an overripe jackfruit.

44 Thiago Ribeiro September 7, 2017 at 2:14 am

Then again, we should have been more welcoming of our new Japanese overlords.

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45 Thiago Ribeiro September 7, 2017 at 7:46 am

Only when Japan has a favela in every town can it truly be called a stable, economic and cultural leader.

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46 Matthew Young September 6, 2017 at 7:19 pm

The yield curve is flat. That means the government is doing one thing only, making pension payments.

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47 Ray Lopez September 6, 2017 at 9:56 pm

True, but even in the USA the Federal budget deficit is 50% ‘transfer payments’ (pensions). Get rid of Social Security (make it means-based) and you starve the beast, Bush II was right about that, too bad the AARP got him.

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48 mulp September 7, 2017 at 2:18 am

Unless “means” is just above homeless and hungry, very few people can survive without SS and Medicare over the age or 60 if not working, and most workers over age 60 are not workers business want to employ, though they do more out of self preservation.

And SS is already very means tested. If you are working, you aren’t drawing SS but your benefits do not increase that much especially if wages are high. Plus at age 70, drawing SS with other income subjects a big part of SS to income tax along with out her income. High income workers get less while low wage workers get more of their income replaced by SS, also means testing.

In any case, SS as share of gdp is not rising that fast, nor in absolute terms. The problem is in FICA revenue declining as income inequality increases because the numerous of workers paying low FICA taxes is increasing faster than those Paulding the max, with the middle class workers paying less FICA as they get replaced with lower income workers.

Perhaps you have some theory about consumers with less and less money to spend driving higher gdp growth.

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49 Ray Lopez September 7, 2017 at 10:26 am

@mulp – thanks, I think we both can agree if you are rich, you don’t need to draw from Social Security? (“Unless “means” is just above homeless and hungry, very few people can survive without SS and Medicare over the age or 60 if not working,”). So we are talking about those “very few people”. Don’t give them money. That will ‘balance’ SS and require in the long run fewer taxes.

Bonus trivia: my folks in the 1% in wealth department collect Social Security to the tune of about $50k/yr. Thank you taxpayers. That’s about the profit of a couple of DC rentals, not bad.

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50 XVO September 7, 2017 at 7:28 am

If social security was means tested, why does everyone have to pay into it? The whole point is that it’s meant to go to everyone, that’s why everyone pays. And supposedly it’s money is kept separate.

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51 Mark Thorson September 6, 2017 at 11:30 pm

What’s the prospect for Japanese stocks? I know some companies I like — Nitto Denko (sort of the Japanese 3M, very innovative on tape and film products), Shin-Etsu (innovative and aggressive silicone company), maybe Hamamatsu (very advanced sensor technologies), maybe Murata (dominant position in small surface-mount resistors and capacitors). But if the whole market is going to sink, trying to pick individual good companies is a losing game.

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52 Ray Lopez September 7, 2017 at 1:31 am

I owned all those stocks via JEQ (Japan Equity Fund) but gave up after nearly 20 years of breaking even. Last I heard the JP central bank owned a sizeable percentage of the JP stock market.

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53 V September 7, 2017 at 9:42 am

That’s nothing.

The UK has negative real yields of -1.6% out to 40 years.

So investors are willing to lose 50% in real terms over the duration of the investment. Why? Regulations that have forced pension funds, banks, and insurers to increase their holdings of gilts.

It’s not solely a Brexit effect. The collapse in the UK real yield curve occurred before Brexit, and has only declined by 0.2 pp since June 2016. Nevertheless, it could be interpreted as an extremely bearish signal for the future of the UK economy.

http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/default.aspx

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54 Ray Lopez September 7, 2017 at 10:31 am

Nice link but the yields as of today don’t show negative, but an interesting ‘sine wave’ relationship for most securities; a nearly inverted curve for others, strange they have different shapes.

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55 V September 7, 2017 at 11:15 am

Look at the real curve, not the nominal one.

It’s negative all the way out to 50 years. Why would anyone invest in a bond that has a guarentteed negative 50% return after inflation?

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56 Thorfinnsson September 7, 2017 at 11:48 am

You already highlighted one–regulatory requirements.

There’s another reason of course–a belief that the bond’s price will rise.

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57 V September 7, 2017 at 12:02 pm

Under what economic conditions will the price rise? Slower growth? An economic slow down/financial crisis? Either way, investors that hold these bonds to term are guaranteed to be worse off in real terms.

Just out of interest – the holdings of UK debt are reported in Table 5.2.10 here:

https://www.ons.gov.uk/file?uri=/economy/grossdomesticproductgdp/datasets/unitedkingdomeconomicaccounts/current/unitedkingdomeconomicaccounts2017q1.pdf

£640bn Banks, of which £430bn is the BoE (up from £493bn 5 years ago)
£134bn other financial intermediaries (no idea, but up from £16bn 5 years ago)
£545bn insurance corporations and pension funds (up from £365bn five years ago)
£85bn households, up from £59bn 5 years ago.
£521bn foreigners of which £87bn is central banks, up from £417bn 5 yrs ago.

Why are pension funds investing so much in assets that have a negative return? Are regulations that force instituional investors to subsidise government borrowing wise? What will happen to these funds if (ha) interest rates rise? Surely they will be sitting on a significant loss?

58 Thorfinnsson September 7, 2017 at 2:10 pm

Apologies for replying to my own comment, as this blog does not allow me to reply to your comment directly.

Bond prices rise when rates fall. So these existing notes would rise in value in the event that rates go lower. People might argue that rates can’t go lower, but I wonder how many times that was said in the past 35 years.

But yes, anyone who holds negative interest bonds to maturity is worse off in real terms. That said, a negative real interest rate bond is still better than cash provided that the nominal interest rate is positive. Sterling Treasury Bills are issued with durations no more than six months, and as such they’re cash equivalents. Better to have a nominal gain but a real loss than for the nominal figure to remain the same and the real loss to remain greater still.

That leaves the question open as to why various German, Swiss, and Japanese government debt issues with actual negative nominal interest rates have also found buyers of course. With the exception of speculators, the only possible explanation can be regulatory requirements given that you can hold cash instead (provided there is no NIRP of course) .

I’m not a pensions manager let alone a British pensions manager, so I can’t say why the funds are buying these joke bonds.

59 V September 7, 2017 at 9:43 am

That’s nothing.

The UK has negative real yields of -1.6% out to 40 years.

So investors are willing to lose 50% in real terms over the duration of the investment. Why? Financial repression. Regulations that have forced pension funds, banks, and insurers to increase their holdings of gilts.

It’s not solely a Brexit effect. The collapse in the UK real yield curve occurred before Brexit, and has only declined by 0.2 pp since June 2016. Nevertheless, it could be interpreted as an extremely bearish signal for the future of the UK economy.

http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/default.aspx

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