Who would save Japan in a sovereign debt crisis? Ideally, it won’t have one. But given the country’s terrifying challenges, some senior Japanese financial executives and government bureaucrats are quietly considering a doomsday situation. In a theoretical credit collapse, even China could come to the rescue.
True, Japan looks incredibly unlikely to default on its debt. Ten-year government bond yields of around 1.1 percent reflect not an iota of concern among investors. And as one of the world’s great creditor nations, Japan has vast resources, hard-working people and, if need be, a central bank that could fire up printing presses.
But the numbers are frightening, especially given Japan’s lack of political leadership around fiscal issues. Government debt stands at about 1,000 trillion yen ($12 trillion), with gross borrowings of around 200 percent of gross domestic product. The productive means to pay off those liabilities are shrinking as Japan’s average age creeps toward 50. Thanks to scant immigration, the country also loses one million people a year.
Japan can finance itself for now; 95 percent of government debt is held domestically. But the combination of aging workers, a lack of new household formation and bank deposit growth, and corporations opting to deploy cash overseas have some economists predicting that, without drastic reforms, Japan may soon need to look abroad for financing.
That could lead to a crisis. If non-Japanese creditors demanded higher yields to compensate for low growth, the country’s dependence on short-term borrowing would quickly lead to spiraling debt service costs. Even a 5 percent haircut on government debt would equate to $600 billion.
Few have pockets that deep. Europe’s resources are tapped out on its problems. America is struggling, and would be even more so if Japan dumped the almost $1 trillion in United States Treasuries that it holds. The only sizable pool of capital available would probably be Chinese.
China might be willing to help out. But the money could also come with strings. Sovereignty over disputed oil-rich islands is one possibility. Some theorize China may demand independence for Okinawa, home to controversial American military bases. Perhaps that’s the best reason for Japan to get its house in order: a Chinese rescue might be as uncomfortable as the debt crisis itself.
Private Sector Growth
Multinational corporations are propping up America’s economic growth. While annualized first-quarter gross domestic product increased a sluggish 1.8 percent, much of it inventory buildup, the private sector expanded more strongly, as did returns from overseas investments. With the government now reining in outlays, the biggest companies are providing the economic stimulus.
The headline economic growth figure would have been 1.1 percentage points higher but for a decline in government spending. And gross private sector output grew at an annual pace of 3.6 percent in the quarter, up from a 2.6 percent growth rate for 2010 as a whole, suggesting an acceleration in productive output as the government’s postcrisis efforts at stimulus are withdrawn.
Meanwhile, gross national product grew at a 3.1 percent rate in the quarter. G.N.P. is based on ownership rather than geography and so includes income from American investments abroad, net of payments to foreigners. Net receipts jumped 26 percent, to $202 billion at an annual rate. Even in a $15 trillion economy, that’s a sizable contribution to growth from the country’s multinationals, and demonstrates how they can overcome some of the drag from the huge domestic budget and payments deficits.
Despite that, the latest G.D.P. figures were somewhat disquieting when viewed at the consumer level. Final sales to domestic purchasers rose at only a 0.7 percent annual rate, while inventories increased by $52 billion, a potential cause of future weakness if the buildup reverses. The country’s savings rate also declined further to 5.1 percent, suggesting consumers were still not rebuilding reserves.
Over all, though, the latest data hints at a healthy shift away from public spending and toward the private sector and global economy. Higher interest rates would provide incentives to rebuild America’s capital base while encouraging free trade would benefit multinationals. Another lesson can be found in the private sector’s ability to sustain growth even as government outlays shrink. With luck, policy makers across the spectrum will see cause to help, rather than hinder, this rebalancing.
www.japaninc.com
True, Japan looks incredibly unlikely to default on its debt. Ten-year government bond yields of around 1.1 percent reflect not an iota of concern among investors. And as one of the world’s great creditor nations, Japan has vast resources, hard-working people and, if need be, a central bank that could fire up printing presses.
But the numbers are frightening, especially given Japan’s lack of political leadership around fiscal issues. Government debt stands at about 1,000 trillion yen ($12 trillion), with gross borrowings of around 200 percent of gross domestic product. The productive means to pay off those liabilities are shrinking as Japan’s average age creeps toward 50. Thanks to scant immigration, the country also loses one million people a year.
Japan can finance itself for now; 95 percent of government debt is held domestically. But the combination of aging workers, a lack of new household formation and bank deposit growth, and corporations opting to deploy cash overseas have some economists predicting that, without drastic reforms, Japan may soon need to look abroad for financing.
That could lead to a crisis. If non-Japanese creditors demanded higher yields to compensate for low growth, the country’s dependence on short-term borrowing would quickly lead to spiraling debt service costs. Even a 5 percent haircut on government debt would equate to $600 billion.
Few have pockets that deep. Europe’s resources are tapped out on its problems. America is struggling, and would be even more so if Japan dumped the almost $1 trillion in United States Treasuries that it holds. The only sizable pool of capital available would probably be Chinese.
China might be willing to help out. But the money could also come with strings. Sovereignty over disputed oil-rich islands is one possibility. Some theorize China may demand independence for Okinawa, home to controversial American military bases. Perhaps that’s the best reason for Japan to get its house in order: a Chinese rescue might be as uncomfortable as the debt crisis itself.
Private Sector Growth
Multinational corporations are propping up America’s economic growth. While annualized first-quarter gross domestic product increased a sluggish 1.8 percent, much of it inventory buildup, the private sector expanded more strongly, as did returns from overseas investments. With the government now reining in outlays, the biggest companies are providing the economic stimulus.
The headline economic growth figure would have been 1.1 percentage points higher but for a decline in government spending. And gross private sector output grew at an annual pace of 3.6 percent in the quarter, up from a 2.6 percent growth rate for 2010 as a whole, suggesting an acceleration in productive output as the government’s postcrisis efforts at stimulus are withdrawn.
Meanwhile, gross national product grew at a 3.1 percent rate in the quarter. G.N.P. is based on ownership rather than geography and so includes income from American investments abroad, net of payments to foreigners. Net receipts jumped 26 percent, to $202 billion at an annual rate. Even in a $15 trillion economy, that’s a sizable contribution to growth from the country’s multinationals, and demonstrates how they can overcome some of the drag from the huge domestic budget and payments deficits.
Despite that, the latest G.D.P. figures were somewhat disquieting when viewed at the consumer level. Final sales to domestic purchasers rose at only a 0.7 percent annual rate, while inventories increased by $52 billion, a potential cause of future weakness if the buildup reverses. The country’s savings rate also declined further to 5.1 percent, suggesting consumers were still not rebuilding reserves.
Over all, though, the latest data hints at a healthy shift away from public spending and toward the private sector and global economy. Higher interest rates would provide incentives to rebuild America’s capital base while encouraging free trade would benefit multinationals. Another lesson can be found in the private sector’s ability to sustain growth even as government outlays shrink. With luck, policy makers across the spectrum will see cause to help, rather than hinder, this rebalancing.
www.japaninc.com
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