Tokyo debt threatens global economyby Patrick J. ByrneNews Weekly
, June 16, 2001
In the next decade, the state of the global economy and the stability of Australia's near neighbours, may depend as much on the state of Japan's ailing financial system as on the health of the US stockmarket.
The Japanese are the world's most prodigious savers. They hold one-third of the world's savings. However, easy credit and bad government monetary policy in the 198os saw a massive boom in property and stock markets.
In 1989-9o these markets crashed. over the next decade, the property market fell 6o-8o percent in the major cites. The stockmarket fell from 39,ooo to hover in the 13,ooo-14,ooo range.
Despite its success as an exporting nation running huge trade surpluses with the US, the Japanese domestic economy has been floundering.
A decade of deflation (falling prices) has discouraged spending. Distrustful of the banks and the state and carrying huge debts, no matter how much money the government injects into the economy through huge public works programs, consumers won't spend.
Further, with a weak social security net, Japan's ageing and shrinking citizenry is fearful of facing retirement with inadequate savings.
So, while the economy needs them to spend in order to boost growth and pull Japan out of prolonged recession, consumers are hoarding savings to repay debt and to save for retirement.
The irrational exuberence of the 198os has left the country with two major financial problems
First, it has left the banking system technically bankrupt.
According to statistics compiled by Goldman Sachs, the banks were facing an "immediate capital shortfall" of $831 billion at the end of March. They are facing potential losses of $1.75 trillion, allowing that 3o percent of this is recoverable from indebted businesses. Reserves against losses stand at $83o billion.
[Note: to get a handle on the scale of these figures, consider that if $1 is one second in time, then $1 million is 11.6 days, $1 billion is 31.7 years and $1 trillion is 31,7oo years].
According to Goldman Sachs Asia Vice-President, Kenneth Courtis:
"There is no way banks can earn their way out of this situation. Japan will see more banks go under and will need to recapitalise its banking system on a massive scale."
Poor quality management in Japan's financial institutions is part of the problem. Mergers of crisis-ridden banks and funds is seeing old managers becoming more entrenched, while young talent is going offshore as finance institutions cease hiring new staff.
There is a second impeding crisis, resulting from the '8os exuberence. The government has raised huge amounts on the bond market to finance numerous, failed economic stimulus packages.
Consequently, Japan's national debt is now equal to 18 per cent of the world's total annual production, and 146 per cent of Japan's Gross Domestic Product (GDP). Servicing this huge debt takes up 65 per cent of the Government's annual tax revenue.
According to Courtis, this has created "the biggest [financial] bubble in the world, more important than the one that exploded on the Nasdaq."
At the rate it is growing, it could reach an unsustainable 29o per cent of GDP in nine years time.
Currently, the only reason the bond market has not collapsed is that 95 per cent of the Government's debt is owned by Japanese investors, who collectively have 33 per cent of the world's total savings.
Having lost confidence in Japan's stock market, Japanese investors have put their money into Japanese Government bonds. Ten year bonds pay only 1.28 per cent, but have been considered a safe form of investment.
But even that could change suddenly. According to Ryutaro Kono, chief economist at BNP Parbais Securities, "The market could lose confidence in the sustainability of Japan's public debt burden at any time.
"If the market were to become convinced that nothing will be done to correct the nation's swelling public debt, prices on government bonds would instantly collapse under the weight of risk premiums."
This would send shock waves though the world's financial system.
If a major collapse happened in Japan, it would inevitably see the return of huge amounts of funds from the US, seriously undermining the US bond and stockmarkets.
With the US substantially dependent on Japan investing its trade surplus in the US bond and stockmarket, the two are like one-legged giants, strapped to each other to stay upright.
The crisis in Japan is also a serious threat to the rest of Asia, which depends heavily on growth in Japan to stimulate their own economies. Indonesia would be very seriously affected by any such crisis.
Our nearest neighbour is the third most popular nation on earth. Its has still not recovered from the Asian crash of 1997-98. Its floundering economy is the main reason for ongoing political and civil upheaval. A change of leadership is unlikely to fix that problem.