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Politics pushes Japan toward fiscal cliff

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Welcome to the Fiscal Cliff Club. You seem to have a problem as well as I do with the Tea Party in US Congress. Good luck to both of us.

President Obama USA

5 ( +6 / -1 )

It is time to "bite the chopstick" and stop borrowing money even if the interest rate is .01%, funding all foreign aid projects, and review absolutely every expenditure in every department. Is it possible? Yes. How? Start with a vote to not introduce any new expenditure bills and just pay the present bills. Of course, don't touch any of the local projects in this writer's area.

5 ( +5 / -0 )

which would allow it to sell 38.3 trillion yen in bonds or more than 40% of this year's budget

Selling Bonds = Borrowing Money

If you are an individual, your ability to borrow is based on your earning potential. If you are a company, your ability to borrow is based on your profit potential.

If you are a government, however, your ability to borrow is based on your potential taxes, or future taxes.

Japan's yearly budget is 40% debt. That means that only 60% of government spending is based on current taxes, while the rest is borrowed from future taxpayers.

That means that, EVERY SINGLE YEAR, for every 100 yen the government takes from J-citizens, it's also a promise to take 40 yen sometime in the future. This is ON TOP OF the 40 yen that is owed from last year's deficit, and will just keep piling on.

There is absolutely not way out of this PONZI scheme except default.

Now, you may say that this is OK, because most debt is held by Japanese People. This only means that when the government defaults, they'll stiff the J-public instead of another government.

Which makes it MUCH MORE LIKELY that they'll default.

After all, who would you rather stiff, a foreign government that has a sizable army, or your own citizens?

Since most people own debt through the J-Post, that means one day, EVENTUALLY, anybody who's got any savings in the J-Post will find their bank account has suddenly vanished.

What will happen to the J-economy then?

14 ( +15 / -1 )

Which makes it MUCH MORE LIKELY that they'll default.

gaijinfo, that's what I have been saying over years to Japanese. For some reason, Japanese do not get it or they are still in denial.

7 ( +7 / -0 )

gaijinfo - spot on. At some point it doesn't matter who owns the debt, the absolute size of it, and the annual service costs, simply become too large. Japan is no doubt near that point, if not well beyond it. And, it they ever did default, they'd crush their own economy since the Japanese public, who owns this debt through Japan Post, banks, etc. would lose their savings. Then all the deep bows and sincere apologies in the world won't help.

5 ( +5 / -0 )

The concept of almost completely internally financed on it's own currency's denominated debt at less than 1.0% rate seems like it's too difficult for some posters to understand.

-8 ( +1 / -8 )

This particular problem is a created problem being used to apply pressure, not a real problem. Either there will be an election, or the opposition will cave in return for some benefit. Neither side is going to let this game of chicken go on too long.

0 ( +0 / -0 )

The problem isn't getting enough money, it's spending too much. They need to slice pensions already, they ballooned up from a few billion yen to a few trillion in a very short time, especially considering GDP growth was nowhere near the level of pension growth.

1 ( +5 / -4 )

The problem isn't getting enough money, it's spending too much. They need to slice pensions already, they ballooned up from a few billion yen to a few trillion in a very short time, especially considering GDP growth was nowhere near the level of pension growth

They did decrease the kokumin nenkin disbursement amount due to deflation. The problem mainly is that these pension recievers are saving instead of spending.

-3 ( +2 / -4 )

Cut spending; REAL cuts. Like all countries with so many social programs essentially funded like Ponzi schemes, Japan is nearing the end of the tax-and-spend game. Will the politicians do the right thing? Not until it's the absolute last option.

6 ( +6 / -0 )

The real problem lies in j politicians. Same old stuff of 1930. J people should ouster those with old mindset.

3 ( +3 / -0 )

Japan's welfare state is set up like a Ponzi scheme. It takes current income to fund promised benefits. And it only works in a constantly rising economy as most of the developed world is learning. Then there is the problem of the declining economic conditions putting a greater demand on the bankrupt system. Of course, politicians refuse to face the reality of the situation. Given all of this, why should anyone be surprised at the unsustainable debt?

But it was a nice short-term ride while it lasted...right?

3 ( +3 / -0 )

Far from fearing the sky high fiscal deficit, the Government positively welcomes and actively facilitates it. It's a fiscal version of the Samson Option, a line in the sand signalling that a stronger yen will simply not be tolerated.

0 ( +0 / -0 )

nigelboyAug. 27, 2012 - 08:16AM JST

The concept of almost completely internally financed on it's own currency's denominated debt at less than 1.0% rate seems like it's too difficult for some posters to understand.

@nigelboy, I am one of those who do not understand how it works. If you do not mind, would you please make it easier for me to understand? Some of my investments have been tied in Japanese banks. Thanks.

0 ( +0 / -0 )

I have a personal fiscal cliff every month. It sucks being paid in US dollars when your expenses are in Yen....

0 ( +0 / -0 )

spot on. At some point it doesn't matter who owns the debt, the absolute size of it, and the annual service costs, simply become too large. Japan is no doubt near that point, if not well beyond it. And, it they ever did default, they'd crush their own economy since the Japanese public, who owns this debt through Japan Post, banks, etc. would lose their savings. Then all the deep bows and sincere apologies in the world won't help.

the wild card is the 1.3 trillion in foreign exchange reserves which would allow them to continue to hang on....

1 ( +1 / -0 )

looks like Noda didnt need to stake his political life on passing the tax hike, voter backlash at a forced early election will do it instead, the opposition are loving it, a return to power without having to raise the tax themselves, the "DPJ FALL GUYS" non stop daytime drama.

1 ( +1 / -0 )

nigelboyAug. 27, 2012 - 08:48AM JST

They did decrease the kokumin nenkin disbursement amount due to deflation. The problem mainly is that these pension recievers are saving instead of spending.

Considering they can save, they are being given too much.

-4 ( +2 / -6 )

And on top of this, Japan is now spending 60 trillion it does not have on fossil fuel imports because the government is pandering to the antinuclear fanatics. Stupid!

-3 ( +3 / -6 )

gaijinfo,

Mostly true.

There is absolutely not way out of this PONZI scheme except default.

Or the inflation.

I suppose government will prefer the inflation rather than the default. Many Japanese people have a belief that "weak yen" is good for economic conditions. So if government prints the money to avoid default, dollar / yen rate may easily double, depending on their action.

My advice is to prepare for the inflation.

-1 ( +0 / -1 )

@nigelboy, I am one of those who do not understand how it works. If you do not mind, would you please make it easier for me to understand? Some of my investments have been tied in Japanese banks. Thanks.

First of all, you have to learn to loosen your mind a little bit because Japan is unique in that most of their soverign debts are bought by Japanese themselves.

First of all, why are Japanese people and entities buying up JGB despite the 1% rate? Well. What other safe investments are out there during a deflationary cycle? Foreign soverign bonds with higher yields? Sure. But there already exists a risk in foreign currency exchange rates. To put it simply, a Japanese person that invested U.S. Treasury bonds (let's say 2 years) two years ago versus another Japanese person that invested JGB two years ago, the latter made money while the former lost money. Therefore, from a Japanese person or entities (Banks, Insurance companies, especially) with excess cash, the best bet to place their money is JGB especially if you to minimize risks.

Now that we established the tendency for the Japanese people and entities to invest their excess cash in to JGB, why is there excess cash in Japan? First, Japan is in a deflationary cycle. People aren't spending because they feel that the economy is not looking upward. They believe that their husband might take a pay cut or worse, lose his job so the housewives are limiting their household spending. This is evidenced by the fact that Japanese financial institution has a record surplus of cash holdings from depositors. 《過剰預金)who in turn buy these JGB with this excess cash. So who are these people that are "saving" and not "spending"? The largest of this segment are people of 60 and over who are eligible for social security payments.

Japanese government budget is in a shortfall. Why? Because they need to pay for one, pension and benefits to those 60 and over. How does the government make up the difference? Issue JGB.

Hence, in essence, it's merely a plus/minus game on Japan's total balance sheet.

The flip side of the equation is, what happens when Japanese person stop buying the bonds where the government has to increase to let's say 3%? That means, the excess cash that were in the banks are no longer there. It's circulating, (spending, investing, lending), which means higher GDP and higher tax revenues (i.e. less Debt/GDP ratio).

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First, Japan is in a deflationary cycle.

How long Japan has been in deflationary cycle? It has been more than 20 years!!

ihope2eatwhales is right.

The only option (of course default like Greece is not an option in Japan unless forced by another atomic bomb) is hyperinflation. You print out 50 trillion Yen (about $ 5 trillion) to pay for the national debt (buying back bonds) and raise the pension to please J-citizens. At least you make the balance sheet black. Japan's export will rise and economy get back on the tract. Thanks, Prof. ihop2eatewhale! You deserve to eat whale. But remember, the whale meat cost 2-3 time more then.

1 ( +1 / -0 )

nigelboy Aug. 27, 2012 - 11:32AM JST

The flip side of the equation is, what happens when Japanese person stop buying the bonds where the government has to increase to let's say 3%? That means, the excess cash that were in the banks are no longer there. It's circulating, (spending, investing, lending), which means higher GDP and higher tax revenues (i.e. less Debt/GDP ratio).

Well...actually, an increase in rates to 3% (on 10-year JGBs) would triple the service cost of the debt, forcing the government to raise taxes or borrow more, neither of which will encourage economic growth. Ergo; less tax revenue and a declining GDP. It will be like anchor on the economy. As for that excess cash, it will be in mattresses, walls safes, and buried behind the house.

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nigelboy,

It is true yen assets have performed well in recent years, due to financial crisis in the US and now Europe, but it can not be guaranteed that Japan's fiscal problem will not be such similar disaster as overseas.

I do not think it can be as simple as government issues JGBs because they can.

Soon, the debt (1,000 trillion yen) will be more than the total of Japanese assets (1,500 trillion yen, I think). Imagine when JGBs and remaining assets have become equal. Elderly Japanese taxpayers need to withdraw funds from banks, so banks must sell JGBs to pay the withdrawal. Selling of JGBs will put the upward pressure on JGB yields. It becomes more expensive for Japanese government to keep issuing more JGBs. Even now foreigners do not own many JGBs, when there is crisis overseas. Will they own JGBs when there is growing trouble in Japan? I suppose it depends on overseas, but I can not hope for it.

Rather than issue JGBs, Japanese government may also decide to impose various asset taxes on Japanese taxpayers to pay down debt. For example, a tax on savings accounts (not interest, but tax on principal). Such a tax is being discussed in Kasumigaseki.

"Capital flight" may become the key word in Japan before long. I hope not, but it is my fear.

0 ( +1 / -1 )

Well...actually, an increase in rates to 3% (on 10-year JGBs) would triple the service cost of the debt, forcing the government to raise taxes or borrow more, neither of which will encourage economic growth. Ergo; less tax revenue and a declining GDP. It will be like anchor on the economy. As for that excess cash, it will be in mattresses, walls safes, and buried behind the house.

Why? The excess cash that was available is no longer there (reason for the 3% increase to raise funds) ergo excess money being circulated to the economy. It's a much welcomed inflationary movement.

0 ( +2 / -2 )

saidani,

As for that excess cash, it will be in mattresses, walls safes, and buried behind the house.

Or overseas, safely out of Japan. Maybe Hong Kong, or Singapore. Storing the cash in the mattresses, or in "tansu" as is said in Japan, may hide a person from asset tax, but it will not protect against inflation that may come with yen devaluation.

-1 ( +0 / -1 )

nigelboy Aug. 27, 2012 - 11:59AM JST

Sorry. An increase in rates is the bond vigilante's dream. Why do you think the government and BOJ have kept rates so low for so long? The cost of servicing the debt is a major budgetary item already. Tripling it would bust the budget and cause all kinds of fiscal havoc. People will be scared and hold onto their cash. As ihope2eatwhales fears, capital flight will occur for those who can. The rest are screwed.

1 ( +1 / -0 )

ihope2eatwhales.

Imagine when JGBs and remaining assets have become equal.

Are you talking about the Japanese government balance sheet or Japan's total balance sheet which includes not only the government but private entities and individuals because the only thing that matters is the latter which is Japan's total balance sheet where they are the largest net external assets holders for 20 years in a row.

I hate to bring this up always since people always cry super inflation (when they really don't know what causes it) but the Bank of Japan could easily just issue more currency to pay off the debts. (even though it's not necessary under the current status).

2 ( +3 / -1 )

The Panic of 2012.

But seriously, do people panic? After the 3/11 JEGE up here in Tohoku, everyone stayed calm.

Also, if Japan tanks it has history on its side. Tokugawa era.

0 ( +0 / -0 )

Why do you think the government and BOJ have kept rates so low for so long?

Because PEOPLE and ENTITIES are still buying because of the excesss cash that the financial institution and the insurance companies hold. C'mon people. The result of soverign bonds going up is because they needed to do so in order to entice people to buy. (See Spain, Italy rates).

1 ( +4 / -3 )

ihope2eatwhales Aug. 27, 2012 - 12:03PM JST

Indeed. Of course, those without the means to flee will not want to leave their cash with the banks because the banks will simply buy more bonds with it. While it will not protect against inflation, it will be in their possession which, for most people, is about all they can do. I remember the large amount of cash found after 3/11. People are already using this tactic.

1 ( +1 / -0 )

Find me an economy that isn't a ponzi scheme.

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nigelboy Aug. 27, 2012 - 12:10PM JST

If there was any confidence in economic growth, all of that stored cash would go back into the economy. When confidence goes, so do investments and spending. It is telling that people are buying debt with such little return simply because there is no safer investment. The threat of fiscal collapse of the government or its actions to keep that from happening (higher taxes on everything including wealth or debasing the currency) will scare people into holding their assets closer or finding other non-Yen investments.

0 ( +0 / -0 )

MeanRingo Aug. 27, 2012 - 12:19PM JST

The people who are trashing capitalism as the root cause of this mess have never seen real free-market capitalism. The last 20-30 years is marked by greater government control over the economy throughout the developed world, mostly through expended and unsustainable Ponzi welfare systems. It is the government, not capitalism that is to blame.

2 ( +2 / -0 )

If there was any confidence in economic growth, all of that stored cash would go back into the economy. When confidence goes, so do investments and spending. It is telling that people are buying debt with such little return simply because there is no safer investment. The threat of fiscal collapse of the government or its actions to keep that from happening (higher taxes on everything including wealth or debasing the currency) will scare people into holding their assets closer or finding other non-Yen investments.

Yeah. Never heard of a country that collapsed due to deflation but as I stated in the previous argument, a non Yen investment is already a risk because of the volatility in exchange rates. A Japanese person who invested 2 year U.S. bond two years ago versus a Japanese guy who invested 2 year JGB. Guess who came out on top.

Stop with this nonsense. People and entities aren't scared. That's why they're buying JGB. An increase in 95% domestic owned yen denominated JGB bond at less than 1% is a net sum zero game on Japan's balance sheet.

0 ( +3 / -3 )

Stop with this nonsense. People and entities aren't scared. That's why they're buying JGB. An increase in 95% domestic owned yen denominated JGB bond at less than 1% is a net sum zero game on Japan's balance sheet.

It works until doesn't. It will not a zero sum game when rates rise which is the premise of your original comment.

0 ( +0 / -0 )

nigelboyAug. 27, 2012 - 11:32AM JST

Thanks, nigelboy. Sounds like Japan has a "money tree" that will never dries up. Did I get it right?

0 ( +0 / -0 )

It works until doesn't. It will not a zero sum game when rates rise which is the premise of your original comment.

As I explained previously, rates rise means the excess money is circulating the economy. You might want want to look at some figures in the past where the rates were high which equaled less JGB/GDP.

0 ( +2 / -2 )

“The government is going to have to make some very hard decisions about what spending to cut if there’s no agreement on this legislation in the next few weeks.”

My guess is it won't be unnecessary spending on the chopping block.

1 ( +1 / -0 )

globalwatcher Aug. 27, 2012 - 12:51PM JST

I think he is has simply bought the government's overly-optimistic economic rhetoric designed to cover for one policy failure after another. Sadly, too many others think the same way.

0 ( +0 / -0 )

For those who want to read something other than nonsense Nigelboy writes, someone who knows what they're talking about.

http://www.japantimes.co.jp/text/fl20120724jk.html

'Japan is the richest nation in the world but government bankruptcy is still possible. By GDP, we are ranked third after the United States and China, but the level of our net savings is largest in the world: ¥1,700 trillion. As for debt, 95 percent of Japanese outstanding debt is owed to national entities, not to private individuals. This is dangerous, especially since Japanese banks own as much in government bonds as their net worth in equity. Japanese government bonds are unsafe and we should be aware of the serious danger.'

-6 ( +1 / -7 )

My advice is to prepare for the inflation.

Won't EVER happen. Why? Guess who benefits MOST from a strong yen? Older people close to retirement. Guess who votes the most? Older people, close to retirement.

They start inflating, the people who vote the most will feel the pinch the most. The J-government has no where to kick this can.

0 ( +0 / -0 )

As I explained previously, rates rise means the excess money is circulating the economy. You might want want to look at some figures in the past where the rates were high which equaled less JGB/GDP.

Okay...one last time. You pointed to Italy and Spain earlier as examples.

The result of soverign bonds going up is because they needed to do so in order to entice people to buy. (See Spain, Italy rates).

These rates went up because the debt was too high (a bad thing), not because there were other investments better than government debt (a good thing). There's a difference. As I said before, when confidence is shattered, government debt becomes a safe haven. However, like with Spain and Italy, when the government debt is no longer safe, rates rise to entice investments. This is akin to someone having to borrow money from the Yakuza because their credit is so bad they can't get a loan from the banks. Japan is in the same category as Spain and Italy with its debt. If rates rise, it will be an indication of loss of confidence in the government's ability to repay the debt. You should note that Spain and Italy are on the bailout train, the only thing which has kept their rates as low as they are. As for Japan, there is no similar way to bail out this government except to inflate away the debt or turn its economic sovereignty over to the IMF, neither of which is a good thing for the Japanese people.

0 ( +0 / -0 )

As for debt, 95 percent of Japanese outstanding debt is owed to national entities, not to private individuals. This is dangerous, especially since Japanese banks own as much in government bonds as their net worth in equity. Japanese government bonds are unsafe and we should be aware of the serious danger.'

National entities (i.e. Banks, postal savings, insurance companies) who's funds are provided by private individuals.

Please.

http://rh-guide.com/saiken/kokusai_hiritu.html

1 ( +3 / -2 )

Meanwhile real workers known to me have already been laid off and re-employed as casuals on close to minimum wage. We aren't talking untrained staff here, but scientists with high qualifications who would have been on at least ¥6m salaries prior to this. They are supposed to have been promised their old positions if and when more money comes through...

1 ( +1 / -0 )

Nigel is correct. The Japanese people themselves basically own their own debt. No other country can say the same.

Now, let's weaken the yen. It is way to strong. I need to repatriate $200 grand and am tired of waiting.

-3 ( +0 / -3 )

japan_cynic Aug. 27, 2012 - 01:20PM JST

And yet the government has the audacity to continue to publish its 4.5% unemployment rate. It's pure propaganda and is not even on the same planet with reality.

0 ( +0 / -0 )

These rates went up because the debt was too high (a bad thing), not because there were other investments better than government debt (a good thing).

??? The rates of their Euro denominated bonds went high because they desparately needed the Euro to function their country.

However, like with Spain and Italy, when the government debt is no longer safe, rates rise to entice investments.

That's what we're debating. People, including the foreign investors who buy yen instrument debts which is causing the high Yen rate, is buying this because it's safe.

.

If rates rise, it will be an indication of loss of confidence in the government's ability to repay the debt

That's the thing. If the rate "rise" simply means that the excess money that the banks, postal savings, and insurance companies that they are holding, are circulating. Did you not look up the Debt/GDP ratio when the interest rate was high?

0 ( +2 / -2 )

saidaniAug. 27, 2012 - 01:22PM JST

And yet the government has the audacity to continue to publish its 4.5% unemployment rate. It's pure propaganda and is not even on the same planet with reality.

You know employment rate anywhere in the world is based on people searching for jobs / (workers+people searching for jobs), which is basically people who want jobs needed/ jobs. If less people search, unemployment goes down.

A lot of people will take underemployment over unemployment with a chance for good employment.

-4 ( +2 / -6 )

basroil Aug. 27, 2012 - 01:35PM JST

Of course. However, the government tends to use this figure to boast about its economic policies. Meanwhile, nearly 35% (and growing) of the workforce are working part time or are otherwise underemployed. Is it too much to expect the government to produce accurate and usable data instead of promoting itself with these figures?

1 ( +1 / -0 )

nigelboy Aug. 27, 2012 - 01:32PM JST

Yields rise in a sound economy because there is competition for the money. Yields rise in a failing economy because no one will buy the debt without a much higher return. You must be able to understand these basic differences in order to see that Japan is in trouble. Japan's economy is not sound, largely because of the negative effects of the government massive debt. It is artificially keeping yields low in order to keep the service costs of the debt low. Once rates rise, life in Japan as you know it will change and not for the better.

Otherwise, I give up trying to explain this to you.

1 ( +1 / -0 )

Now I am confused even more.

The bottom line, I like to know if we should pull the money out or leave it there at Japanese banks. Do they have enough cash reserves?. Thanks.

0 ( +0 / -0 )

globalwatcher Aug. 27, 2012 - 01:56PM JST

Who knows if they have enough reserves or even how much is enough. That said, they have been making solid profits even though they are not making any loans. A lot of their profits come from borrowing at zero interest from the BOJ and day trading. The BOJ has also accepted some of their worst assets as collateral for these loans at greater than mark-to market values which would tend to artificially increase the stated value of their assets. In short, it would be difficult to ascertain the true status of these banks. Some people might think that the bulk of their money is safer in Singapore or Hong Kong, keeping only enough locally to pay the monthly bills. To be sure, the banks have diversified their holdings.

0 ( +0 / -0 )

Once rates rise, life in Japan as you know it will change and not for the better.

@saidani: Any time estimates?

-1 ( +0 / -1 )

Yields rise in a sound economy because there is competition for the money

True.

Yields rise in a failing economy because no one will buy the debt without a much higher return

that's also true.

You must be able to understand these basic differences in order to see that Japan is in trouble.

I do see it. Economy is in trouble. I never stated that it wasn't. (Deflationary cycle I previously mentioned)

Japan's economy is not sound, largely because of the negative effects of the government massive debt.

No. The massive debt is as a result of Japan's economy not sound. People aren't spending.

It is artificially keeping yields low in order to keep the service costs of the debt low

Can't do that. It's traded openly.

Once rates rise, life in Japan as you know it will change and not for the better

You still haven't looked at the years when rates were high and the Debt/GDP was low, didn't you?

-1 ( +1 / -2 )

Who knows if they have enough reserves or even how much is enough

If not mistaken, BOJ had approved "Propensity" among Japanese banks too much many years ago, that is not good. Too risky in my opinion. My opinion is same as the Japan Times listed above.

If Japan goes to bankruptcy, there is no guaranteed of savings backed by failing government.

0 ( +0 / -0 )

Carolingium Aug. 27, 2012 - 02:11PM JST

You could become the world's latest billionaire if you knew that answer. Some global investors have lost money over the past year by shorting Japan too soon. To many it is not a matter of "if," but "when." Sadly, it could happen overnight without any warning and be caused by problems elsewhere. Then again, Japan has managed to kick this can down the road for nearly a decade. The difference now is that the rest of the world's economy sucks as bad (note the fall in Japan's exports which have been keeping the economy afloat for years). I wish I knew the answer, however, fate favors the prepared.

1 ( +1 / -0 )

Can't do that. It's traded openly.

It is not traded openly in the manner that you think. The BOJ is buying the assets of the banks, including government debt, in order to make sure there are buyers. This keeps the demand up and the yields down.

You still haven't looked at the years when rates were high and the Debt/GDP was low, didn't you?

This situation is unlike anything Japan has experienced in the past. It has never had debt this high with a declining economy. Government spending accounts for almost 25% of the nations GPD. Without continued borrowing to maintain that level, Japan's GDP plunges to reflect how bad the economy really is. So the nation is trapped into borrowing and spending. Borrowing costs will go up.

1 ( +1 / -0 )

It is not traded openly in the manner that you think. The BOJ is buying the assets of the banks, including government debt, in order to make sure there are buyers. This keeps the demand up and the yields down.

???? Then please explain to me why U.S. and EU criticized Japan for their "intervention" of buying their instruments to keep the currency from going high? (<----Which IMF subsequently stated that Japan should do this) If BOJ is doing this, it's a classic case of Jekyll and Hyde.

C'mon now. Where did these monies that were in EU during the financial crisis go to cause something is missing here.

-1 ( +1 / -2 )

No. The massive debt is as a result of Japan's economy not sound. People aren't spending.

That is just wrong. You are confusing correlation with causation, something the government also does. On can not create demand by increasing supply which is the basis of government policies. Look at all of the money given to the banks so that they will lend. Yet, no one wants to borrow because they have no confidence in the economy. It is the same with consumer spending. The debt overhang on the economy causes a crisis in confidence which leads to the current situation. And it only gets worse until consumer confidence returns.

The debt was not the result of a bad economy, but the mismanagement of the economic decline after the asset bubble burst by the incompetent government. It has simply burdened future generations in order to maintain an economy that needed to return to reality. We are paying today for the decisions made years ago and no one has learned anything.

0 ( +0 / -0 )

Saidani

Let me get this straight. The banks and insurance companies who make up the bulk of the holding of the low interest JGB is buying them up because of the massive debt that Japanese government has in it's fiscal budget which result in issuance of JGB to cover the shortfall?

0 ( +2 / -2 )

???? Then please explain to me why U.S. and EU criticized Japan for their "intervention" of buying their instruments to keep the currency from going high? (<----Which IMF subsequently stated that Japan should do this) If BOJ is doing this, it's a classic case of Jekyll and Hyde.

Well, this is a very good question. Obama promised to double the US's exports during his first term. About the only way to accomplish this is to lower the value of the USD to other currencies, making US products cheaper. All struggling nations are doing this. Japan has been the patsy in the race to the currency bottom.

And this is not the first time the US has done this to Japan (look up Plaza Accord which some claim was the root cause of Japan's asset bubble). The US's hypocrisy toward China should be noted. While the US is the biggest currency manipulator in the world, it condemns China for maintaining a soft peg on the dollar. China has noted the damage done to Japan by the Plaza Accord as reason not to kowtow to US demands.

Do not expect the US to consider the interests of the Japanese. Americans will always seek their own interest first, something Japan should also do.

0 ( +0 / -0 )

Let me get this straight. The banks and insurance companies who make up the bulk of the holding of the low interest JGB is buying them up because of the massive debt that Japanese government has in it's fiscal budget which result in issuance of JGB to cover the shortfall?

And using the deposits and investments of the people to do it. Quite the cozy deal, eh?

0 ( +0 / -0 )

@Nigelboy, do a bit of reading. You've ruined another good thread.

I'd start with the basics, if I were you. You obviously need to... here

http://noahpinionblog.blogspot.jp/2012/08/financial-repression-japanese-style_13.html

For anyone who is interested in the Japanese economy, the recent paper by Takeo Hoshi and Takatoshi Ito is a must-read. Basically, it says that the days of Japan's seemingly infinite capacity to increase its national debt are numbered. Everyone knows that Japan sustains its unprecedented national debt by borrowing money from its own people. The willingness of Japan's private sector to lend near-infinite amounts of money to the government at a pittance of an interest rate is legendary. What Hoshi and Ito do is this: They assume that Japan's current government deficits, current GDP growth rates, and current savings rates will basically be maintained. Then they simply calculate the time when ALL of Japan's private wealth will be held in Japanese government bonds. Beyond that point, Japan will only be able to finance its deficits by borrowing money from foreigners, which of course will instantly push interest rates up to the point where Japan is forced to default. Under all of the scenarios, doomsday comes before 2023. Of course, that is making some very extreme assumptions, i.e. that government borrowing crowds out all other borrowing and that Japan's private sector demand for government bonds does not falter. The upshot: Unless it balances its budget, Japan will start borrowing from foreigners in the next decade

and maybe after, have a look at.

http://www.businessweek.com/news/2012-08-01/imf-warns-government-debt-holdings-risk-bank-stability-in-japan

-3 ( +3 / -6 )

You didn't answer my question. Which culprit is buying up JGB which us keeping it low?

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nigelboyAug. 27, 2012 - 03:11PM JST

You didn't answer my question. Which culprit is buying up JGB which us keeping it low?

Japanese Pension funds and Japanese insurance companies. The Ministry of Finance has lot of leverage over these guys, and basically forces pension funds to put households' savings in JGBs. But you may ask: Why don't workers demand that their funds invest in something higher-yielding?

In Japan, you can't do that!! In America, workers have a say in what asset classes their pensions go into. In Japan, this is apparently not the case. A 22-year-old entry-level worker, who really should have all of his money in global stocks, has absolutely no ability to stop his pension from putting all his money into low-yielding Japanese government bonds. Nor can he simply withdraw his pension early; apparently that is also not allowed in Japan.

Now go and do some basic reading on those threads I offered up, you need to.

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You didn't answer my question. Which culprit is buying up JGB which us keeping it low?

Actually, I did answer your question. Banks and insurance companies are using depositor and investor funds to buy government debt. I recall that the government wanted to increase the limit for deposits in Japan Post Bank. The reason was to give them more money to swap out for debt. The BOJ is taking that debt as collateral for loans to banks. It simply goes from one pocket to another, largely financed by the savings and investments of the Japan's well-noted savers.

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Dog Aug. 27, 2012 - 03:18PM JST

Yes, of course, and the pension funds. Thanks for helping out here.

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saidaniAug. 27, 2012 - 03:19PM JST

Actually, I did answer your question. Banks and insurance companies are using depositor and investor funds to buy government debt.

Actually Japanese banks have stopped buying JGBs and MOF is rather troubled by this because there is little they can do to compel them to. However it doesn't detract from the fact that they previously bought a lot of JGB's and presently are holding a worth of JGBs which is greater than their actual worth.

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The only way Japan can dig it's way out of this deep pit of debt is to cut spending,de-value the yen to boost exports, and cut taxes by 2-5 percent....raising taxes to allow for more debt is not going to do anything except increase the debt load and further put the financial future of Japan in dire straights..But I don't know how this can ever happen as Japan has many problems to face..financing the clean up effort and decontamination of vast areas affected via the failed NPP is probably not going to happen as the Japanese Government is basically broke...Buying JBGs is about as smart as investing in junk bonds... Governments selling bonds as a way of to service National debt is no diferent than a citizen bouncing a check to pay an over due rent,mortgage or car payment...it just multiplies the debt burden and makes no progress in debt servicing what so ever...Tax rates can onlybe raised to a certain point before the tax burden sterts to slow investments. All modern western economies have barrowed and overspent for far too long..the day of reconing is here and tough times are ahead..Bash China all you want but the Chinese have been doing a very good job of keeping their curency at an exceptable/sustained/realitic value and they have been saving reserve cash...when the Chinese did not have large sums the government did not borrow and spend...They are now reaping the bennifits of good conservitive financial policy. It is enteresting to take note of the great progress being made in countries that have refrained from allowing debt to be the crux and reason for high taxation.

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Dog.

Lot of assumptions in that paper one of which doesn't even consider the rise in tax revenues due to GDP growth and for some reason, he's basically stating that the savings for the elders would decrease without giving reason or the impact of where the money is going. The professor also states that since the as he predicts corporate savings is increasing and hence, it's making it unnecessary to raise the JGB rates. Then he goes about that if these companies start getting aggressive with investments, there will be less money available for JGB.

In other words, it appears he doesn't take into consideration of the economic impact(tax revenues) when these companies start investing.

http://sankei.jp.msn.com/economy/news/120707/fnc12070703040000-n2.htm

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Actually, I did answer your question. Banks and insurance companies are using depositor and investor funds to buy government debt. I recall that the government wanted to increase the limit for deposits in Japan Post Bank. The reason was to give them more money to swap out for debt. The BOJ is taking that debt as collateral for loans to banks. It simply goes from one pocket to another, largely financed by the savings and investments of the Japan's well-noted savers.

Thanks. You basically have banks, depositor, BOJ, simply as you quoted, "from one pocket to another". That's really my point. Internally financed almost completely.

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Dog Aug. 27, 2012 - 03:27PM JST

And merely a sign of what's coming. The government pension fund has become net sellers of debt as well, I believe.

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I'm not in the habit of agreeing with Nigelboy, but it needs to be pointed out that Japan is not really "indebted." It's the world's second biggest creditor nation and continues to run surpluses on its capital account.

Since Japan's fiscal debt is held internally, it's really an issue of distribution of wealth. You can't compare fiscal debt with household held; they're different things.

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JeffLee, the problem is though, Japan's account surplus has tanked 66% this year. If Japan doesn't have the account surplus, they'll need to borrow from abroad to make up for the deficit. But with the level of the debt so bad, investors around the world will demand premium interest rates. Of course, Japan can cut spending and cut the deficit, but that's going to hurt a lot of people, and the problem could self feed itself to grow bigger.

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JeffLeeAug. 27, 2012 - 10:16PM JST

Since Japan's fiscal debt is held internally, it's really an issue of distribution of wealth. You can't compare fiscal debt with household held; they're different things.

How much logic is needed to understand that while Japanese debt is internal, it is institutional. It's not owed directly to your next door neighbour Hiroshi, but by the Japanese finacial services and a mere 2% negative return on 10 year bonds - which is rather optimistic - will result in a 7.5 trillion dollar loss in investment returns for Japan as a whole.

At the present rate of investment in JGBs, all of Japan's wealth of 1,200 trillion dollars will be invested in JGBs by 2023, which means that next door neighbour Hiroshi will have zilch in his bank savings and pension account.

Is it really that hard to understand?

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I'm not in the habit of agreeing with Nigelboy, but it needs to be pointed out that Japan is not really "indebted." It's the world's second biggest creditor nation and continues to run surpluses on its capital account.

JeffLee. I think the concept "internally financed" is lost among the crowd. Like you said, it's merely a distribution of wealth within the country itself for they only look at the balance sheet of the Japanese government and not the entire country of Japan (which also includes private entities and persons). The latter is that Japan is the largest net external assets holder in the world for 19 consecutive years. It's a net creditor nation.

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nigelboyAug. 27, 2012 - 04:00PM JST

Dog.Lot of assumptions in that paper one of which doesn't even consider the rise in tax revenues due to GDP growth.

What GDP growth? There is a shrinking aging population. The only reason for GDP growth at present is the Tsunami rebuilding, which is being achieved at the taxpayers' expense.

In other words, it appears he doesn't take into consideration of the economic impact(tax revenues) when these companies start investing.

There is no internal investment in Japan, other than government investment ,financed through spending taxes that have and never will be collected. All present investment by japanese companies is investment elsewhere in Asia.

And I know that they this may be obvious to anyone with a basic understanding of Japanese corporate law, but I suspect you are the exception, Japanese companies, like American companies, only have to pay corporate tax on profit generated within Japan or profits repatriated to Japan.

They merely have to, and they surely will, follow the 'Apple Model' because capitalism and profit know no patriotism.

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What GDP growth? There is a shrinking aging population. The only reason for GDP growth at present is the Tsunami rebuilding, which is being achieved at the taxpayers' expense

In essence, the money is circulated as opposed to sitting there in the bank. What happens in a natural course of economics when money starts to be circulated?

There is no internal investment in Japan, other than government investment ,financed through spending taxes that have and never will be collected. All present investment by japanese companies is investment elsewhere in Asia.

So the external assets will indeed increase. We know where that Yen went.

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To many it is not a matter of "if," but "when." Sadly, it could happen overnight without any warning and be caused by problems elsewhere.

This is absolutely correct. You probably did not know that US was ready to go off the cliff within 24 hrs in 2008. It came with no warning and we were all in panic. FYI

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CarolingiumAug. 27, 2012 - 02:11PM JST

Once rates rise, life in Japan as you know it will change and not for the better.

@saidani: Any time estimates?

It depends on demand/supply in global financial market and credit rating of Japan. Bond yield went up to 6% for Spanish and Italian bonds for global investors. The rule of thumb is when the risk is higher, then the yield goes up higher. If Japanese investors do not buy the bond, BOJ has to go elsewhere for the sale of bond (global investors). FYI

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Budget is a problem, but so it revenue. And it's not just a matter of raising taxes. The gov't has been doing all they can to get the value of the Yen down. But frankly there's not a lot they can do anymore. Foreign investors are manipulating the currency for their own gains. That's killing productivity in Japan and forcing large Japanese companies to move manufacturing to China and other low cost countries. It's a bit of a death spiral to be honest.

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next door neighbour Hiroshi will have zilch in his bank savings and pension account.

Not quite, one of the biggest purchasers of JGBs is....the national pension fund. So much of that money eventually comes back to him and nearly every other pensioner, although the return won't be so great. A whimper, but not a bang.

By the way, the dooms-dayers, including high-profile hedge fund managers, have been shorting Japan for nearly a decade now, pointing to Japan's fiscal situation, demographics, etc. To date, every prediction they've made has been wrong (like the impoding yen), and they've lost lots, and lots and lots of investors' money. Check out Kyle Bass and his Japan fund. Yikes, now THAT's a real disaster. http://www.businessinsider.com/japan-is-never-going-to-default-2012-5

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Check out Kyle Bass and his Japan fund. Yikes, now THAT's a real disaster.

It's amazing that a person can run a hedge fund without truly understanding the soverign debt system. As the author summed it, "Eventually, that currency(Yen) will find its way home, and the cycle is complete."

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It's really disappointing situation that the conflict bet DPJ and LBP is giving citizens disadvantages of welfare. I want to see the situation recovering as quickly as possible. Unlike Greeks, Japanese officers are not a kind of people who want to parade in the street....

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