1standgoal comments

@herefornow:

Let's examine why Japan have a such low FDI rate: Japan is the world's largest creditor and hence the world's largest EXPORTER of CAPITAL, so why would they need foreign capital for its economic well being?

Ironically, Japan's "debt problem" is not by lack of capital, in fact, it's the opposite: it's because capital is so abundant! After the bubble burst, Japan's private sector accumulated huge surpluses (especially its corporate sector) equal to 8-9% of GDP annually; this huge pool of money has to go somewhere, and more often than not, it ends up in JGBs. In some estimates, J corporate is sitting on more than 3 trillion $ of cash, cash equivalents, and long-term investments.

So why the heck does Japan's public debt keeps climbing yet its yield keeps falling?

Because: J private sector keeps generating huge surpluses each year,

And: these surpluses are in turn deposited in J financial intermediaries such as banks/insurance companies/postal savings...etc

And: J financial intermediaries invest these funds in JGBs..... so on paper, Japan's public debt keeps increasing..... because money keeps coming in from the private sector! If the private sector surplus declines, then Japan's public debt will decline as a result.

There's no way for both the public sector (the J government) and the private sector (J households and corporate) to simultaneously run surpluses...it's just not possible in math or logic.... it’s analogous to:

Country A trades with Country B

A has a trade surplus with B

So what must be true based on that fact?

B runs a deficit with A.

J government deficit is basically the flip side of the J private sector surplus.

Finally, have you ever wonder why almost everything on this site (and the media in general) is doom and gloom? Is the world really falling apart? Remember, like everyone in the media business, JT needs advertising to pay its bills, and your attention is the fuel that keeps this gravy train rolling.

@YuriOtani:

Sure, Japan has its problems (who doesn't?), but in many tangible aspects such as net international investment position, corporate and household savings, current account surpluses, near monopoly position in key industrial components, robust financial system...etc it has never been more wealthy and dwarfs the amounts during the supposed golden bubble era.

And don't you think it's kind of weird that for an debt-ladden economy on the verge of debt induced collapse (if you believe the "experts"), its biggest problem for the past two decades has been the Yen been TOO STRONG?

@nigelboy:

Yeah, no kidding :D

BTW, why are so many folks on this forum so bitter?

The trade deficit is temporary – it basically came entirely from two countries – Saudi Arabia and Kuwait because all the nuclear reactors have been shut down hence the increased consumption of LNG for power generation. Right now Japan has trade surpluses with basically every major region in the world (North America, Europe and China) save the oil export countries in the Gulf. Japan is also the number one exporter of advanced capital goods to China, and exports to the U.S. rose more than 40%!

Therefore once the nuclear reactors get restarted, the trade deficit will be gone, and if the Yen can weaken significantly, Japan will enjoy record trade surplus again.

BTW, buried in the doom and gloom is the inconvenient fact that Japan is the world’s largest creditor nation for the 21st straight year with over 3 trillion dollars in net assets.

Ganbatte Nippon!

A nation’s account is calculated as the balance of:

Public sector + foreign sector = private sector

For Japan, the public sector is in deficit, but the foreign sector and the private sector are all in surplus; during the bubble era, the public sector and the foreign sector was in surplus, but the private sector (corporate) was in deficit. After the bubble burst, Japanese corporate sector went through painful restructurings but ultimately emerged stronger than ever and hence accumulated over 2 trillion $ in cash. Japan is also the world’s largest creditor (and hence the largest exporter of capital) with net international investment position of over 3 trillion $ -- that’s more than China and Germany combined.

That why it’s illogical to say that Japan will run out of savings and cause a debt crisis, when in fact the increase in Japanese government debt is CAUSED by the increase in private sector (household + corporate) savings! Ironically, if the pundits are correct and Japan does run out of savings, Japanese government debt will decrease as a result of the private sector deficit.

However, I do understand why this web site constantly beats the doom and gloom drum – web media is a competitive business, and the name of the game is ADVERTISING. To attract advertisers, JT needs web clicks, and to do that, something like “the structural surplus of excess savings in Japan’s corporate and household sectors and its influence on the JGB market” won’t do the job; sensational titles such as “Japan will collapse soon, the sky is falling, hoard gold” makes much more business sense.

These articles are informative:

corporate Japan is sitting on a 2.4 trillion $ cash pile:

http://www.bloomberg.com/news/2011-05-30/sony-leads-japan-inc-circling-takeovers-with-2-4-trillion-cash-real-m-a.html

Japanese households have more than 10 trillion $ in cash:

http://www.bloomberg.com/news/2011-03-23/japanese-households-record-cash-holdings-may-be-defense-from-quake-woes.html

Nigelboy has a great point – most people do not understand that Japan’s increasing public debt (JGB) is actually CAUSED by the corresponding increasing in the surpluses generated by its private sector (mathematically the sum of the three sectors – public, private and foreign balances out). It’s no coincidence that Japan’s public sector deficit of 7% of GDP per year is exactly the same as its private sector surplus – of 7% of GDP – it’s analogous to the flip side of the same coin.

So ironically, the constantly fear mongered “debt problem” is caused by Japan having too much money – investing in JGB is basically free money for J- mega banks, as they have over a trillion dollars of excess deposits burning a hole in their pockets – because the corporate and household sectors are sitting on record cash reserves and hence they have relatively low demand for loans.

What's really impressive about Japan is its EXTRAORDINARLY ROBUST private sector balance sheet -- yes, its government is a mess, yet its private sector has never been more flush with cash.

@ oginome: Thanks for your kind words. I’m no economist (I’m actually a law student), but I am a contrarian by nature and enjoy thinking critically.

BTW, this diagram nicely illustrates Japan’s dominant (upstream) position in the manufacturing of semiconductors:

http://images.businessweek.com/mz/11/13/1113_mz_18econsupplychain.pdf

Technically Japan is not even in deflation – it’s in what's called “disinflation” because statically a CPI of 0.3% (Japan's inflation rate last year) is the same as -0.3%.

@Napoleancomplex:

You are taking about the nominal yield (i.e. not adjusted for inflation). With deflation, the real yield for 10 year JGB is the second highest in G7 (behind Italy).

So with zero interest rate and a vast depositor base, investing in JGBs is basically free money for J banks – in fact, they made over a trillion yen in JGB last year.

Also, the JGB “doom and gloom” school’s reasoning is so comically circular: the conclusion is given and any evidence (pertinent or not) points to their favored conclusion -- JGB will collapse.

So JGB will collapse because:

• Trade surplus • Trade deficit • GDP grew • GDP contracted • typhoon • earthquake/tsunami • summer heat • Yu Darvish pitched a bad game…..

Basically, anything will automatically lead to the JGB collapse, logic be dammed.

Japan is the world’s largest creditor nation with over 3 trillion dollars in net international investment position -- by far the largest on the planet.

Japan’s public sector debt is like the flipside of a coin – it simply reflects the vast surplus from its private sector. Japan’s private sector has a surplus equivalent to 9% of GDP last year; and guess what’s the public sector deficit rate? You guessed it, 9%. These surpluses are deposited in J-banks and eventually find its way into Japanese government bonds. I mean how else can J banks make money? Loan demand is anemic and there are hundreds of trillions of Yen of excess deposits sitting on their books with nowhere to go – Japan’s private sector is extraordinarily strong and awash in money.

Japanese mega banks are phenomenally well funded --Mitsubishi UFJ alone has over 1.6 trillion dollars in deposits. They are also making good profits on JGB -- over the dead bodies of all those doom sayers :D

http://www.economist.com/node/18233464

The supposed imminent JGB crisis is a red herring. Japan’s government debt to GDP ratio is high on paper because its corporate and private sectors are in huge surplus – big companies and households are both sitting on record amounts of cash. So somebody has to borrow to start the credit creation processes necessary for economic growth, and it might as well be the J government.

Furthermore, J banks are sitting on trillions of dollars worth of excess deposits with nowhere to go, so they park it in JGB and earn a nice yield (in real terms).

Kazuo Inamori is a business genius.

@ oginome:

The above poster can't argue with your logical reasoning, so he/she resorts to an ad hominem attack.

Obviously, intelligence is not his or her forte.

To provide some historical context:

After WW2, Japanese industry always graduated to the next level, and leave the lower end work to other Asian nations. In the 1950s and 60s, Japan exported toys/shoes/garments; in the 70s and 80s, cheap cars and electronics. In every one of these circumstances, Japan upgraded to the next level of manufacturing sophistry and outsourced the lower end jobs to lower-cost nations in Southeast/East Asia.

Japan now produces capital goods, advanced components, luxury cars (a Lexus LFA costs over 300,000 $!), and high-end electronics (for example, most of the DSLR cameras used by pros in the London Olympics will be from Canon and Nikon).

Some people like claim that Japan's manufacturing might decreased and cite the evidence of its lost of market share in TVs/refrigerators/washers/DVD players. But these products are now mostly commodities differentiated almost solely by price, and Japan cannot outcompete with China, and to a lesser extent, Korea, on price. Japan's specialty is in high-end manufacturing, which is highly- automated and employs few workers because its highly-authomated.

This in-depth article from bweek illustrates Japan's dominance in capital goods:

http://www.businessweek.com/magazine/content/10_49/b4206044280596.htm

The most amazing fact I got from this article is that Fanuc ( the dominant player in robotics and CNC) manufacture robots using robots. Whenever you buy an iphone or take a flight in a Boeing airplane, Fanuc probably took a (very lucrative) cut -- their operating margin is over 44%.

This is how Japan (and Germany) rolls -- they make the most advanced machinery that no one else can make but every manufacture requires to manufacture high quality products. Barriers to entry is extremely high because of R&D costs and technical expertise are accumulated over decades. South Korea, without a doubt an extremely successful economy, currently occupies the medium level in terms of the overall production chain. I'm not saying that South Korea and China cannot graduate to this level eventually, but it takes time.

@oginome:

Moreover, Japan’s debt figure is vastly exaggerated.

Case in point: the Japanese government have over 1 trillion $ in FX reserves – mostly from interventions to stem the yen’s relentless rise. However, these FX reserves are classified as both assets and liabilities, because after a FX intervention, the money supply in both the foreign currency (mostly dollar) and Yen increases, resulting in increase in inflation. To prevent the increase in the Yen money supply, BOJ “sterilizes” this new money with matching new issues in JGBs, thus removing this new money from circulation. This paradoxically results in increase in the official Debt to GDP figure. The idea that Japan will suffer a crisis of debt denominated in its own currency is literally impossible – BOJ can issue its own sovereign currency at will by creating money out of thin air – nowadays by entering a few zeros on its excel spreadsheet. Issuing debt in your own currency is a privilege enjoyed by few, and Japan is one such nation.

The lesson: LIES, DAMMED LIES, and STATISTICS.

@oginome:

In 2010, China had a deficit of $50 billion with Japan and $40 billion with Germany on capital goods.

After two “lost decades” of “stagnation” and “decline”, Japan is so beleaguered economically that:

Its major corporations are sitting on a cash pile of more than 2.4 trillion dollars (an all time record)

http://www.bloomberg.com/news/2011-05-30/sony-leads-japan-inc-circling-takeovers-with-2-4-trillion-cash-real-m-a.html

Its household is sitting on 19 trillion dollars worth of financial assets (also an all time record) http://www.bloomberg.com/news/2011-09-20/japan-household-assets-rise-for-first-quarter-in-five-boj-says.html

Its post office is sitting on the world’s largest cash pile: -Kampo, its insurance arm, is the world’s largest insurer by assets -Yucho, its banking arm, is the world’s bank by deposits http://www.japanpost.jp/en/group/disclosure/2011/pdf/05.pdf

What Japan is doing is analogous to an extremely wealth person (with a lot of offshore assets) living a moderate lifestyle and pretending to be a lot less wealthy. It makes a lot of strategic sense from a Sun Tzuian point of view – always provide your competitors misinformation to maximize your own strategic advantage.

@Oginome:

Actually, Japan is the world's largest creditor nation (by a very wide margin):

http://www.financialsense.com/contributors/leslie-cuadra/2011/08/31/list-of-worlds-largest-creditor-and-debtor-nations

Japan’s net assets:

At the end of 1989: 42,543 billion yen (554 billion dollars)

At the end of 2010: 251,495 billion yen (3.3 trillion dollars)

After the bubble burst and two "lost decades", Japan’s total net worth increased more than 490%!

http://www.mof.go.jp/english/international_policy/reference/iip/e2010.htm

http://www.reuters.com/article/2010/05/24/japan-economy-assets-idUSTOE64N07320100524

Guess who is the “Microsoft” of global factory automation and controls over 60 % of the CNC market (the operating system of factory machines)?

Fanuc, and they are laughing all the way to the bank.

http://www.businessweek.com/magazine/content/10_49/b4206044280596.htm

http://www.bloomberg.com/news/2011-01-14/fanuc-to-build-robot-factory-count-on-cranes-with-brains-to-fuel-growth.html

And from an anecdotal perspective, I was in China a few months ago and noticed that the sleek skyscraper I was staying in had elevators from Mitsubishi Electric. I also noticed the profusion of construction equipments from Komatsu, Hitachi and Kobelco on the construction sites in Beijing. Even the Starbucks where I sipped overpriced lattes couldn’t escape the influence of Japan Inc -- industrial strength air conditioners from Daikin kept me cool from the blistering Beijing heat.

All warfare is based on deception.

-Sun Tzu

Consider these facts about Japan:

It's the world's number one creditor: http://online.wsj.com/article/BT-CO-20110523-713266.html

Its major corporations have over 2.4 trillion dollars of cash: http://www.bloomberg.com/news/2011-05-30/sony-leads-japan-inc-circling-takeovers-with-2-4-trillion-cash-real-m-a.html

Its households have 19 trillion dollars in financial assets: http://www.bloomberg.com/news/2011-09-20/japan-household-assets-rise-for-first-quarter-in-five-boj-says.html

It is the "Microsoft" of factory automation: http://www.businessweek.com/magazine/content/10_49/b4206044280596.htm

Strategically It is in Japan's national interest to keep telling the rest of the world how weak it is when the opposite is true.