Econintersect: Japan has piled up masive public debt levels over the years since their bubble economy burst more than 20 years ago. At latest reading the government debt to GDP ratio was 245% according to Takehiko Nakao, Japan’s vice finance minister in charge of the exchange rate. (See The Telegraph.) This has been repeatedly cited as an impossible economic burden which is sure to lead to massive currency devaluation and accompanying high inflation. As John Mauldin has repeatedly said, “Japan is a bug in search of a windshield.”
But, in the face of all this, Japanese government bonds are near a record high (record low interest rate). Tuesday (26 March 2013) the Japanese 10-year bond touched a rate of 0.53% according to the Financial Times, just above the all-time low of 0.43% in June 2003. This is not the situation expected before an imminent collapse of the bond market and higher inflation. In fact the country continues to float in and out of deflation.
The graph below from Trading Economics shows how the Japanese debt has grown over the past 16 years since 1996 when Japan had a debt to GDP ratio similar to what the U.S. has today. The numbers shown in the graph are for 01 January of each year, so the increase in the ratio has been from 211.7% to 245% over the past 15 months.
Click on graph for larger image.
According to an article by Ambrose Evans-Pierce in The Telegraph, the Japanese government concedes that there can be problems and mentions that hedge funds have begun shorting Japanese debt. But, in spite of acknowledging that the debt level is not really safe, the following representation is quoted by Ambrose-Pierce from statements by Nakao:
“We didn’t blame other countries after the Lehman crisis when they had large falls in their currencies. We are using monetary policy to tackle persistent deflation in Japan, and avoid a deflationary spiral“.
And what about the new short positions on Japanese debt? Ambrose-Pierce wrote the following:
Veteran Japan-watchers say there is a graveyard full of foreign funds that bet against Japanese debt over the last two decades, only to learn the hard way that the country is sui generis, with vast overseas assets and a captive pool of domestic savings.
But Japan had one thing going for it while all those investors went broke shorting Japanese bonds: a big trade surplus. And in recent quarters that has evaporated. So is the 20-year old bug about to find that windshield or should we be paying attention to Marshall Auerback who says:
Let’s Cut the Crap About Japan’s ‘Lost Decade’.
- Mr Yen cautions on Japan’s ‘unsafe’ debt trajectory (Ambrose Evans-Pierce, The Telegraph, 26 March 2013)
- Japan bond prices near all-time high (Ben McLannahan, Financial Times, 26 March 2013)
- Japan: Third Largest Trade Deficit on Record (GEI News, 19 December 2012)
- Let’s Cut the Crap About Japan’s ‘Lost Decade’ (Marshall Auerback, GEI Opinion, 22 December 2012)