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Japan's economic paradox

Astroboy

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Japan offers $60bn to boost IMF firepower (not firework)
Japan is to provide $60bn to the International Monetary Fund’s effort to expand its resources, pledging to lead the global effort to prevent the sovereign debt crisis in Europe from weighing on economies around the world.
Japan offers $60bn to boost IMF firepower - FT.com

1. It is said that Japan's debt (government debt) surpassed 200% of its GDP.
2. Both Int'l media and Japanese media contiues to tell "Japan's debt level is far worse than Greek and Spain."
3. Int'l rating firms also continued to threathen Japan "We will downgrade grade of soverign bond of J-government unless Japan raise tax!"

However, such a reportedly debt-laden governement of Japan generously offer money to IMF, while other countries are reluctant.
Case of Japan is a good example to understand macro-economics as it's a paradox of conventional economics being popular among West.
 

Tokugawa Ieyasu

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Japan offers $60bn to boost IMF firepower (not firework)

Japan offers $60bn to boost IMF firepower - FT.com
1. It is said that Japan's debt (government debt) surpassed 200% of its GDP.
2. Both Int'l media and Japanese media contiues to tell "Japan's debt level is far worse than Greek and Spain."
3. Int'l rating firms also continued to threathen Japan "We will downgrade grade of soverign bond of J-government unless Japan raise tax!"
However, such a reportedly debt-laden governement of Japan generously offer money to IMF, while other countries are reluctant.
Case of Japan is a good example to understand macro-economics as it's a paradox of conventional economics being popular among West.

Eammon Fingelton basically said the same thing in this article:

If Japan Is Broke, How Is It Bailing Out Europe? - Forbes
 

Aino

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Eammon Fingelton basically said the same thing in this article:
If Japan Is Broke, How Is It Bailing Out Europe? - Forbes


Eammon Fingelton is working on a book about the " end of the American Dream " ~ the scenario is plausible as US becomes more Black & Brown ( both racial groups account for 30% + of current total population ~ continue on the uptrend and they will be 50% of Americans by at the end of this century if not sooner ).The education system is a big mess.Whites have became a divided people ~ constantly at each others throats over race issue / gay rights / immigration & illegal immigration / national healthcare / separation of church and state / etc.
 
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ClarkH

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Aino,

Are you implying that because various people are of the same race, they should agree on issues like healthcare and immigration, otherwise something is wrong?

Whites have became a divided people ~ constantly at each others throats over race issue / gay rights / immigration & illegal immigration / national healthcare / separation of church and state / etc.

What's wrong with that?

Also, I don't think it's relevant to this thread anyway.
 

ClarkH

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Anyway... let me try to address the OP.

There should be no "conventional economics". One cannot simply say, "since debt is greater than 200% GDP, Japan is doomed" or "since Japan's debt is greater than Greece and Spain, Japan is doomed." These "conventional" statements or rules of thumb are far too simple to analyze macroeconomic condition of a sovereign nation. In any case, you will hear media making such statements for many reasons. I believe the reason these sort of comments are so popular in the media is because most of the audience can't understand economics much further than these simple statements, and also media tends to prefer to spin bad or scary stories.

Let's look at the Japanese economy, debt levels, GDP, and macroeconomic trends in more detail.

See this chart. It compares debt composition among the world's largest economies. Most of Japan's debt is government debt. Japan has far more debt than Spain, yet Spain has more household and nonfinancial firm debt. These kinds of debt cost a lot more. Think about Japanese interest rates, and interest rates in Spain and other PIIGS nations. Japanese debt is much cheaper, meaning that investors do not require such a high rate of return (indicating that they are not taking as much risk by investing in Japan vs investing in Spain).

Why do investors find Spain so much riskier than Japan? The answer to this question is really what's at the heart of what you call the "Japanese economic paradox."

Check this excellent article. I would encourage you to read it all if you are really that interested, but I will put some quotes below as well.

The financing of federal governments is much more complicated than the simple taxation of citizens. Governments finance themselves through some combination of direct taxation of citizens, taxation of businesses, tariffs on imports from other countries, build-up and usage of foreign currency reserves from international trade, issuance of debt, and money printing (if possible). Therefore, Japan’s ability to finance its federal government will be determined by the health of its GDP growth (which grows tax revenues, all else equal), its ability to grow federal tax revenues, its ability to control its budget, its ability and willingness to use its substantial foreign exchange reserves, and perhaps most importantly, its ability to continue selling bonds to the public. The secret of Japan’s ability to finance itself over the past 22 years is that it has used its current account surplus to create a closed loop — more money flows into Japan than flows out, and that net inflow is largely invested in JGBs (Japanese government bonds).

Here’s how it works: on the trade side, Japan exports more than it imports bringing more capital into Japan than leaving. Japan has maintained a trade surplus for about 30 years. And because of this persistent trade surplus, Japan has built up a large portfolio of foreign currencies. These foreign currencies are then invested in foreign assets (e.g., U.S. Treasuries) earning Japan a steady stream of income. Because this portfolio is large, Japan — as a country — regularly earns more income on its foreign currency holdings than they pay out to foreign investors. In combination, the trade surplus and the income surplus brings new money into corporate Japan. Corporate Japan places that money into the banking system, which then gets levered up and dramatically expands its purchasing power. Then the banks, life insurance companies, and pension funds turn around and buy lots of JGBs (accompanied with much pressure/regulation by the Bank of Japan).

So far, sounds good, right? Well, some conditions are changing in Japan which will make this cash flow cycle unsustainable:

Although Japan probably still is often thought of as a high-saving society, this is no longer true, at least for households. Japan’s household savings rate is now around 2% (down from a peak of 44% in 1990). So, in combination with chronic, large fiscal deficits, Japan’s low bond yields appear to present an oxymoron.

Japan’s population — 20 years from today — will shrink to about 118 mm by the year 2032 (with an even greater deceleration in the working age population). Today, Japan’s GDP per capita stands at about ¥3.7 mm per person. Assuming they can maintain this level over time and keeping inflation neutral, Japan’s GDP would shrink from ¥476 trillion today to about ¥442 trillion in 2032. Given the ongoing massive fiscal deficits which Japan finances through similar levels of debt issuance, their national debt levels will rise to ¥2.4 quadrillion (rising from ¥980 trillion today). Another big question mark is of course interest rate levels. Even assuming their average interest cost on debt remains unchanged from today’s levels, Japan’s debt service will consume over 50% of the federal budget by 2032 (up from 23% today)

This part is very bad news. Once GDP begins declining, the Japanese economy will be in real trouble. But when will that GDP decline become substantial? Here's part 2 of the article which attempts to answer this question.

Already, Japan’s debt service is 23% of GDP, with interest rates at 1%. What happens if and when rates rise? In short, debt service would explode and crowd out huge portions of the federal budget. So, what causes rates to rise? Rates rise when the market senses a paradigm shift. Perhaps first is what corporate asset managers decide to do. Second, the general dissaving that is spawned by aging will reduce aggregate demand at a time when aggregate supply is increasing. Third, a stronger yen means fewer exports and, furthermore, the shift in energy policy after the Fukushima disaster means a downward structural shift in the current account balance. Not only does aging impact federal budgets, but it also puts downward pressure on GDP.

The funding deficit over the 2000–10 time frame has been modestly negative and made up for with accommodative policy by the Bank of Japan. This accommodative policy has been offset by deflationary forces in Japan, so the net effect has been mild deflation. Looking forward, if this funding deficit of, say, –5% of GDP were made up for with accommodative monetary policy, then the inflationary force of this accommodative monetary policy would very likely exceed the mild deflation (say, –1% or so) that has been occurring in Japan for some time. The net result would be some mild inflation of, perhaps, 2–4% (depending on how much monetization and how much debt issuance occurs), but it would likely be enough to recalibrate the bond market’s expectations. And if JGB yields rise from 1% to just 2%, Japan’s debt service will explode. Thus, a vicious cycle of higher yields, greater fiscal deficits, greater monetization, and greater inflation will occur.

While the underlying economics will change gradually over time, the crisis will erupt when the bond market breaks from the past. When the market realizes that the status quo has changed, rates will rise and force the government’s fiscal budget to explode, creating a sequence of cascading events. Watch closely to see what the major Japanese banks do with their JGB holdings. In addition, watch pension fund managers. The stewards of capital changing their policy allocations will determine when the status quo shifts.

You see? This can't all be boiled down to some sort of "conventional wisdom," nor could the media report this kind of news and expect keep the attention of your everyday couch potato (at least not in America).
 

Astroboy

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@ClarkH

I agree with you for most parts. Current acount surplus is a good point, but comparison with Greece and Spain is not a good idea.

Big difference from european countries is the fact that Japan is a sovereign nation being able to print "money" - JPY. Japan has also its own central bank. Even if Japan plung into current account loss, I think it's not a problem. Government of Japan will force BOJ to print money.

Then economists will warn ... "JPY value will be damnaged ! if BOJ continues to purchase governmet bonds" ... But I think it's not a problem, either, because Japan is suffering from deflationary economy, not inflation. Instead of worrying about JPY value, Japan is suffering from too much valuable JPY at the moment. In other words, Soaring YEN.

Therefore, I think:

1) J-government need to push BOJ to purchase government bonds.
2) J-government spend more money on construction, dam, hughway, bridge, .... social security, and so on so forth, on behalf of Japanese citizen.
3) Value of JPY will go deteriorated accordingly
4) Inflation arise, but nominal GDP will grow - which means more tax revenues to J-goverment, while per-GDP debt-size will shrink.
5) Consurrently ... JYP exchange rate go plunged, meaning more expensive foods & petroleum, prompting inflation in Japan .... bitter life for Japanese.
6) However, JPY deppreciation will help Japan's manufacturing sector and drive exports.
7) Again, Japan return to ccurrent acount surplus country .... Like today.

It is possible to erase debt .... instantly if we can cause inflation.

Am I wrong ?

---------- Post added at 20:49 ---------- Previous post was at 20:32 ----------

See this chart. It compares debt composition among the world's largest economies. Most of Japan's debt is government debt. Japan has far more debt than Spain, yet Spain has more household and nonfinancial firm debt. These kinds of debt cost a lot more. Think about Japanese interest rates, and interest rates in Spain and other PIIGS nations. Japanese debt is much cheaper, meaning that investors do not require such a high rate of return (indicating that they are not taking as much risk by investing in Japan vs investing in Spain).

I understand that this graph means .... debt is debt. Doesn't matter whether it's govenment debts or household debts.
Then, you better see Balance Sheet Comparison at national level. As far as I know, Most of the listed countries, except Germany, are net external asset deficit countries, while Japan and Germany are Net External Asset Surplus countries. This means that Japan will be able to pay for imports by selling external assets for quite long time even if Japan turns current account deficit country.

Am I wrong?
 

ClarkH

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Hi Astroboy,

I agree with a lot of your points too, except some important ones, and so I disagree with your conclusion.

@ClarkH
I agree with you for most parts. Current acount surplus is a good point, but comparison with Greece and Spain is not a good idea.
Big difference from european countries is the fact that Japan is a sovereign nation being able to print "money" - JPY. Japan has also its own central bank. Even if Japan plung into current account loss, I think it's not a problem. Government of Japan will force BOJ to print money.

BOJ could print money, but only as a last resort.

Then economists will warn ... "JPY value will be damnaged ! if BOJ continues to purchase governmet bonds" ... But I think it's not a problem, either, because Japan is suffering from deflationary economy, not inflation. Instead of worrying about JPY value, Japan is suffering from too much valuable JPY at the moment. In other words, Soaring YEN.

Definitely I agree with you. Very strong JPY is hurting exports. However, there are 2 sides to that coin. Japan imports virtually all raw materials used for production, like oil and other commodities. If JPY becomes devalued, the cost of production will also rise (Japan will need to pay more for oil and commodities), and Japanese products could be less competitive. So, there are two things to think about when you consider value of JPY, and they offset each other: Stronger JPY means cheaper costs for production, but more expensive for foreigners to buy Japanese products. Weaker JPY means higher costs for production, but less expensive for foreigners to buy Japanese products (if the price stays the same, which is unlikely because of higher costs). You see how it's not so simple about whether Japan should prefer strong or weak JPY? Unlike in US, where most commodities are traded in USD.

Therefore, I think:
1) J-government need to push BOJ to purchase government bonds.

Yes, they do this a lot already, and BOJ has been purchasing increasing number of JGB (Japanese Government Bonds). This chart shows exactly JGBs owned by BOJ (in Y100 mm).

4) Inflation arise, but nominal GDP will grow - which means more tax revenues to J-goverment, while per-GDP debt-size will shrink.
5) Consurrently ... JYP exchange rate go plunged, meaning more expensive foods & petroleum, prompting inflation in Japan .... bitter life for Japanese.
6) However, JPY deppreciation will help Japan's manufacturing sector and drive exports.

Here I begin to strongly disagree about the results of inflation, and this is the part I think is critical. I only agree about #5 from this quote.
So, for #4, I must say, increasing inflation will be very bad for Japan, not only because it will mean a bitter life for Japanese citizens, but also because it has huge implications for the cost of debt. Cost of debt (interest rate) is a sum of many different risks. In particular, bond yield compensates investors for these types of risks: risk free rate, default risk (probability that BOJ won't pay, approximately 0%), liquidity risk (JGB are highly liquid, so this is approximately 0%), maturity risk (bonds with longer maturity should have higher interst rate), inflation risk (risk that inflation will make bond less valuable before it matures). In the case of JGBs, almost all risks are 0%, except inflation risk (and risk free rate, which we can ignore here). As we know, interest rates on JGBs are extremely low right now, particularly because there is deflation in Japan. However, when inflation begins to rise, the interst rates on JGBs will rise as well, and this will put BOJ in very much trouble! It will no longer be so easy to retire debt and borrow more money cheaply. Once inflation starts to rise, Japan will actually be in deep sh**! I'm sorry to say it. ; ;

Also, about #6, as I mentioned above, JPY depreciation may not necessarily mean Japan's manufacturing and exports will be stronger, because costs for manufacturing will also rise.

7) Again, Japan return to ccurrent acount surplus country .... Like today.
It is possible to erase debt .... instantly if we can cause inflation.
Am I wrong ?

I think you're wrong. Raising inflation is not the way to do it. And to be honest, I don't know what is the best way for Japan to erase debt, but it's definitely not through inflation. Inflation will increase the debt burden a lot! Let's say right now that inflation is -1%. If inflation rises even to 2%, then interest rates in Japan will rise by 3%! And since interest rates now in Japan are below 1%, that is a HUGE increase in interest rates, and that's very bad news. It is like the cost of debt raising by 300%!

I understand that this graph means .... debt is debt. Doesn't matter whether it's govenment debts or household debts.
Then, you better see Balance Sheet Comparison at national level. As far as I know, Most of the listed countries, except Germany, are net external asset deficit countries, while Japan and Germany are Net External Asset Surplus countries. This means that Japan will be able to pay for imports by selling external assets for quite long time even if Japan turns current account deficit country.
Am I wrong?

I have to disagree again. Debt is not debt! Would you rather lend Y100,000 to the BOJ or to a family in Greece? Because one of these parties is much more likely to pay you back than the other. Greek family will rip you off. Haha. BOJ will certainly pay you back. So what do I mean here? Default risk from a Greek family is extremely high, and default risk from BOJ is 0%. There are two important things to consider when you think about debt. 1) The level of debt. 2) The cost of debt. Spain and Japan both have high levels of debt (and also most other developed nations). High levels of debt alone is not bad. However, Spain has very high cost of debt, while Japan's cost of debt remains very low. Japan is still much better off than Spain. ^^

Clark
 

Astroboy

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Thanks for the detailed explanation. You sounds like an official of Japan's MOF !

Here I begin to strongly disagree about the results of inflation, and this is the part I think is critical. I only agree about #5 from this quote.
So, for #4, I must say, increasing inflation will be very bad for Japan, not only because it will mean a bitter life for Japanese citizens, but also because it has huge implications for the cost of debt. Cost of debt (interest rate) is a sum of many different risks. In particular, bond yield compensates investors for these types of risks: risk free rate, default risk (probability that BOJ won't pay, approximately 0%), liquidity risk (JGB are highly liquid, so this is approximately 0%), maturity risk (bonds with longer maturity should have higher interst rate), inflation risk (risk that inflation will make bond less valuable before it matures). In the case of JGBs, almost all risks are 0%, except inflation risk (and risk free rate, which we can ignore here). As we know, interest rates on JGBs are extremely low right now, particularly because there is deflation in Japan. However, when inflation begins to rise, the interst rates on JGBs will rise as well, and this will put BOJ in very much trouble! It will no longer be so easy to retire debt and borrow more money cheaply. Once inflation starts to rise, Japan will actually be in deep sh**! I'm sorry to say it. ; ;

Also, about #6, as I mentioned above, JPY depreciation may not necessarily mean Japan's manufacturing and exports will be stronger, because costs for manufacturing will also rise.

You are telling that inflation will increase borrowing costs of JGB, meaning more costs to J-govenrment (not to BOJ).
I think ... you forget ownership of BOJ. Unlike US-Fed, Bank of Japan, aka Central Bank of Japan, is a consolidated subsidiary of Government of Japan.
If interest rates rise, Yes, J-government have to pay more premium to BOJ (in case that BOJ owns most of JGB), but the interests paid to BOJ will return to J-Government (MOF) as extra-ordinary income.

I think you're wrong. Raising inflation is not the way to do it. And to be honest, I don't know what is the best way for Japan to erase debt, but it's definitely not through inflation. Inflation will increase the debt burden a lot! Let's say right now that inflation is -1%. If inflation rises even to 2%, then interest rates in Japan will rise by 3%! And since interest rates now in Japan are below 1%, that is a HUGE increase in interest rates, and that's very bad news. It is like the cost of debt raising by 300%!

I think we have to remember the history of modern sovereign nations. Are there any nations that repaid all of sovereign bonds ? I think there is none. Instead, everybody repaid it by way of Inflation. Especially, in the times of recession (GDP remaining unchanged or shrinking), tax-raising is suicidal action. It is only possible to erase "gradually" by way of infaltion ... under central bank's management. In short, if inflation enters dangerous zone, BOJ should tighten monetary policy.

As I said, Japan is stuck with deflation .... in which per-GDP size of government debts grow as GDP is flat or shrinking. Deflation means ... there are certain gap between supply and demand. Maybe Japan is lack of Demand. Therefore, J-Governement must create Demand by distributiong JGB.
 

Tokugawa Ieyasu

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I find it interesting that after two "lost decades", Japan's net foreign assets (also called net international investment position) went from 554 billion dollars at the end of 1989 to more than 3 trillion dollars today.

So Japan is actually far wealthier today (at least in terms of its international asset position) two decades after the bubble burst, even though its domestic GDP stagnated (that is assuming these GDP numbers are even correct!)

For example, when a J-multinational opens a plant in China, all the GDP is recorded in China, but the bulk of the profit goes back to Japan. Admittedly some employment is affected, but most of these jobs are low-level assembling jobs. That's why GDP is such a misleading indicator of economic strength -- it tells you how much is produced within a nation, but not by whom, or how much value is added, and how much of it is made by domestic companies..etc.

GDP/debt/any kind of statistics can be easily manipulated to fit into whatever argument one wants to construct.
 

ClarkH

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Thanks for the detailed explanation. You sounds like an official of Japan's MOF !

I wish! That would be a dream! You are too kind. You give me too much credit. I'm not nearly wise enough to be in Japan's MOF. Not even close. I still have a lot to learn. I just give opinion and I can easily be wrong. Many people have been wrong about Japanese economy over the years since the huge recession in 1998-99! Many investors tried to bet again Japan since 1999 and those investors lost a lot of money. It's quite an interesting case to study actually. Many people thought that America may go down the same path after the recession in 2008-09.

You are telling that inflation will increase borrowing costs of JGB, meaning more costs to J-govenrment (not to BOJ).
I think ... you forget ownership of BOJ. Unlike US-Fed, Bank of Japan, aka Central Bank of Japan, is a consolidated subsidiary of Government of Japan.

I'm sorry. You are right. In my mind, I just thought of it as the same entity.

If interest rates rise, Yes, J-government have to pay more premium to BOJ (in case that BOJ owns most of JGB), but the interests paid to BOJ will return to J-Government (MOF) as extra-ordinary income.

Still there are many other investors in the JGB as well, including foreign firms.

I think we have to remember the history of modern sovereign nations. Are there any nations that repaid all of sovereign bonds ? I think there is none. Instead, everybody repaid it by way of Inflation. Especially, in the times of recession (GDP remaining unchanged or shrinking), tax-raising is suicidal action.

Absolutely I agree. Some people speculate that Japanese government will have to raise taxes, but I think it will be a bad idea.

One theory many people never heard about is called the Laffer Curve. It proposes that a government may earn maximum revenue in some cases by decreasing taxes! That is, there is some optimal tax rate where economic activity is still encouraged, but tax rates are still high enough to collect a lot of revenue.

Basically: If tax rate is 0%, government earns no revenue. If tax rate is 100%, there is no incentive for people to work and again goverment earns no revenue. Here is a graph. Anyway, it's just a theory, but I think it's probably true. There is probably a optimal tax rate, and raising taxes is not always the best way for governments to earn more revenue. Instead they should try to stimulate economic activity.

It is only possible to erase "gradually" by way of infaltion ... under central bank's management. In short, if inflation enters dangerous zone, BOJ should tighten monetary policy.

Yes, I agree totally. Japan definitely has enough room for inflation to rise quite a bit and still be okay without having to tighten monetary policy. That's probably what will end up happening. Most governments have target inflation between 1-3%. I think if Japan's inflation eventually gets to 2%, they will still be safe. It's usually difficult for governments to devalue their currency rapidly though. Here's an attempt by BOJ to devalue JPY in November 2010. You can the intervention was effective for only 30 minutes. Again the BOJ and other nations attempted to devalue JPY in March 2011, and within a couple months, JPY regained most of that strength. And again more attempts in 2011 by BOJ to devalue JPY that quickly failed.

Weaker JPY should help Japan (even if it makes commodity costs higher), but it's not very easy to devalue JPY rapidly. Eventually though, if inflation does get out of control (I think it would be unlikely or may take a very long time before that happens), BOJ will need to tighten monetary policy as you say.

As I said, Japan is stuck with deflation .... in which per-GDP size of government debts grow as GDP is flat or shrinking. Deflation means ... there are certain gap between supply and demand. Maybe Japan is lack of Demand. Therefore, J-Governement must create Demand by distributiong JGB.

Investors are still willing to buy JGB. That's why interest rates remain so low. Investors continue to have extreme confidence in Japan, and I think it's well deserved. For several decades Japan has invested a lot in education, infrastructure, research, and development. Even while the Japanese economy struggles since 1999, they still have a lot of valuable knowledge capital, which provides a lot of growth prospects, and good investments are driven by growth prosepcts.

I wouldn't be surprised if Japan continues with struggling economy for several years, and may ultimately avoid another huge recession. I certainly hope so! Japan does not deserve more tragedy, but economics are very cold. It doesn't have any emotion. Haha.

It's so difficult to forecast out 10+ years.

I find it interesting that after two "lost decades", Japan's net foreign assets (also called net international investment position) went from 554 billion dollars at the end of 1989 to more than 3 trillion dollars today.

So Japan is actually far wealthier today (at least in terms of its international asset position) two decades after the bubble burst, even though its domestic GDP stagnated (that is assuming these GDP numbers are even correct!)

For example, when a J-multinational opens a plant in China, all the GDP is recorded in China, but the bulk of the profit goes back to Japan. Admittedly some employment is affected, but most of these jobs are low-level assembling jobs. That's why GDP is such a misleading indicator of economic strength -- it tells you how much is produced within a nation, but not by whom, or how much value is added, and how much of it is made by domestic companies..etc.

GDP/debt/any kind of statistics can be easily manipulated to fit into whatever argument one wants to construct.

It's true, statistics can be spun any way the author wants. That's why it's not so easy to say what will happen in Japan just by looking at a bunch of statistics. Still, it gives us a better idea than looking at nothing.

By the way, there are other measures of economic activity that you may find more suitable:

Gross Domestic Product (GDP) - Monetary value of all finished goods and services produced within a countries borders.
Gross National Income (GNI) - GDP, plus income earned by a nation overseas, minus income earned by other nations within a countries borders. This is like the number you are referring to above.
Net National Income (NNI) - GNI, minus depreciation. The idea is to measure the resources utilized by a nation in the production process. This number is difficult to estimate and I think not widely used.

I think most people choose to discuss GDP because it's easiest to measure, and usually there isn't significant variance when compared to other measures of economic activity.

Clark
 

Astroboy

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Absolutely I agree. Some people speculate that Japanese government will have to raise taxes, but I think it will be a bad idea.

Good to know that you are stnading with my side, and Nobel Prize-winning economist also told ...
There has never been any successful austerity program in any large country The European approach definitely is the least promising. Europe is headed to a suicide.
Spain Slips Back Into Recession in First Quarter: Economy - Bloomberg

However, International Rating firms, IMF, World Bank, OECD, etc., are telling "Japan must raise VAT" and Japan's MOF as well as Japan's PM Noda and his Cabinet are heading for that. From my point of view, they are killing Japan's economy. I believe that the first thing for government to do is to increase GDP, not to increase VAT.
 

Astroboy

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Vice President of Moody's Investor's Service says ... "Unless Japan raise VAT, The Last Judgement will approach to JGB earlier than before, and we will downgrade JGB (Aa3) again!"

http://jp.reuters.com/article/marketsNews/idJPT9E8FH00Y20120502 Only in Japanese.

I think why International rating firms are so interested in rating JGB, while foreign investors are not interested. I personally believe that Japan's MOF utilize this man of Moody's to speak.
 

ClarkH

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Those ratings are bullsh**. I agree, it's much more about politics than actual quantitative assessment of government default risk. When JGBs were downgraded in August, it had no effect on interest rates. Rates now are approximately the same, if not lower (volatility is another mater, but the range is not very big in my opinion).

Also, look at the downgrade that happened to the U.S. debt. It actually caused money to flood into U.S. bonds at an incredible pace! US and JP debt are among the safest investments in the world! When people worry about economic troubles, money floods into these investments. They absolutely should have the highest rating possible. Probability of default is still nearly 0%. Ratings agencies definitely use the "rating" as political tools.
 

Astroboy

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Probability of default is still nearly 0%. Ratings agencies definitely use the "rating" as political tools.

Yes, I agree. It is because US T-bond is in USD currency and JGB is in Japanese Yen. If we need to repay it, then just printing money is enough, while Spanish/Greek government bonds are in Euro currency, and printing money is restricted by ECB (headquareted in German Frankfurt).

BTW, what knid of politcs behind the international rating firm do you think?
In case of Japan, I personally believe that Japan' MOF is working behind the scene because:

1) MOF wants to raise tax ... as more tax is more revenue (aka more free money) for MOF, meaning more power to MOF.
2) Downgrading JGB is good to downgrade Japanese YEN (theoretically). It is good for Japan's export-oriented sector as they are suffering soaring YEN.

Your frank opinion is appreciated.
 

ClarkH

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Hi Astroboy,

Sorry for the late reply. I haven't been on the forum lately, because of finals in college and studying for another finance exam. :(

When I was younger, my dad told me about a saying, I think it originates from France or Turkey. If you want to figure out what's going on, "just follow the money trail." Right? My dad told me, if I find myself wondering what's going on, then just look at what's going on with the money.

The biggest problem with ratings agencies is they are paid by the entities that issue the bonds they are rating. For example, Apple pays ratings agencies to rate Apple bonds. The same with sovereign debt. This is an inherent conflict of interest. If you think the MOF wants to have their debt downgraded, I certainly think it's possible they could pressure ratings agencies to do so.

In many cases though, with sovereign debt (especially in the last few years), I think the ratings agencies make political moves without the support of those nations. At least, this is what I've seen throughout Europe and America (and Japan) for the last 2 years. I'm not sure if MOF supports rating agencies downgrades of JGB bonds. I just think rating agencies try to assert more control over sovereign nations monetary policy than those nations themselves. I guess, that is their job, but the timing that rating agencies come out with announcements is very political, and not coincidental. Exactly as a nation expresses need to sell more debt when they are in trouble, rating agencies come out with statements about downgrades, to try to control their monetary policy. Again, I think that's their job, but I suspect the agencies are not performing their due diligence.

Like, for the recent statement by Moody's, they are threatening to downgrade JGB to Aa3, which means probability of default is something like 0.1%. What's the difference in default probability between 0% and 0.1%? It's very difficult to measure! Still I think probability of default is 0%. What's the point of having Aaa, Aa1, Aa2, Aa3 when the probability of default only ranges from 0% to 0.1%? It's just a tool to try to control monetary policy.

Clark
 

ewww

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What's the difference in default probability between 0% and 0.1%? It's very difficult to measure!
:D
That is so cute statement, like an old joke: I will meet or I will not.
 

Astroboy

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Japan Logs Second-Biggest Foreign Asset Haul on Record: Economy
SFGate Business News — San Francisco Bay Area Business, Real Estate, Technology and Financial News & Small Business Resources
Investments abroad grew 3.3 percent to 582 trillion yen ($7.3 trillion) in 2011, rising for the third year, the Finance Ministry said in Tokyo today. Currency gains cut the value of existing holdings but encouraged increased investment abroad. Foreign investors increased Japanese assets by an extra 17 trillion, leaving the net creditor position of the country little changed at 253 trillion yen, the world’s largest, the data showed....

This means ... that Japan aims to go retirement and live on return from investment. 🙂

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Fitch downgrades Japan
Fitch Ratings downgrades Japan - May. 22, 2012
According to Fitch, JGB grade is lower than the Chinese government bond. 😊

Thanking to the downgrade, JPY slightly decline against USD. Probably Japan need to ask Ficth for further downgrading of JGB.
 

ODANOBUNAGA

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Japan offers $60bn to boost IMF firepower (not firework)

Japan offers $60bn to boost IMF firepower - FT.com

1. It is said that Japan's debt (government debt) surpassed 200% of its GDP.
2. Both Int'l media and Japanese media contiues to tell "Japan's debt level is far worse than Greek and Spain."
3. Int'l rating firms also continued to threathen Japan "We will downgrade grade of soverign bond of J-government unless Japan raise tax!"

However, such a reportedly debt-laden governement of Japan generously offer money to IMF, while other countries are reluctant.
Case of Japan is a good example to understand macro-economics as it's a paradox of conventional economics being popular among West.

first the japanese are unlike all other nations much more patriotic and most debt is held by japanese also the weirder question is, if 200 percent debt is so bad why keep people buying yen??
 

Astroboy

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first the japanese are unlike all other nations much more patriotic and most debt is held by japanese also the weirder question is, if 200 percent debt is so bad why keep people buying yen??

Japanese ordinary citizens are NOT purchasing Japan Government Bonds, but they are saving money at Banks, and Japanese Banks are purchasing JGB because banks cannot lend money to private sectors. Generally speaking, private sectors in Japan (households, enterprisese, etc.) are not interested in spending money, but saving money. Therefore, government is borrowing money from private sectors.
 
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