Japan's Economy: This Is No Kobe Earthquake Redux
By Wall Street Examiner Mar 17, 2011 4:00 pm
Is Japan really going to be able to borrow and print as though this is the same scenario as in 1995, when there was little global inflation and its debt service to tax revenues were half what they are today?
The Japan earthquake is a game changer and tipping point. I can’t see how news networks can compare this to Kobe’s 1995 incident. For Japan, the classic measure of interest expense (red line) is rapidly pushing up to the 30% debt trap demarcation line, versus 22% in 1995. Debt service as a percent of tax revenues is pushing 60%, versus 28% in 1995. This is despite the fact that nominal interest rates on almost all JGB are trading below 1% yield. It has gone on so long that the conventional wisdom accepts it as normal and not an aberration. Talk about a so-called black swan event.
Japan’s fiscal situation has rapidly deteriorated since 2007 and has an increasingly parabolic dimension to it. Japan has about half its debt maturing in the next year and a sky-high budget deficit, about 9% of GDP, thrown in for good measure.
Japan holds a trillion in US bonds at a time when its trade and power infrastructure is not just disrupted, but is likely impaired for some time. And the Japanese won't be as involved in speculative purchases of PIGS bonds. Japan’s treasury is insolvent, and the country will need its foreign reserves. Printing money as a bandage will just spike more inflation and chaos, the last thing they need for effective project planning and rebuilding. My first order actionable is to short 5-year US Treasuries and the Japanese Government Bond (JGB).
The charts from above are from before the earthquake. Is Japan really going to be able to borrow and print as though this is the same scenario as the Kobe quake in 1995, when there was little global inflation and Japan’s debt service to tax revenues were half what they are today? Even in that more solvent environment, Japan’s market dropped 20% before recovering six months later. Now the markets act like non-Japanese overpriced sectors, such as machinery and industrials, are going to be booming rebuilding bankrupt Japan right in the aftermath of this earthquake.
In reality, Japan’s weak economy is going to contract severely, and this will have a global impact. About one-third of the country’s power is nuclear, and about one-third of that is going to go away for good. They will need to cover this gap via imported fossil fuels. This is not a mobilized, total-war economy where an Albert Speer persona can reorganize production and resources by dictatorial edict.The Financial Times covered part of the gambit of high-value, supply chain technology disruption out of Japan that will add to low value supply chain woes out of China.
Among the core parts made in Japan that could be at risk of supply disruption are capacitors and transistors -- components contained in almost every electronic product. Also at risk of earthquake-related shortages could be high-end cells for batteries used in notebook computers and cars. Japanese companies -- which have to contend with rolling blackouts imposed to manage electricity supplies -- account for about 40%of the world’s technology components.
REACTION
Michelle Jade Nantes
First of all I would like to commend the author of this article for his rather brave approach and very critical angle that he took on regarding this issue. The commendation is no less than because this article actually looks at the Japanese economy with strong convictions that most people would take in as rather offensive under the note that Japan is still recovering from the earthquake and tsunami that devastated the Japanese people and consequently the Japanese Economy. It is rather appalling in the first glance to read this article especially that most of us have this sympathy that Japan deserves. However, it is in the fact that every economy fluctuates for whatever reason that the need to look at this new step from the Japanese Government- after all, the fluctuation is most visible after the catastrophe.
Russ Winter begins the argument by presenting the figures such as debt trap demarcation that increased to a whopping 8% since 1995. Also, he said that “nominal interest rates on almost all JGB are trading below 1% yield” which is a strong statement and at the same time so true that I felt that I was on the verge of agreeing to this statement. Government bonds indeed have to be exceptionally high to survive this kind of dilemma; especially that we are looking at a “super economy” that brought us so much interesting breakthroughs for ages now. Toyota and Ford are just one of the most spectacular feats of the Japanese economy that has brought millions of jobs to the world and as well as to the Filipino people.
The main point of the article is that Japan, in its valiant efforts to save the economy from the rubble may indeed be having a hard time due to three main reasons: timing, debt and mutated trends. I felt that I had to agree with the author that the timing is quite different this time. I am interested in the fact that Japan's Economy was able to recover the 1995 tragedy in Kobe. But today is another story. Today, the whole world had a taste of what it means to have a global recession which means that the allies of Japan are also struggling in their own economies. The US for example already has enough on its plate to fully carry Japan towards the rescue. Debt is another factor, after 2007, Japan incurred large debt that naturally affected their reputation and value in the international arena. The 1995 scenario did not have this one. Thirdly, trends have changed so dramatically that there is also a noticeable pattern in the assessment of Government Bonds no matter how great Japan was during the industrial revolution.
I was strongly moved by what the author said in the second to the last paragraph: “n reality, Japan’s weak economy is going to contract severely, and this will have a global impact.” The global economy turned the dice such that Japan will have a hard time but in turn this will also affect the global community as Japan plays an important role that no other nation can carry for the mean time. This is a sad reality some say it's a chicken-and-egg question that only sudden upturns of events would be able to change since the domino effect rounds up to a complete circle. I have been skeptical during the first time I read this article and how it somewhat managed to pick an undertone to discuss the Japanese Economy on such an occasion. However, these are the hard facts and facts must be accepted and learn from them. As for now, we can only pray that the effect of this sordid event would only be isolated to the car-manufacturing industry in the Philippines and no more than that. The biggest lessons that I learned from the article are the two sentences: History does not always repeat itself and the famous adage What comes around goes around; what comes up must come down.
As they say it in Nihonggo: Taihendesune.
