Friday, March 23, 2012

The Philosopher King

Let us say you are reading an op-ed from Toronto's The Globe and Mail on Japan's immense national debt by a Mr. Daryl G. Jones, director of research at Hedgeye Risk Management in New Haven, Connecticut. You read that:
The Asian nation has been adding debt at an accelerating pace over the past decade. In 2001, Japan’s debt-to-GDP ratio stood at 144 per cent. A decade later, it was 212 per cent – meaning that Japan is now far more indebted than Greece was at the worst point of the recent crisis, when Athens’ debt topped out at 165 per cent.
And you sort of shrug, as you know half of the gross debt is actually owed by the government to itself, and that 90% of the remainder is in the hands of passive domestic investors -- who have an incentive, as they are Japanese, to not push Japan into foreclosure.

So you trundle along:
Japan’s debt burden is still expanding rapidly. We project the country will run a budget deficit of more than 9 per cent of GDP this year. This is a huge gap and will require even more borrowing. The Japanese government says that revenue from bond issues will account for 49 per cent of all government revenue in 2012 – a situation comparable to a family having to borrow half of the money it expects to spend over the next year.

Turning the situation around is difficult. Social security spending and debt repayments are projected to make up 53 per cent of Japan’s 2012 federal budget. Both areas are hard to cut, especially with an aging population.

Government is also tough to trim because Japan’s government spending is only 40 per cent of GDP, lower than in most industrialized nations. Thus, it is unlikely that Japan can, or will, implement austerity to reduce its deficit.
This makes you a bit more worried, as it reflects some of your own concerns. Laying aside the country-as-household metaphor, which never works, any more than the country-as-corporation metaphor, the inability of the Democratic Party of Japan, despite its best efforts, to find "wasteful government spending" in amounts that would make sensible Hatoyama Yukio's and Ozawa Ichiro's complaints about the sequencing of the imposition of a rise in the consumption tax ("First find all the waste; cut it; then make the necessary tax adjustment") is a point the Noda government is failing to hammer home.

The op-ed then takes a turn, as they always do, through Japan's demographic conundrum. You skip over the part about investors losing confidence as they did in Greece, Portugal and Spain, which managed to have debt crises prior to demographic crises.

Then you read another interesting passage:
There are a number of reasons that Japanese sovereign debt may be re-priced sooner rather than later. The first is that Japan will have to refinance 24 per cent of its outstanding debt this year, an enormous amount that will test the limits of the market’s hunger for Japanese bonds. Second, Japan is shifting from a current account surplus to a current account deficit, which naturally reduces the appetite for Japanese bonds.
If the current account were going into the red zone, that would be really worrisome. It must be noted that yesterday the Finance Ministry announced an unexpected trade surplus for February (E) -- so perhaps, for at least today, we can ignore our fears of the inevitable switch to a current account deficit.

So everything is going pretty well. There are some dire predictions and uncomfortable facts, but nothing you cannot handle.

Then, in the second-to-last paragraph, you hit this:
Japanese philosopher Daisaku Ikeda once said, "A person, who no matter how desperate the situation, gives others hope, is a true leader."
...and then your day is shot, as your mind is filled with increasingly elaborate and borderline paranoid theories ("Hedgeye...You know if you say it really fast, you know what it sort of rhymes with?").

"Philosopher"? That is a new one for me.

For the full op-ed, click here


Ryan Cecil said...

Hedgeye hedgeye hedgeye hedgeye...

HI? agile? etch-I? or is it edgy? HHHHH? itchy?????? Ichiro???

Always love the blog even when I can't read between the lines....!

(You should reveal the answer written upside down at the bottom of the post... or in the comment section.)

MTC said...

Ryan Cecil -

In this instance, will not go there...

The Chrysanthemum Sniffer said...

Well, Daisaku Ikeda has at least three honorary doctorate degrees in economics, so he must know how to save the economy.

Troy said...


your take is pretty good on this.

I don't know where the dust settles 2015-2050 with these demographic challenges but I think I'd rather have Japan's row to hoe than the US's.

If Japan can reign in the deficit, all it has to do is convert JGB sales to taxes and it will be smooth sailing.

And it should be remembered that it's the US that owes Japan $1.1T in sovereign debt, not the other way around. Japan's holdings increased $200B YOY, which is a rather odd factoid in itself.