4 ms·

One of the most important lessons that we have learned from the past years is that you cannot look at a country's standard of living in isolation. You also have

by Yrlec 15y ago

One of the most important lessons that we have learned from the past years is that you cannot look at a country's standard of living in isolation. You also have to look at the debt levels to see if it is sustainable in the long run. Japan has the highest government debt-to-gdp ratio in the world: http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt http://en.wikipedia.org/wiki/List_of_sovereign_states_by_pub... (higher than Greece!). I suspect that they have a huge hangover coming their way.

tobylane 15y ago
They have a uniquely high level of internal debtors, the government bonds were bought by Japanese people much more so than other citizens buying their countries' bonds. I didn't understand why this made a difference though.
- Yrlec 15y ago
  Indeed. That helps them postponing the problems but it doesn't make the debt-levels any more sustainable. http://www.youtube.com/watch?v=-quUyId2WZ0 http://www.youtube.com/watch?v=-quUyId2WZ0
  - more_later 15y ago
    Japanese debt is Yen denominated and, if they want, they can extinguish it by printing money. This option is not available to Greece/Italy/Spain/Portugal/Ireland.
    - daydream 15y ago
      But by printing money they'd wipe out (or at least reduce) the real value of their peoples' savings - basically all those bonds the Japanese people bought. The consequences would be borne by their own people, not some foreign banks. This may be politically unpalatable.
    - Yrlec 15y ago
      There are limits to how much you can print without creating a currency crisis. http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
      - rayiner 15y ago
        You can pursue an economic policy that creates high levels of inflation without necessarily triggering hyperinflation. The goal of course would be to gradually inflate away the value of the debt, not to pay it all back immediately.
        alexmat 15y ago
        Wouldn't that wipe out the very same people who invested in Japan? There are a lot of regular Japanese people who hold Japanese debt. Wiping it out via inflation is equivalent to wiping out the wealth of regular Japanese people to save the Japanese government.
- blumentopf 15y ago
  It does make a difference in that Japan could finance the public debt entirely by itself. The country has a trade account surplus, it's not them being indebted to others, but others are indebted to them. That makes it unattractive for speculators to bet against the country. Countries like China or Germany are in a similar position.
  - rmrm 15y ago
    They have had a historically high internal savings rate that allowed this. One thing to keep an eye on is their terrible demographics. I believe Japanese citizens as well as the largest institutional buyers (Japan Post etc) have just recently become net sellers of JGBs as they move towards liquidation to fund retirements. Japan currently funds more than half of their gov't via borrowing, with the demographic shift and the internal demand for JGB turning towards net negative, they will increasingly rely on external buyers of their debt. I believe China has been a buyer of late. What has worked for Japan historically may not work so well going forward.
    - muraiki 15y ago
      I've read that most of this money came from retiree savings, which are rapidly running out. Furthermore, the younger generation doesn't have such savings, yet alone the population, to keep such a thing going. In a sense, this system of internal borrowing in a hidden tax. While it of course is not mandated, it's required in order to keep things going smoothly.
ppk 15y ago
I doubt it, take a look at this, http://www.wolframalpha.com/input/?i=japan+public+debt http://www.wolframalpha.com/input/?i=japan+public+debt change the time scale to 10 years, it looks pretty sustainable to me... It's close to the lowest it has been in 10 years.
- Yrlec 15y ago
  Wolfram Alpha displays the debt in your local currency (SEK to me). Which currency did it show to you? Look at this video and tell me how that is sustainable: http://www.youtube.com/watch?v=-quUyId2WZ0#t=0m13s http://www.youtube.com/watch?v=-quUyId2WZ0#t=0m13s
  - Retric 15y ago
    If I citizen of a country buys that country's bonds then a portion of their interest is collected back as capital gains. Thus the country actually pays (interest rate * (1- capital gains rate) - inflation rate). So because the overwhelming majority of Japan's debt is owned by it's own citizens and it's in it's own currency they can easily drive their loan servicing costs below zero at fairly modest inflation rates. They can also achieve the same effect by slightly bumping the capital gains tax which is currently set at 15%.
    - Yrlec 15y ago
      Great arguments! I still don't think that paying 50% of your tax revenues in interest rate is sustainable (especially not when the interest rates are as low as they already are). However, your point about capital gains combined with high level of domestic creditors certainly changes the math.
    - alexmat 15y ago
      "they can easily drive their loan servicing costs below zero at fairly modest inflation rates" Why will Japanese people buy government bonds that return a negative interest? Stuffing cash in a mattress seems like a better option at that point.

by Yrlec 15y ago

tobylane 15y ago

They have a uniquely high level of internal debtors, the government bonds were bought by Japanese people much more so than other citizens buying their countries' bonds. I didn't understand why this made a difference though.

Yrlec 15y ago
Indeed. That helps them postponing the problems but it doesn't make the debt-levels any more sustainable. http://www.youtube.com/watch?v=-quUyId2WZ0 http://www.youtube.com/watch?v=-quUyId2WZ0
- more_later 15y ago
  Japanese debt is Yen denominated and, if they want, they can extinguish it by printing money. This option is not available to Greece/Italy/Spain/Portugal/Ireland.
  - daydream 15y ago
    But by printing money they'd wipe out (or at least reduce) the real value of their peoples' savings - basically all those bonds the Japanese people bought. The consequences would be borne by their own people, not some foreign banks. This may be politically unpalatable.
  - Yrlec 15y ago
    There are limits to how much you can print without creating a currency crisis. http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
    - rayiner 15y ago
      You can pursue an economic policy that creates high levels of inflation without necessarily triggering hyperinflation. The goal of course would be to gradually inflate away the value of the debt, not to pay it all back immediately.
      - alexmat 15y ago
        Wouldn't that wipe out the very same people who invested in Japan? There are a lot of regular Japanese people who hold Japanese debt. Wiping it out via inflation is equivalent to wiping out the wealth of regular Japanese people to save the Japanese government.
blumentopf 15y ago
It does make a difference in that Japan could finance the public debt entirely by itself. The country has a trade account surplus, it's not them being indebted to others, but others are indebted to them. That makes it unattractive for speculators to bet against the country. Countries like China or Germany are in a similar position.
- rmrm 15y ago
  They have had a historically high internal savings rate that allowed this. One thing to keep an eye on is their terrible demographics. I believe Japanese citizens as well as the largest institutional buyers (Japan Post etc) have just recently become net sellers of JGBs as they move towards liquidation to fund retirements. Japan currently funds more than half of their gov't via borrowing, with the demographic shift and the internal demand for JGB turning towards net negative, they will increasingly rely on external buyers of their debt. I believe China has been a buyer of late. What has worked for Japan historically may not work so well going forward.
  - muraiki 15y ago
    I've read that most of this money came from retiree savings, which are rapidly running out. Furthermore, the younger generation doesn't have such savings, yet alone the population, to keep such a thing going. In a sense, this system of internal borrowing in a hidden tax. While it of course is not mandated, it's required in order to keep things going smoothly.

ppk 15y ago

I doubt it, take a look at this, http://www.wolframalpha.com/input/?i=japan+public+debt http://www.wolframalpha.com/input/?i=japan+public+debt change the time scale to 10 years, it looks pretty sustainable to me... It's close to the lowest it has been in 10 years.

Yrlec 15y ago
Wolfram Alpha displays the debt in your local currency (SEK to me). Which currency did it show to you? Look at this video and tell me how that is sustainable: http://www.youtube.com/watch?v=-quUyId2WZ0#t=0m13s http://www.youtube.com/watch?v=-quUyId2WZ0#t=0m13s
- Retric 15y ago
  If I citizen of a country buys that country's bonds then a portion of their interest is collected back as capital gains. Thus the country actually pays (interest rate * (1- capital gains rate) - inflation rate). So because the overwhelming majority of Japan's debt is owned by it's own citizens and it's in it's own currency they can easily drive their loan servicing costs below zero at fairly modest inflation rates. They can also achieve the same effect by slightly bumping the capital gains tax which is currently set at 15%.
  - Yrlec 15y ago
    Great arguments! I still don't think that paying 50% of your tax revenues in interest rate is sustainable (especially not when the interest rates are as low as they already are). However, your point about capital gains combined with high level of domestic creditors certainly changes the math.
  - alexmat 15y ago
    "they can easily drive their loan servicing costs below zero at fairly modest inflation rates" Why will Japanese people buy government bonds that return a negative interest? Stuffing cash in a mattress seems like a better option at that point.