Japan Cuts Growth Forecast

Here in Japan, people are dour as the Bank of Japan cut its growth outlook for fiscal 2012 to +2.0 pct from its October estimate of +2.2 pct. It cited heightened concern about the eurozone crisis crimping the global economy, and the strong yen.

Shortly after that, the government said it’s likely to fail in its goal of balancing the budget by 2020 even if it proceeds with the wildly unpopular plan of doubling the national sales tax. Societe Generale’s chief Japan economist quipped, “To balance the budget, the [sales tax] rate needs to rise further. We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

Pretty hard by the looks of it. Finance Minister Jun Azumi told lawmakers at this year’s first Diet session that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.” Very convincing — except that it’s what they say every year.

Is this finally the year that Japanese government bonds (JGBs) give up the ghost and Japan solves the world’s worries over Europe by cratering so spectacularly that Greece and the Merkozy show become an annoying gnat to swat? Possibly, though predicting the appearance of the JGB reaper has been the best provider of egg on financial faces for more than a decade now.

Consider, though: Japan is only walking dead rather than buried dead because its borrowing costs are about 1 pct. If yields on JGBs rise to 3 pct — as many analysts predict they’d do if sold on global markets instead of to clueless Japanese workers willing to earn nothing on their savings — the nation is instantly bust. While the clueless are no more clued in now than they were in decades past, they are simply older and more interested in selling JGBs than buying. Thus, the domestic money tree is about shaken out as Japan’s debt aims at 230 pct of GDP next year. No, not in 2020, but next year.

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19 Comments

  1. Kent Lacey
    Posted January 25, 2012 at 7:11 pm | Permalink

    Jason,

    Difficult times call for difficult measures. All major economic nations should meet and agree to all go bankrupt at the same time. All debts are cancelled, everyone starts over, and we should be good for another thirty years before the politicians bankrupt us again.

    What ever happened to the concept of spending only what you have in your pocket, and spending it only after it is in your pocket, not spending what you anticipate you will have sometime in the future, maybe?

    Government no longer works. We need a constitutional amendment forbiding debt in our national gov’t. And we need strict term limits to get rid of the idiots who got us here. Or we need tar and feathers. Government IS the problem. Therefore, government cannot cure the propblem. It is a simple concept, but the answer is revolution.

  2. Scott
    Posted January 25, 2012 at 9:04 am | Permalink

    As a resident here in Japan, I’d be happy with a higher consumption tax instead of 5% now. 10% works Down Under with 23 million, why not here with 127 million?

    Without hard commodities and the like for China to take advantage of what other revenue resource is there for Japan?

    Scott
    Australian in Japan

    • Posted January 25, 2012 at 9:49 am | Permalink

      I agree on 10% being reasonable, but government is saying it isn’t enough and now they’re tossing around higher figures. Nearly 60 pct of the population opposes any tax increase, so even the 10% is going to be a battle. Meanwhile, the sovereign imbalances worsen by the month.

  3. Gregory Iwan
    Posted January 25, 2012 at 8:36 am | Permalink

    Solving their difficulties? It’s easy to say now, but an ounce of prevention . . . . It’s amusing to see the lenders (people who bought JGBs or other sovereign bonds, like US Treasuries) suddenly be running around like Chicken Little. The time to worry about being paid back was WHEN YOU LENT THE MONEY, or, more apropos, when you were CONSIDERING lending the money. O whence due diligence? Now the lender community wants reform, technocracy, moving of Heaven and Earth. Humph. Expectations are the only better pavement on the road to Hell than are good intentions. And they last longer!

    In my view, the mess most of the world finds itself in arose largely if not exclusively because there has been (and still is) FAR too much money sloshing around it! Overinvestment has NEVER turned out well, not in pharaonic Egypt, not in Renaissance Holland, not in “enclosure” Great Britain, not in Hoover’s USA — never. But the sound of any central bank even THINKING about mopping up the excess gives those with so much dough the d.t.’s.

    As far as “growing your way out of trouble,” what can make ANYONE think that will turn out differently? All that excess money will slosh in and ruin the whole show, again. And these days it can move 180 degrees in latitude in a millisecond. Ouch. As far as the “growth” paradigm, well, that makes politicos feel like they have a chicken in the pot, but is that the best or even the workable blueprint over the long run (when, as Lord Keynes reminded us so aptly, we are all dead)? Growth in production isn’t worth squat if there isn’t demand to pick it up. And if that money doesn’t spread around a bit, like into the pockets of the great “unwashed (who WILL spend it, and fast),” this train ain’t going anywhere.

    So pick y our poison: redistribution (not “sharing”) of wealth, or oblivion — financial or otherwise is the ONLY remaining question. Funny how the words “eschatology” and “scatology” are similar. The whole infrastructure is taking on more and more entropy every quarter, and all the mavens and analysts and money managers and pundits, etc., etc., want nothing more than to wring their hands over “debt.” Humpty Dumpty was MUCH more reparable while he still sat on the wall. Now a new start is needed. Will it be a painful purging, or a milder indigestion? We who set the table don’t get to decide; only the people with the caviar spoons have a vote. I am not sanguine.

  4. Paul Hertz
    Posted January 25, 2012 at 5:15 am | Permalink

    I am going to Japan for 3 weeks end of March and last time I was there the exchange rate was 115 to a dollar and now my son tells me its like 75! OUCH! How are they going to get any American tourists over there? Between the tsunami and the radiation, now I find the exchange rate is terrible! Will there ever wake up to solving their difficulties in Japan?

    • Posted January 25, 2012 at 9:56 am | Permalink

      Tell me about it. Since I moved here, my US dollars have lost 42 pct of their purchasing power in Japan. I used to be rich — now I’m just a poor schmuck stuck earning a living in deflating dollars. On exchange rate alone, Japanese office space costing $5,000 per month ten years ago now costs $7,100.

  5. Michael Malitz
    Posted January 25, 2012 at 4:38 am | Permalink

    Hallo Jason,

    fantastic article…
    Very good comments, good and sound analysis with some portion of “black humor” and funny elements.

    I enjoyed – very much – reading it!!.

    Hopefully you will be a “model” for other authors dealing with macro-economics.

    thanks & rgds mikel from Austria and Germany

  6. Warren
    Posted January 25, 2012 at 1:04 am | Permalink

    I am an old man … with a long perspective. As dour as Japan’s circumstances are, I see a positive glimmer here: they appear to recognize the depth of their problem.

    The deeply troubled Countries of Europe still are looking for magic-sleight-of-hand solutions from their financial gurus, while the real solutions must come from the collective pain of the entire populace, especially those who have become accustomed to living on the dole.

    The USA is in an even more primitive situation with a near-majority of the populace still believing the modern fairy tale that it “can’t happen here”. A classic state of denial …

    73 de af9q

  7. Jason C
    Posted January 24, 2012 at 11:24 pm | Permalink

    What’s puzzling to me is why, when the economy is in the tank, they worry more about debt than growth – especially since yields on JGBs are 1%? Without growth, their fiscal situation will never improve.

    • CHRIS - DENVER CO
      Posted January 25, 2012 at 12:13 am | Permalink

      Your comment puzzles me how you don’t see much wrong w/ debt. With this large amount of debt, their fiscal situation will never improve.

      The US isn’t in much better shape either, and right now about 15% of our taxes goes to servicing the interest on debt. Imagine if the US were out of debt, that’s 15% less in taxes each and every one of us could spend, save, invest in our own economy. Imagine if it wen’t further and we cut the budget even further, say in half, that’s even more money each and every one of us could then save, spend, or invest. One heck of a stimulus package.

      Instead Japan is sending a ton of its money out in interest every month. Money it gets from its citizens and is sent out to others who own their debt. If people get the notion that their debt is getting hard to pay back, the risk goes up, and so does the interest rate people demand to let Japan borrow their money. This tipping point can happen very fast.

      On the personal side, let’s say my household brings in $10,000/month. Right now I’m up to my eyeballs in debt. I borrowed and borrowed in my younger years and now have student loans, car payments, and house payments. I’d probably say $8000 goes right out the door in bills, food, and payments to big banks.

      I’m currently on a mission to pay down debt, as fast as I can, imagine the options I’ll have when I’m completely debt free. An entire $10,000 / month to spend, save, give, or invest. Now that’s stimulating the economy.

      So the best way to grow and stimulate is to do it debt free.

      • Bill
        Posted January 25, 2012 at 12:34 am | Permalink

        Couldn’t agree more, Chris. However, government debt is now so out of control that the only way to get back to the growth you outlined is through outright default or money printing. Either way, it will be extremely painful, but all the evidence points toward inflating our way out of this mess.

        • Posted January 25, 2012 at 9:53 am | Permalink

          I agree. Chris is right, but the right path on debt went out the window decades ago when the population continued electing people who would borrow to provide services that taxpayers didn’t want to pay for. As with so many issues, we should but we won’t. In this case, we should run government with the same prudence that a financially smart household uses with its budget, but we won’t.

        • CHRIS - DENVER CO
          Posted January 26, 2012 at 1:20 am | Permalink

          It’s not impossible, just improbable. The US could balance the budget, pay down the national debt, and lower taxes at the same time, but it would take a plan like Ron Paul. The US will instead elect the same old crap and we’ll spend spend spend my future children’s money.

          I’m voting for the guy as he’s the only one I believe actually wants to drastically cut the government and pay down the debt. He wants to cut $1 trillion right off the bat and balance the budget within 3 yrs.

          Here’s his plan, and a quick commercial:

          • Bill
            Posted January 30, 2012 at 2:08 pm | Permalink

            I hear you, Chris, I’m a big Ron Paul fan myself. Assuming that he is elected President, and has the full support of both chambers of Congress, his plan essentially calls for taking the pain now rather than kicking the proverbial can further down the road in order to keep avoiding the pain.

            As Jason inferred, we flew past the fail-safe point long ago, but most politicians continue to either ignore the problem or act like there’s still plenty of time to deal with it. We will change someday, the question is whether it will be the kind of change that is within our control or the kind of change that is out of our control.

            Ron Paul is essentially saying the “bill is due now.” We can either make prudent plans to ease this plane to the safest landing possible right now, or we can keep on flying until we have no choice but to “brace for impact.”

            Either course of action will be extremely painful, but if we wait until we “fall out of the sky” the pain will no doubt be much, much greater. If austerity continues to be rejected, the only alternative left is to print money, lot’s of it!

            BTW, a really good book from the 70’s (currently out of print) that puts a lot of this in plain English is a book by Jens O. Parsson, Dying of Money. You can get a PDF version here.

  8. Bill
    Posted January 24, 2012 at 11:17 pm | Permalink

    Well said, Jason. The sovereign debt crisis in Europe is no doubt putting all government bonds under the microscope so this could very well be the year that JGB’s give up the ghost. As John Mauldin is fond of saying “Japan is a bug in search of a windshield,” the only question is when. We live in interesting times, for sure!

  9. Glen
    Posted January 24, 2012 at 10:54 pm | Permalink

    Are there any investment opportunities that we should be considering as a result of this mornings post? As the interest rate on Japanese Government Bonds go up, is there any way to take advantage of JGBs prices going down that we should be researching?

    Thanks

    • Kevin
      Posted January 24, 2012 at 11:23 pm | Permalink

      Check out the ticker JGBD. It is a 3x inverse JGB ETF.

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