How Japan could still throw off the shackles of debt

John Mauldin, a respected commentator on matters economic in the United States, describes Japan as "a bug in search of a windscreen". That's rather an apt description if you look back at Japan's economic performance over the last 25 years and compare it with what went before.

Until the financial collapse that began in the early 1990s, Japan was regarded as the great success story of the post-World War Two era. Then it came undone as the equity and property markets collapsed. Japan's two "lost decades" began.

Japan's fall from economic grace was real, if rather exaggerated in the popular version of events. Even with the two lost decades, that nation today remains the third-largest economy and the fourth-leading exporter in the world. It is also the first developed economy to pass the tipping point - in 2011 - at which its population began to decline.

The demographics of Japan are daunting, but even more challenging in terms of economic management is the public sector debt - 230 per cent of gross domestic product. That's the conventional wisdom.

Lord Adair Turner, a self-described technocrat who has had practical experience with financial and public sector operation and regulation, begs to differ. In a syndicated article published this month, Turner explained why he believes the Japanese debt will never be repaid in the normal sense of the word. He points out that the government's debt is not currently being repaid but being bought up by the Bank of Japan (BoJ).

Total debt, net of the BoJ holdings, is falling and on the present trajectory could be down to 65 per cent of GDP by 2017. That's Tony Abbott's comfort zone.

Because the government owns the BoJ, it is only the declining net figure for public debt that represents a real liability for future Japanese taxpayers.

Turner points out that monetising fiscal debts to put spending power directly in the hands of companies and households is what former US Federal Reserve chairman Ben Bernanke first proposed in 2003. He suggests the Japanese authorities could make their monetisation explicit by replacing some of the interest-bearing debt held by the BoJ with a perpetual non-interest-bearing bond.

The greatest risk involved is that money markets could become concerned that monetisation would invite excessive inflation, with consequential debasing of the face value of the bonds. However, unlike other heavily indebted sovereign issuers, Japan has relatively few foreign buyers because locals are content to buy and hold.

Turner's belief that the Japanese debt problem can and will be solved with little more than a shrug of the shoulders seems too simple and good to be true. But he has put it out there with optimism and confidence.

 

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Max Walsh

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Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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