Bill Bonner

Even before the Richter needle began to quiver and the pots began to fall, Japan’s finances were already shaky. The country began running huge budget deficits following the stock market sell-off of 1990. Economists called this “fiscal stimulus” back then. Two decades later, the deficits are bigger than ever – 7.5% of GDP this year – and they stimulate nothing.

Japan has gotten in the habit of living beyond its means. The country has an accumulated debt equal to twice national output and 20 times tax revenues.

Japan has become a “zombie state.” Its people are getting old. Net of private and public borrowing, its savings rate is now hugely negative.

Japan is “fiscally and demographically doomed,” as Dennis Gartman puts it.

The zombie state survives only by feeding off the next generation. The government borrows, spends the money, and then counts on the next generation to make good on the loans. But the next generation is disappearing.

CNN carried an interview with an emergency worker in Japan. He noted that there were very few children among the dead. The interviewer speculated that the young were faster and better able to scramble to safety. Another reason may be that young people in Japan barely exist. There are no immigrants. Women do not get married. They do not have children – at least not enough to replenish the population anyway.

Obviously, a change of direction is in order. But what’s the hurry? One of the remarkable features of our financial world is the low yields on US and Japanese sovereign debt. Japanese investors – who own 94% of Japanese government bonds – lend money to the central government for 10 years at only 1.2% yield. At that rate, the carrying cost of debt is so low borrowers are under no pressure to reduce their debt load or to change their habits. It is easier to add more debt than it is to face up to the challenge of a major political and economic restructuring.

No wonder the debt increases. Adding debt is the path of least resistance. And this is the path politicians tend to follow. As we mentioned here two weeks ago, the Bank of International Settlements estimates that Japan’s debt will reach three times national output by the end of this decade.

This was the status of things when the teacups began to rattle and fall. Zero interest rates, money-printing and large fiscal deficits were already regular, every-day, business-as-usual components of the Japanese economy. Take them away, and all the unhappiness that the Japanese authorities had tried to avoid for so long would suddenly fall upon them.

As it turned out, the teacups fell upon them first. And then the sea rose up and threatened to swallow them whole. And if that weren’t enough, their power plants turned against them too. Their recent quake was the most expensive natural disaster in history – likely to cost $200 billion to repair, according to an estimate from Goldman Sachs. The Tokyo stock exchange saw its biggest sell-off in 24 years – a loss in market value of $610 billion.

Under these circumstances, austerity was not only out of the question, it was no longer even part of the conversation. Reprising almost the exact words used by Ben Bernanke, Larry Summers and Tim Geithner in the autumn of 2008, the Japanese announced they would deal with the emergency at hand and worry about the long-term integrity of their national finances later.

In came the Bank of Japan with ¥15 trillion ($189 billion) of QE on Monday and another ¥21 trillion ($264 billion) on Tuesday. By Wednesday, almost $700 billion of new funds had been made available. On Tuesday, the price of gold also sank $30, prompting observers to speculate that Japan was selling gold in order to raise cash.

Japan hardly needed to sell gold. Like the US, Japan uses debt monetization (now politely called “quantitative easing” but more accurately described as money-printing) to fill in the gaps in its budgets. But as the Japanese age, they save less and less. And the window on “borrowing from ourselves” closes. QE is surely destined to play a larger role in financing both the Japanese reconstruction…and Japanese self-destruction, too.

As to the reconstruction, no one is going to complain if the Bank of Japan buys a few more government bonds. The country is repatriating capital from all over the world. In anticipation of this the yen has spiked to record highs versus the dollar. This makes QE seem not only like a sensible way to make funds available for reconstruction, but a way to help the economy too. It will help push the yen back down, helping Japan’s export industry.

In the long run, no program of unbridled money printing goes unpunished. Sooner or later, Japan will add hyperinflation to its long list of torments.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • The InvestorsFriend

    Will the United Staes benefit by selling various re-construction services to Japan and by taking up the slack in manufacturing left by idled / destroyed Japanese plants?

    Keep in mind too that the Japanese are not one team. Certain individuals in Japan will profit hansomely.

    The world will roll on.

    Winners will win, losers will lose. It has always been so and always will be.

  • CommonCents

    Zombies have nothing to lose, everything to gain.

  • Sendaiguy

    How many times has this saw made the rounds? Japan is Greece. Japan is Italy. Japan is finished. And the yen just stays in the clouds.

    What everybody who keeps buying yen knows better than all the editorialists is that Japan is running trade surpluses. It has been doing so for about 6 decades now. Consistently. It does not have a huge float of bonds held by outside buyers. And it can raise taxes and sell bonds any time it wants to.

    If Japan is a zombie, then what is the US? Debt ridden, trade deficits, high real interest rates, moribund, reliant on other countries to finance its fiscal AND trade deficits. The looters in the US hold positions of responsibility. Looters in Japan? Well… do they exist?

    Oh. Sorry. Am I kicking the US when it is down? Take a look at what you are doing. Let the smoke clear from the rubble and ashes of Tohoku before you stop piling on, will you? Please?

  • Sendaiguy

    Oh and Bill, you might want to look in the dictionary under the word “ghoul.” Someone who preys on the dead, in this case, you are doing it to make a point.

    “an emergency worker in Japan…noted that there were very few children among the dead… … young people in Japan barely exist.”

    Oh really? Emergency workers can speculate, but journalists check their facts. The earthquake occurred when, Bill? 2.46 pm on a school day. I know. I was here. And where were the children? In coastal towns, they were at schools, which had been built on higher ground later in each town’s history. I know. I am here.

    Bill, you accept hearsay and speculation and aspire to advise people about things you do not know about and places you have never been. I think I would just as soon let the emergency worker handle my finances as listen to you tell me about what is wrong with Japan.

    Who is the zombie, Bill? I think you need to find another line of work.

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