News for Credit Professionals       NACM-SE

Commentary: Japan is in Worse Shape than Europe—So Why isn’t it Suffering as Much?
It’s not as if Japan has not been hearing warning bells, but there is always a sense that somehow those clever Japanese will pull something out of their hat and stave off the worst of it. The United States is near panic over a debt that is roughly equal to its GDP, a little less actually. The Greeks are looking at debt that is roughly 150% of their GDP, and they have been written off by some until the next millennium. Meanwhile, Japan is looking at a debt that is close to 220% of its GDP, and it has been there for years.

The latest IMF assessment of Japan is a true gloom-fest, with warnings coming from all directions. The conclusion is that almost nothing in Japan’s economy is sustainable—even in the relatively short-term:

  • The GDP numbers are not improving.
  • Much of the Japanese manufacturing community has already decamped for greener pastures in either lower-cost production nations or in the countries.
  • The population is old already and getting much older.
  • The pension system is not capable of handling the situation much longer.
  • The government spends far too much on white elephants and show projects.
  • The population is resistant to future taxation.

But, evidentally, the big difference is that investors in Japanese bonds are mostly Japanese, and they really lack the ability to invest easily elsewhere. In Europe, the spooky investor can stash their cash in some nearby haven, but the more insular Japanese lack that option. In Europe, bond buyers are institutional and therefore flighty. At the first sign of trouble, they split and take their money elsewhere. Japanese bonds are sold to the general public, and these are investors that typically just sit and wait. Even the corporate bond sellers are facing far less volatility and, as a result, there is far less pressure on bond issuers to do anything dramatic to contend with the vagaries of the market. The nation is insular and that can be a blessing and curse.
Analysis: Thus far, the isolation in Japan continues to offer protection but, at some point, even this will not be enough to cushion the system from the pressure of the outside world. The problem is that financial change in Japan is a lot like earthquakes. Everyone knows the next big one is coming, but nobody has any idea when. They all know that at some point the bottom will fall out of the bond market and Japan will suddenly be facing the same kind of crisis that is bringing Europe to its knees.

Source: Chris Kuehl, NACM economist