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When Japan Goes Japanese: Presenting The Terminal Keynesian Endgame In 14 Charts
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
It is hard to find fiscal situations that are worse than Japan's. The gross government debt/GDP ratio, at more than 200%, is the worst among the major developed economies. Yet yields on Japanese government bonds (JGBs) have not only been among the lowest, they have also been stable, even during the recent deterioration during the European debt crisis. This apparent contravention of the laws of economics is both an enigma for foreign investors and the reason for them to expect fiscal collapse as a result of a sharp rise in selling pressure in the JGB market. As Goldman notes, the European debt crisis has led to an increase in market sensitivity to sovereign risk in general and questions remain on when to expect the tensions in the JGB market and the fiscal deficit to reach a breaking point in Japan. In the following 14 charts, we explore the sustainability of fiscal deficit financing in Japan and Goldman addresses the JGB puzzles.
Goldman Sachs: Japan’s fiscal/JGB enigma and conceptual framework
A financial crisis can come about as a result of a lack of solvency or liquidity. Solvency is a government’s ultimate ability to pay its debts. Liquidity is concerned with the “here and now”: can a government fund its ”current” fiscal deficit in a particular fiscal year? In terms of solvency, there are massive concerns about Japan. Despite these concerns, domestic investors have poured funds into the JGB market. As a result, Japan currently has no liquidity problem at all, which may seem strange at first glance.
Even the government’s primary balance forecast, based on a growth-strategy scenario that is far more optimistic than private-sector forecasts, does not predict primary surpluses in the next ten years (it assumes a total of 5 percentage point increase in the consumption tax rate until October 2015). We conclude from this that Japan’s debt/GDP ratio can only be stabilized through deep spending cuts that will necessarily include cuts in areas such as social security, and believe this will be extremely difficult to achieve politically.
One reason why Japanese investors continue to invest in JGBs despite solvency concerns is that firms are saving sufficiently.
Falling growth expectations as a result of Japan’s ageing demographics have eroded the incentive to invest…
2012-08-20 18:20:17
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