The country has been living beyond its means for years, leaving future generations to pay
Naoki Maeda / AP
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.