Monday, February 4, 2013


Record high government debt that has so far been domestically funded, record low interest rates (positive real rates  & until recently an appreciating Japanese Yen)  and a current account surplus has enabled the Japan to continue to muddle its way through just over two decades of deflation.

As the current administration promises to weaken the Japanese Yen and attempts to inflate its way out of debt, the stage may be set for a tragic end.

According to Martin Feldstein -Even without the prospect of faster inflation and a declining yen, fundamental conditions in Japan point to higher interest rates. The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving. The excess of saving over investment has given Japan a current account surplus, allowing the country to finance all of the government borrowing domestically, with enough left over to invest in dollar-denominated bonds and other foreign securities. But that is coming to an end.
The household saving rate has collapsed in recent years, falling to less than two per cent. The combination of high corporate saving and low business investment has sustained the current account surplus, allowing Japan to fund its budget deficit domestically. But the surplus has fallen sharply in the past five years, from roughly six per cent of GDP in 2007 to only one per cent now. With a falling rate of household saving and the prospect of new fiscal deficits, the current account will soon be negative, forcing Japan to sell its debt to foreign buyers.

As Satyajit Das says in his article -Japans toxic combination of weak economic performance,large budget deficits,high and increasing levels of government debt,declining household savings and looming current account deficits is unsustainable."


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