Ambrose Evans-Pritchard, International Business Editor for the Telegraph, wrote an article on the Japanese fiscal situation at the beginning of this month.
The article informs us that, fiscally, Japan is in very dire straights. The article states that:
1. The IMF is expecting the Japanese budget deficit to top 10% of GDP this year (for some perspective, the U.S.'s deficit-to-GDP level will likely end up being around 12% this year).
2. Japan's Gross Public Debt will reach 215% of GDP in 2009, the highest in the world.
3. Corporate tax revenues are negative in Japan due to "a collapse in profits."
4. The Japanese savings rate has fallen from 14% in 1990 to 2% today.
Wow. My perspective? Its important to keep in mind that Japan has reached this point after nearly 2 decades of on-and-off (mostly on) deflationary decline, numerous corporate bailouts and several rounds of attempted fiscal stimulus. Even with all that effort expended, Japan is still experiencing record year-over-year deflation and it has accumulated alarming levels of debt (which, in turn, is alarming bond investors). The Japanese deflationary period is not exactly analogous to the U.S.'s current situation but, in some ways, its a better fit than the Great Depression of the 1930s is. If the stimulus ends up being incapable of resuscitating the economy people should definitely pause, take a look at the Japanese historical experience of the past 2 decades and ask ourselves what exactly happened there and how can we avoid the same fate? That's especially true if policy-makers begin pushing for a second major stimulus package or a string of more "Cash for Clunkers"-type subsidies.
So why'd I label in this post "The Japanese Obama"? Well, as we can see, while in some ways Japan is trending years ahead of us in regard to being in a debt-fueled slump, in other ways they're just catching up.
The Japanese just elected the Democratic Party of Japan (unseating the Liberal Democratic Party for only the second time in the post-war period). The DPJ brings with it Mr. Yukio Hatoyama as the new Prime Minister. Hatoyama and his party were partly elected on the promise of Obama-style social reform including, as Evans-Pritchard's article points out, $180 billion "for child allowances and social policy." The people of Japan have invested a lot of hope in the idea that the new blood of the DPJ will re-invigorate Japan. I think the changes to the savings rate tell us everything. Japanese culture emphasizes saving and frugality. Thats why the savings rate was at 14% in 1990. It didn't come down because the Japanese suddenly became rabid consumers. My supposition is that it came down primarily because people had to utilize their savings to "make ends meet" quite often. According to Evans-Pritchard, PM Hatoyama is already backing away from some of his social policy promises after realizing the costs involved.
A lot of attention is being focused on China. This is justified of course since China is the rising star on the global stage. However, we should still pay attention to the second biggest economy in the world. Considering our similar predicaments, we potentially have a lot to learn from their experience(s).
Read the article here: Bond vigilantes fret over Japan