The Japanese Obama?

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

Forecast Calls For Higher Taxes

Today, the Toronto Star tells us that:

OTTAWA–The International Monetary Fund says most countries will need to raise taxes to pay off the trillions of dollars they spent fighting the global recession.

IMF chief economist Olivier Blanchard says in an article to be published today that governments acted properly in ramping up spending to stop the worst slump since World War II.

Soon, he says, nearly all countries will have to raise taxes to pay the recovery bill.

I'm not sure why the IMF has to publish an article in order to inform the public of this fact. How else were governments expected to pay for these stimulus programs?

Blanchard, meanwhile, says with the recession virtually over, what is left are deep scars that will take years to heal.

He sees positive growth for most countries in the next few years, but says it will be sluggish.

“The recovery has started,” Blanchard says in the paper released by the Washington-based lender.

“The crisis has left deep scars, which will affect both supply and demand for many years to come.”

In many countries, the potential exists for economies never to return to where they stood before the recession hit, Blanchard states.

I disagree that the recovery has started. None of these officials can point to one sector of the economy that is actually experiencing significant growth, not even the government sector under their control. Nor can they rebut the myriad facts that point towards the economy worsening, not recovering. The only bright point is the ongoing stock market rally. However, the stock market is driven more by investor psychology than by economic fundamentals. For whats it worth, the stock market in China just officially entered a bear market.

A rebalancing among nations is also needed, the IMF says, with countries like the United States increasing imports and economies like China increasing exports.

I'm assuming this is a typo or I'm just reading it wrong. Rebalancing would involve the U.S. increasing exports and China increasing imports, but the chance of that happening is close to nil right now.

Fiscal deficits could feed "worries about U.S. government bonds and the dollar ... causing large capital flows from the United States," Blanchard added.

"Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty" that could derail recovery

No joke: President Obama just raised the 10-year budget deficit projection to $9 trillion from approximately $7 trillion. It's pretty obvious that taxes are going to have to be raised to cover this increasing deficit. As for the fate of the dollar, I covered that in a previous post.