My $80,000 Says Deflation Will Only Get Worse
Naoto Kan may get the state dinners and the motorcades, but he no longer runs Japan. Economist Masaaki Shirakawa does.
If anything is clear since the drubbing that Prime Minister Kan’s Democratic Party of Japan took earlier this week, it’s that politicians are passing the buck to the central bank. Expect Bank of Japan Governor Shirakawa to feel more pressure to boost economic growth than ever before.
You may think you have seen this movie before. You haven’t. Increased reliance on the BOJ will end badly for the world economy.
It’s now entirely possible that, come September, Japan will have its sixth leader in four years. Speculation is growing that a power struggle could nudge Kan out of a job he assumed just five weeks ago. That would be a blow to investors. Kan is the only leader in 20 years who has talked seriously about ending Japan’s debt-fueled-growth insanity.
With Kan now weakened to lame-duck status, the odds of him reining in a debt that is double the size of Japan’s $4.9 trillion economy are dwindling. His party lost control of parliament’s upper house in July 11 elections. The International Monetary Fund yesterday warned about the nation’s fiscal trajectory.
Before Greece’s debt crisis, it was perhaps possible to downplay Japan’s burden. Now, investors are questioning whether Japan can avoid an eventual default.
That’s admittedly a stretch. Japanese households are sitting on trillions of dollars in savings and more than 90 percent of government debt is held domestically. Also, Chinese demand for Japan’s debt is growing markedly, as Finance Minister Yoshihiko Noda told Bloomberg News yesterday. Japan is neither Greece today, nor Thailand circa 1997.
Yet attention is turning to a depressing figure: $80,000. Last November, the media worked itself into a tizzy over news that Japan owed $76,000 for each of us 126 million people residing here. Around the same time, former IMF Chief Economist Simon Johnson told the U.S. Congress that there is a “real risk that Japan could end up in a major default.” Well, that figure has grown to $80,000 per person.
If I could wager my $80,000 share, I’d bet that Kan’s travails are a harbinger of even greater trouble for Japan.
Demographics alone are enough to keep you awake at night. Sony Financial Holdings Inc. tells the story. The insurance and banking unit of Sony Corp. said it’s expanding in Asia as an aging population constrains growth at home.
Japanese leaders seem completely befuddled by this phenomenon and others. Kan essentially committed political suicide by proposing higher consumption taxes amid deflation and weak employment. Even if Kan hangs on to his job, his credibility has taken a terrible blow.
Kan, missteps aside, may be the most prescient Japanese premier in years. His focus on unsustainable debt trends is the right one. Japan needs to create growth organically, not via stimulus. Kan’s weakened position makes it much harder for him to balance the budget in 10 years.
It’s possible Kan will get a second wind and that two years from now Japan will be on stronger footing. Kan will have to stay in his job and then win broad support for radical change. Both accomplishments look unlikely.
The DPJ’s poor election showing gave rise to a new crop of lawmakers. Rather than offering fresh ideas, many see the central bank as the answer. The sudden emergence of Yoshimi Watanabe’s one-year-old “Your Party” is a case in point. Japan’s newest political force is already calling on Shirakawa to do more.
This isn’t change; it’s the same-old-same-old. For 20 years now, politicians have relied on the central bank to boost the economy. Never mind that Japan’s problems are more structural than monetary — critics say the BOJ isn’t doing enough.
Yet greater reliance on the BOJ is dangerous. In 2000, it was one thing to rely on monetary largess. Ten years on, it’s quite another. Moody’s Investors Service and Standard & Poor’s are sniffing around Tokyo for any whiff of optimism to offset Japan’s toxic fiscal and demographic trajectories.
As Japan’s credit rating edges lower, so will investor confidence. The Land of the Rising Sun is becoming the Land of the Setting Sun.
With the benchmark interest rate at 0.1 percent, what can Shirakawa do? He could return to the quantitative easing of the early 2000s. He could buy loads of government and corporate debt, essentially monetizing the economy. He could leave the yen-printing presses on indefinitely.
Any of these actions will take even more of the onus off politicians to do their jobs. Two decades after the bubble years ended, Japan still doesn’t know how to grow without massive government subsidies. BOJ moves to bail out the government will punt true change another five or 10 years down the road.
Japan doesn’t have that kind of time to spare. Pressure for the BOJ to take the lead smacks of desperation. It’s also a sign that Japan may underperform to an even greater degree in the years ahead.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
By William Pesek – Jul 15, 2010