Thursday, February 16, 2012

Japan - Will The Economic Powerhouse of the Eighties Become The Next Greece?

During the 1980's Japan was a manufacturing dynamo that many feared would decimate the American industrial base. However, the country has lost its status as an exporting powerhouse. During 2011 it ran its first annual trade deficit since 1980.  The country also experienced a  2.3% contraction in the  GDP in the fourth quarter. It is stunning to contemplate the downward spiral that the Japanese economy has undergone within the last few decades. Japan may be approaching a tipping point that could lead the country into a depression. 

As reported by the New York Times in 2010, 
Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West. But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.  
The economic outlook for Japan had gotten even worse over the last couple of years due to: 

  1. the March 2011 Tsunami 
  2. the increased cost of energy due to shutting down of nuclear plants
  3. the country's ageing and declining population
  4. the largest debt to GDP ratio of any country in the world at 235% 
  5. a government budget that will fund half off all spending via borrowing in 2012
The tipping point for Japan may be the countries high cost of energy. A powerful anti-nuclear movement has prevented Japan's nuclear reactors from being brought back online after they are shut for routine maintenance, and only three of 54 are now operating. Without approval for restarts, all of them could be shut by the end of April, boosting fossil fuel use and adding over $30 billion a year to the nation's energy costs. The elimination of this source of electricity has led to frequent brownouts, leading to increased manufacturing costs..

Tepco, the struggling operator of the tsunami-hit Fukushima nuclear complex, plans to raise electricity prices for commercial customers by an average 17 percent, citing a higher import bill as it shifts to fossil fuel-fired power generation. Concerns over the unstable supply and high cost of electricity have led to industrial production being shifted overseas, making it even more difficult to reverse the downward spiral of the economy.

The multiple problems facing Japan's economy make addressing the enormous budget deficit extremely challenging. The huge debt is only sustainable for now due to the low rate of interest on the government issued debt. However, if buyers start demanding higher yields for government debt, the size of the Japanese deficit will start increasing almost exponentially. 

Japanese Prime Minister Yoshihiko Noda's Cabinet is set to endorse his plan to double the sales tax in three years. With outstanding public debt that is over twice the size of the economy-- and higher than in Greece--Noda wants to raise the current 5% sales tax to 8% in April 2014 and then to 10% by October 2015 to fund growing social welfare spending. 

If the doubling of the sales tax passes, it may be as disastrous for the Japanese economy as austerity measures have been for the Greek economy. The downward spiral of the Japanese economy may pick up momentum and lead it to become the next Greece. 

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1 comment:

  1. Yikes -- for those with a time frame of a couple of years or less, I certainly got this one dead wrong. But, I still think the Japanese economy is in huge trouble down the road. Thus, I continue to stand behind this post, and will only admit that I was painfully wrong on the timing.