The Setting Sun – Japan’s Debt Problems

Today, Japan’s industrial and economic decline is palpable.

But in 2012, Japan’s Nikkei 225 stock average rose by around 23%. Much of the increase reflects faith in the reflation strategy of second time Prime Minster Shinzo Abe to increase growth through an additional US$120 billion of public spending, create inflation to reduce the debt-to-GDP ratio and devalue the Yen.

The strategies, which have all been tried before with limited success, may not restore the health of the Japanese economy.

Dark Statistics

The Japanese stock market is around 70-80% below its highs at the end of 1989. The Nikkei Index fell from its peak of 38,957.44 at the end of 1989 to a low of 7,607.88 in 2003. It now trades around 8,000-12,000. Japanese real estate prices are at the same levels as 1981. Short-term interest rates are around zero, under the Bank of Japan’s (BoJ) zero interest rate (ZIRP) policy that has been in place for over a decade. 10-year Japanese government bonds yield around 1.00% per annum.

Since 1990, public finances have deteriorated significantly. Government spending to stimulate economic activity has outstripped tax revenues, resulting in a sharp increase in Japanese government gross debt to around 240% of GDP. Net debt (which excludes debt held by the government itself for monetary, pension and other reasons) is about 135%. The U.S. government has gross and net debt of 107% and 84%. Total gross debt (government, non-financial corporation and consumer) is over 450% of GDP, compared to around 280% for the U.S.

Japan’s demographics parallel its economic decline. Japan’s population is forecast to decline from its current level of 128 million to around 90 million by 2050 and 47 million by 2100.

The proportion of Japan’s population above 65 years will rise from 12% of the total population to around 23%. Japan’s work force is expected to fall from 70% currently by around 15% over the next 20 years. For every two retirees there will be around three working people, down from six in 1990.

According to one forecast, by 2050 Japan will have a median age of 52, making it the oldest society ever known. Current sales of adult diapers exceed those intended for babies.

Japan’s problems have been compounded by two major natural disasters – the 1994 Kobe earthquake and the 2011 Tohoku earthquake and tsunami.

In the face of the nation’s long-term decline, Japanese politics has become increasingly fractious. Frequent changes of leadership, often driven by arcane internal factional politics, have created an unstable environment and a lack of policy continuity. Japan has had seven prime ministers in six years and six finance ministers in three years.

Japan’s total tax revenue is currently at a 24-year low. Corporate tax receipts have fallen to 50-year lows. Japan now spends more than 200 yen for every 100 yen of tax revenue received.

Private consumption is weak, falling to about 57% of GDP, further reducing domestic demand. This reflects weak employment, lack of growth in income and the aging population. Strong exports and a current account surplus have partially offset the lack of domestic demand, as firms focused on overseas markets.

With investment and consumption weak, large budget deficits have supported economic activity, avoiding an even larger downturn in economic activity.

Continued economic weakness, a decline in savings rates and a reversal of the current account surplus make the Japanese government debt burden increasingly unsustainable.The aging population further reduces the savings rate.

The combination of falling exports, lower saving rates, declining corporate earnings and cash surpluses is likely to move the Japanese current account into deficit. In turn, this will force Japan to become a net importer of capital to finance government spending, altering the dynamics of its finances.

If Japan continues to run large budget deficits, as is likely, then the falling saving rate and reversal in its current account will make it more difficult for the government to borrow, at least at current low rates.

As the drawdown on financial assets to finance retirement accelerates, Japan will initially run down its overseas investments, losing its net foreign asset position. Unless public finances improve, Japan ultimately will be forced to finance its budget deficit by borrowing overseas.

To avoid the identified chain of events, Japan must address the core problems. But reductions in the budget deficit are difficult. Spending on social security accounts and interest expense now totals a major part of government spending. Increasing health and aged care costs are expected by 2025 to be around 10-12% of GDP. An aging population and shrinking workforce will continue to drive slower growth and lower tax revenues. Tax increases are politically unpopular. Reductions in the budget deficit are likely to reduce already weak economic activity, compounding the problems.

Once the problems emerge, they will be difficult to contain. As Economist Rudiger Dornbush once observed: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

Link -
http://prudentbear.com/index.php/featuredcommentaryview?art_id=10755
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Japan is our future, with some variations!

The Recovery Continues To Topple 'Big-Picture' Theories

There's never a shortage of "big picture" theories, usually of the gloom and doom variety. They certainly sell books; often cause anxiety, sometimes even fear. But they almost never come to pass.

Now fast forward to the financial meltdown in 2008. The budget surpluses had already reversed to deficits as the result of the terrorist attacks, home defense and military build-up, and the Iraq and Afghanistan wars. The subsequent bursting of the housing bubble, the financial crisis, and resulting "Great Recession" were tackled with still more government spending, on massive government bailouts and stimulus efforts.

The gloom and doom theorists came out of the woodwork again.

Even now, almost four years after the 2008-2009 recession ended, after the stock market has recovered all the way back to its pre-crisis level of 2007, the big-picture theorists are warning that disaster has only been delayed, that the record debt load will still sink the U.S.

However, while they remain fearful, convinced their theories will still work out, the economic recovery continues into its fourth year. Most of the bailout money has been paid back -- with interest.

Even the shorter-term worries -- the fiscal cliff, extension of the debt ceiling, that Washington will be unable to break from dysfunctional political deadlock -- have been handled with more success than expected.

Of course, there are still big problems ahead.

Will Washington initiate the necessary belt-tightening slowly enough to allow the strengthening economy to absorb the spending cuts without rolling over into another slowdown?

Will the Fed manage the second half of its massive stimulus program, reversing it by selling off the trillions in bond assets it has accumulated, allowing interest rates to rise, and so forth, slowly enough that the economy is not affected?

Neither Washington nor the Fed have demonstrated such perfection in the past. There will doubtless be more scares, market corrections, and gloom and doom headlines as those problems are tackled over the next year or two or three.

Link -
http://seekingalpha.com/article/1169561-the-recovery-continues-to-topple-big-pic...
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One of the posts to this article included -
"Everyone needs water, food, energy, exchange, and shelter -- invest for the long term"

And, therein lies the rub or at least, part of it!

Everyone does need all of these things, for the current system to continue to flourish, as it has for some 200 years, plus!

That said, there are cycles, commonly known as "The Good, the Bad & The ugly" and there are still cycles with cycles.

However, within all of the Economic cycle of ups & downs, over this last 200 years or so, there have been 3 basic factors, which kept returning the Global Economy back to a Growth heading & they were -
1) Population Growth
2) Cheap & Abundant Energy
3) A Goldilocks Global Climate.

All of the other factors were no doubt important for direction at the time, BUT the underlying issues that guaranteed a return to Economic Growth, were the 3 above.

That said, Demographics clearly shows the Global Population is slowing, with Japan showing the way. The normal "fix" here would be another Baby Boom, like that from 1945-1964, BUT that can not happen, for the following reasons -
A) Energy - The EROEI (Energy Return On Energy Invested) for the major Energy sources of Oil & Coal have already reduced significantly and that process is set to continue, as Production shifts from the higher grade, old reserves, give way to lower grade Coal reserves & from the higher grade Conventional Oil, to the lower grade unconventional products, such as Shale Oil & Tar Sands.
The overall results being -
1) Energy Prices will be forced Higher, after another initial dip, as the Global Economy goes into Decline again, over the next few years.
2) The Energy to GDP ratio will rapidly increase, drastically reducing the Disposable income capacity for individuals, Businesses & Governments.
3) Spare Energy Capacity will decrease, placing additional stresses on Productivity.

B) The Goldilocks Global Climate - With Climate Change, the frequency and intensity of extreme weather events are growing. Areas that were hot & dry, are becoming more susceptible to the heat & drier, areas that were wet & becoming more susceptible to being wetter & even more snow events, BUT overall the planet is getting hotter.
And that, combined with higher Priced Energy, is putting an enormous strain on Agricultural Food Production, both in terms of Supply & Price.

All of which leads to much greater stresses, than have ever previously existed on all shorts of "exchange mechanisms", including both Money & Debt!

Certainly, the old truism of "invest for the long term or invest it & forget it", are no longer truisms, BUT more a recipe for disaster, on a grand scale. But in spite of the periodic setbacks and unceasing doom and gloom predictions of the "big-picture" theorists, the long-term path to good times continued.

And the odds are high that, intermediate-term stumbles notwithstanding, in fact, to be expected, that we are on a similar long-term path in this cycle.

Btw, it is quite possible the original article could have been contrived by Maqqa &/or Longweekend, as it is their style?

Retail, business power prices to soar

Consumers and business face the prospect of a new wave of power and

gas price increases driven by shortages of natural gas

.

The average Queensland household may be hit with an electricity price increase of 21.4 per cent next financial year following the lifting of a one-year price freeze instituted by the new Liberal National Party government.

The NSW energy regulator is expected in May to decide to jack up electricity prices in the state.

Gas producers expect wholesale gas prices in eastern Australia will rise from the historical average of about $3.50 a gigajoule to as high as $9 when LNG plants start operating in Gladstone in Queensland, a move which will incorporate eastern Australia into the global gas market.

Three big LNG projects, worth about $60 billion, will come on line in the next two years. All of their gas will be sold overseas through long-term contracts, mostly to Asian countries for use in power generation. Gas has to be liquefied for transport across oceans.

Link -
http://www.afr.com/p/national/retail_business_power_prices_to_hxTOyltdZNB18GAP4S...
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No matter what any Politician (Labor or Liberal - State or Federal) says, Power Prices are set to increase dramatically, particularly in the medium to longer term.

Forget the Politicking for a moment & just look at the facts.

It took from 1776 to 1966 for the US to have its first $Trillion spending year, unaffected by a World War.

AND, less than 50 years later, the US is now nudging a $4 Trillion Spending year?

Now ask yourself, WHAT DROVE THAT SPENDING INCREASE?

Ex Dame Pansi wrote on Mar 7^th, 2013 at 12:42pm:


Thanks Pansi, some of those comparisons certainly make it stand out that the Real Economy IS NOT KEEPING UP WITH SHARE PRICES!

That article actually fits in very nicely, with a lengthy piece that I have been working on, so I will try to add that info in.

Cheers

BIG Trouble from Little Cyprus FIX?

Cyprus bailout spooks local investors, ASX 200 down 1.5pc in early trade

A European Union bailout of Cyprus had scared investors and led to a negative opening on the Australian market, IG Markets strategist Evan Lucas said.

“This will impact European markets tonight and will therefore make investors here nervous, coupled with losses to major leads in the US on Friday,'' he said. “Expect the sell-off to be hard today, barring any positive news coming out of Cyprus.”

The European Union has imposed a condition of a 9.9 per cent levy on deposits of more than 100,000 euros in Cyprus's banks as part of its 10 billion euro ($12.6 billion) bailout for the island.

Link -
http://www.theaustralian.com.au/business/markets/cyprus-bailout-spooks-local-inv...
==============================
From the reactions on the US & European Futures markets & the Australian market, it would seem that there may be a reasonably widespread view that the "CYPRUS FIX", IF IT GETS UP", COULD BE APPLIED MORE GENERALLY & THUS IT IS SPOOKING THE MONEY END OF TOWN?
http://www.investing.com/indices/us-30-futures-advanced-chart
http://www.bloomberg.com/markets/stocks/futures/
http://www.tradingroom.com.au/apps/mkt/indexDetails.ac?idx=XAO

Certainly, the loss of value on world markets, is set to vastly outweigh the amount of the $12.6 EU bailout package!

But,here's the kicker, the bailout package will not re-invigorate the Cyprus Economy, any more than any other program tried elsewhere, be it Stimulus or AUS-terity!

It is about time for the Politicians, Economists & TPTB to understand that this time is different & the old fixes won't work now!

As the saying goes, It's the real Economy Stupid!!!

It will be interesting to watch what comes out of this absurd move by tptb in Cyprus.

What the EU and IMF did to Cyprus today is poised to be a repeat of what happened to U.S. banking in 1933.



Quote: "Insanity is doing the same thing over and over again but expecting different results."

yeah perceptions,  i had to read it a few times to belive it . seems like one crazy step.