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‘Japan looks like a slow-moving train wreck,” says A. Gary Shilling, New Jersey–based economist who in 1988 was almost alone in predicting that the Japanese bubble would burst. But with the euro zone falling apart today, some economists think Shilling may be too optimistic: Japan, whose debt load is even worse than some of Europe’s most reckless borrowers, could go into the tank at the same time Europe is drowning, say the pessimists. However, Japan has some protections, particularly its own currency.

Do you remember that Japanese bubble that ended ignominiously in 1990? In the 1980s, the grounds of the Imperial Palace were worth more than all the real estate in California. San Diego entrepreneurs unloaded some doggy commercial real estate on swashbuckling Japanese speculators. The Japanese collateralized overpriced stocks to buy overpriced real estate and vice versa. Eventually, Tokyo real estate got so expensive that people couldn’t afford to live there. The central bank had to prick the bubble by raising interest rates. Whoosh! The air rushed out. The Nikkei stock index had almost reached 40,000 in late 1989. It crumbled and was as low as 7055 last year. It’s still hovering below 10,000. Ugh. Japanese real estate values have sunk about as much.

Since 1990, the Japanese economy has been in and out of deflation. The central bank has kept interest rates barely above zero and tossed zillions into public works projects, such as “bridges to nowhere,” says Shilling. The economy hasn’t moved much. (Should that tell the United States anything?)

Japan’s gross government debt is about 200 percent of its total annual economic output: that’s worse than Greece’s and Italy’s, two of Europe’s sickest puppies. Actually, net government debt, which eliminates borrowings by one branch of government from another branch, is a better measure. Japan flunks here too: net debt is well over 100 percent of output, topping Greece’s net indebtedness.

But there is a difference. Japan is in debt to itself. Foreigners hold less than 6 percent of Japanese government bonds. (In the U.S., foreign interests, including governments, hold 50 percent of our debt. That’s why we have to bow and scrape to them.) Because Japan’s debt is almost all held domestically, “if Japan were to go bankrupt tomorrow, the world would not notice,” says Ulrike Schaede, professor of Japanese business at the University of California San Diego. She is now on sabbatical in Tokyo.

But her UCSD colleagues aren’t so comfortable. Professor Takeo Hoshi, an expert on Japanese economics at the university’s School of International Relations and Pacific Studies, says, “I wouldn’t be surprised if Japanese investors [particularly Japanese banks] start leaving Japanese government bonds by trying to reduce their exposure to them.” Interest rates at zero “have nowhere to go but up,” says Hoshi, and if the Japanese started selling and curtailing their buying of this debt, “the Japanese could face trouble refinancing the bonds.” According to Shilling, 42.5 percent of Japanese bondholders are banks and 20 percent are insurance companies in the country.

If bondholders started deserting, what would the government do? “They could try to depreciate the yen or try to inflate away the bonds,” says Hoshi. Therefore, this country that has been suffering from deflation might have to wrestle with inflation.

The yen has been a very strong currency for more than three decades. Japan might resort to devaluation. But with Europe’s problems, that would be difficult. The yen has been a bit over 90 to the dollar. If it went to 125, “the Japanese economy would recover immediately,” says Schaede. “Japan’s biggest problem is that the yen is too strong, and the euro crisis will probably make it stronger.” Hoshi agrees with that.

Japan is a major exporting nation. “Devaluation would be good for export industries” but could be bad globally if it’s done during a deep worldwide recession, says Ross Starr, another professor of economics at UCSD. A Japanese devaluation would be particularly hard on its neighbors, Starr says.

But Japan has one great advantage over troubled European countries: its own currency, the yen. The euro-zone countries are tied to one currency, the euro. Those in trouble can’t devalue. That’s why scholars fear that the euro zone will fall apart. There is a word we don’t hear much in the U.S. but is mentioned often in Europe: “eurosceptics.” These people have long been skeptical of, or opposed to, European economic integration. Their numbers are increasing now, with Portugal, Italy, Ireland, Greece, and Spain (the so-called PIIGS) choking on a lifestyle they can’t afford and Northern Europeans, particularly Germans, reluctant to provide it to them.

One reason for Japan’s huge debt load is that its population is so much older and has such a health-care burden, points out Starr. Almost 20 percent of Japan’s population is over 65, and that will be 30 percent by 2050. Life expectancy is 82.1 years in Japan, higher than other large industrialized nations. The population is actually shrinking, as people die off and the country doesn’t bring in many immigrants.

Japan has the lowest fertility rate (number of births per 1000 women of reproductive age) of the large industrialized countries. Japan’s is 1.21; Italy’s 1.31; Germany’s 1.41; Canada’s 1.58; Britain’s 1.66; France’s 1.98; and the U.S.’s 2.05. In Japan, there are 3.4 people of working age for every one of retirement age. By contrast, the ratio is 5.3 in the U.S., 4.5 in Britain, 4.7 in Canada, 4.1 in France, and 3.9 in Italy. Only Germany’s ratio is worse: 2.8. Japan’s is expected to be a lowly 2.6 in 2040.

“The health-care problem in Japan is worse than it is here in the United States,” says Hoshi. But Medicare and Social Security face severe problems in the U.S., he notes. And looming U.S. deficits are scary, he says.

Japan has always had a very high savings rate. However, that is going down, partly because the older people are spending, says Hoshi. Nonetheless, “These elderly people are sitting on a huge pile of savings,” notes Schaede, and that helps Japan service its debt, even as the savings rate declines.

“The aging of the population is a gradual process,” says Starr. “With enough foresight, Japan will be in a good position. Will everything be rosy? Probably not. But Japan should be in better shape than Greece.”

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David Dodd June 10, 2010 @ 4:33 p.m.

Japan's stimulus failure is a perfect example of where and how neo-Keynesian economics fails at times. The government pays 100,000 men to dig holes, and then another 100,000 to fill them. The money supply is increased, but since there is no increase in goods, existing production is worth much less; more money simply represents the same thing. If government is going to do anything at all (and perhaps it shouldn't), then some nominal investment in creative destruction would be more beneficial than simply increasing the money supply with no substantial thing created by it.


Don Bauder June 10, 2010 @ 4:43 p.m.

Response to post #1: The U.S.'s recent experience with Keynesian pump-priming, along with extremely low interest rates (the monetarist approach), will tell us much about the efficacy of these two methods. Of course, if there is a recovery, there will be an endless debate on whether Keynesianism or monetarism gets the credit. If neither work, and the recovery is extremely modest, as has happened in Japan, then we have to re-think our approach to economic crises. Of course, the supply siders want tax cuts. But their tax cuts for the rich helped us get into this mess. Best, Don Bauder


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