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Sunday, June 5, 2011

Japanese Debt Enigma

Japan’s national debt has become almost 227% its GDP and Moody is supposed to downgrade its debt rating.
Japan’s public debt is twice the size of its $ 5 trillion economy but on the other hand Japan holds around $ 1 trillion of US treasury products which is almost 20 % of Japanese debt.

A simple question arises, why Japan does not use this fund to set-off some of its national debt?
And the answer is the Japanese export led economy, which can’t bear the strong Yen (local currency) as it shall be a dampener for its exporters.
Let’s see how this happens?
Japanese companies get payments mostly in dollars and as per ‘Demand and Supply’ rule, too much of dollar stacked in the Japanese bank, shall appreciate Yen and strong Yen is not desirable for exporters, and that’s why Japanese government ends up with buying US treasury products to get rid of piling US dollars.Japan has no option but to invest in US treasury products to keep Yen competitive against world’s reserve currency dollar.
How Japan piled up such a massive debt?
This began with, Japan offsetting collapse of housing and stock bubbles in early 1990 with deficit spending.In 1991, debt was only 11% of GDP, which kept on accumulating to present 200+ levels; and this is highest debt level of any major economy in the world.
What gives Japan solace is, maximum chunk of this debt is owned by Japanese and only 5% is owned by foreigners, while 50 % of US debt is owned by foreigners- mainly by China and Japan.
In March, Japan underwent devastation caused by an earth quake followed by tsunami which could cause Japan $ 600 billion as rebuilding cost; this shall add more to Japanese debt woes.

This disaster shall affect  Japan’s debt to GDP ratio on both ends, debt shall rise due to reconstruction work and GDP shall shrink along with.
GDP shall shrink due to factory shut-downs and other factors responsible for disruption of production.
Only ray of hope is access to cheaper domestic loans, as families and businesses buy government bonds willingly, unlike Euro nations who have no option but to seek expensive foreign loans.


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