Comparing Japan’s economic situation with Greece has lessons for us all

All the excitement and action that has surrounded both events in the UK and in Europe has meant that I have not been publishing many updates on Japan recently. However she is important for many reasons not least the size of her economy in world terms and as some new data has been released overnight I thought that it was time to consider her position again. She is in some respects a symbol and forerunner of policies which are now being tried elsewhere but she is also a country with quite a different situation. You see Japan is mired in disinflation where her consumer price indices are negative and her “lost decade” has now stretched into two decades. Also at a time when as I discussed yesterday that even the European Central Bank is in effect indulging in Quantitative Easing (QE) via its sterilisation programme which is something of a charade and a smoke screen one can look at Japan for the signs of the long-term effects of QE as she was the first country to employ this tactic back in the 1990s.

Where is Japan different to say Greece?

If we compare these two countries and look at some of the issues that have impacted on Greece over the past 6 months or so it is easy to take the wrong direction. For example Greece is vilified for having a gross national debt of 115.1% of her Gross Domestic Product (GDP) as of the end of 2009 (figures quoted in this paragraph are from the latest IMF Fiscal Monitor) whereas Japan had one of 217.7%. Greece has had a difficult year because she has had a lot of debt to refinance so adding her expected fiscal deficit of 8.1% to her refinancing needs of 12.4% means that in 2010 she will have to issue debt of 21.5% of her GDP. However and you might wish to sit down before reading this Japan has debt to refinance this year of 54.2% of her GDP and an expected fiscal deficit of 9.8% making a grand total of 64% of her GDP in debt issuance. So not only does she have a flood of bonds to issue Japan has an expected fiscal deficit which is expected to be larger than that of Greece now that she is on her IMF approved austerity programme.

One of the measures of Greece’s problems has been the yield level of her government bonds and the ten-year bond is used as a benchmark. This has been into double figures recently but last night closed at 8.19% somewhat up on the previous day making me wonder what games the ECB is playing with its Quantitative Easing programme. However back to Japan you might be expecting some horrendous yield level for a country with a higher national debt than Greece,worse fiscal deficit than Greece and a veritable flood of bonds to refinance. Well you would be wrong as her equivalent bond yield closed at 1.29% last night. I have got used to having positive yield comparisons with Germany but here is a country with a negative one and it is -1.46%. Of the worlds major economies no-one else even comes close to this and even Switzerland is left trailing in her wake in this respect.

So we have a clear difference with Greece as Japan manages to have a government bond yield nearly 7 percentage points below that of Greece whilst on many fashionable economic measures she is in fact in a worse position. Welcome to the enigma wrapped in a puzzle which is Japan.

Japanese GDP Figures

Last night saw economic growth figures for the first quarter of 2010  published and they do help to shed a light on the reasons for the situation I have discussed above. On an annualised basis Japanese economic growth was 4.9%, slightly slower than the expected 5.5% but still rather respectable in world terms at 1.2% for the quarter. However her  GDP deflator (a measure of inflation) actually fell by 3% and here you are getting one of the clues as to where she is different Japan has falling prices or disinflation. There is another clue to where she is different in the composition of these figures, you see only 17% of this growth came from domestic consumption with the rest being provided by exports. She is in effect riding the economic growth of the Pacific region but is struggling to add to this growth domestically. It is good that she is a net exporter and many countries would envy her,after all how many currently are crying out for export-led growth? But for Japan it always comes with poor domestic consumption and this is another problem for her going forwards.

Poor domestic consumption and disinflation are the features of Japan’s “lost decade” and it would appear that she cannot escape them.

Themes of Japan’s problems

In my article on Japan on the 12th January 2010 I produced some themes which illustrate Japan’s economic situation and problems.

1. Reducing the National Debt

2.Shoring up the National Pension System

3.Raising economic productivity

4.Increasing the birthrate so Japan has future income earners to support an ageing population 

5.Ending the spectre of deflation and disinflation

6.Boosting domestic consumption

7.Getting economic growth to be at least twice long-term interest rates.

Analysis

The IMF’s recent report on Japan suggested the following

the need for early and credible fiscal adjustment has become critical. The fiscal response to last year’s recession was necessary and effective, but has pushed public debt to unprecedented levels…………Stabilizing the public debt ratio and placing it on a downward path will also require measures to contain the growth in spending

You may have already spotted the flaw in this argument. Japan is already struggling for domestic consumption and this is a long-running problem for her since the mid-1990s,so a cut in government spending could lead to another downwards spiral for her, and yet she needs to cut her deficit. There are elements of a trap her as she is damned if she does and damned if she doesn’t. There is no easy answer to this and the main hope is of course external that world trade grows and Japan benefits from it . Whilst this is plainly a good outcome the truth remains that it only masks Japan’s domestic problem of a lack of consumption.

Disinflation

Here is another big factor in the Japanese economic experience. Her Consumer Price Index is currently at -1.1%. This figure went negative in February 2009 and has remained there since. It is a big problem as it forms a negative feedback loop with the lack of consumption problem. In Japanese minds the thought must be why buy now? After all it will soon be cheaper.

Japan’s aging population

I wrote on this subject back in December 2009.

With long-term solvency an increasing problem for Japan as a nation then its ageing population structure makes the potential problem worse. Its population is 130,000,000 but its birthrate per woman has dropped to around 1.3. Demographers estimate that a level of 2.07 is necessary to maintain a stable population.

So as we go forward Japan has a population structure that is likely to increase government expenditure as for example spending on health will plainly have to rise and also reduce taxation as less of the population is of working age. And yet remember her existing level of national debt (217.7% of GDP)? This is high enough.

The Bank of Japan

Having been the first central bank to actively pursue a policy of Quantitative Easing and with interest rates virtually zero the Bank of Japan does not have many options going forward. In essence Japanese economic policy is as follows. The Bank of Japan blames the governments fiscal policy for Japan’s economic problems and the government of Japan blames the Bank of Japan’s monetary policy. You could compare them with two schoolchildren squabbling in a playground.

The Bank of Japan is currently in a two-day meeting but I do not expect much. There is talk of a plan to expand lending to businesses but I expect some talk and symbolism but little real action. I rather suspect that the Bank of Japan has run out of ideas but in true Japanese style will not admit this due to the loss of face it would provide.

Conclusion

I compared Japan to Greece earlier and indicated that if you look at many currently fashionable economic statistics Japan is in fact in a worse position than Greece. However I have hinted at a clear difference and the truth is you can sum it up in external balances. As I have discussed above Japan is a net exporter and this gives her two strengths. Firstly she has economic growth ( 1.2% in the first quarter of 2010 compared with Greece’s -0.8%) derived from the exports and secondly she has no need for foreign finance. Indeed as domestically her nation is a nation of savers then if we use the stereotype of Mrs. Watanabe then she is a saver and she can finance Japan’s national debt. You could hang up a sign saying foreigners not required and this is why Japan has such low bond yields. Any positive yield when you have disinflation is a real gain.

However there are clear challenges as Japan’s national debt is ballooning and looking forward she has an aging population. This aging population may help with her lack of domestic demand but then she will save less and so the deficit will be less affordable. Each time you think of a way out of this conundrum you hit another problem. So whilst Japan is on a longer fuse than Greece she too is showing all the signs of long-term insolvency.

I believe that there is a potential answer to the problem and it lies in her banking sector. You see ever since I worked in Japan in the early 1990s there have been questions over the solvency of her banking system. Of course in the last couple of years many other countries have had similar problems, but Japan’s have been much longer lasting. Her banks are currently trying to raise capital and according to the Financial Times raised some US $38 billion last year and so far this have raised US $12 billion in equity finance. They are afraid of new capital requirements from any Basel accord. However I think the problem is deeper than this you see Japan has supplied liquidity and cut interest rates and fudged numbers ( banks can count losses as capital) but has never really reformed her banking system. Somewhere in that fact is why she has not recovered and it is a lesson for us all as so far we have not done so either.

We are in danger of making the same mistake as Japan in bailing our banks out, letting them fudge numbers but not reforming them. I believe that we should be reforming our banking system right now instead we have had two years of wasted time.

Update 3.20pm

In a slightly curious move the New York Stock Exchange invoked Rule 48 today as the US markets opened.

Rule 48 provides the Exchange with the ability to suspend the requirement to disseminate price indications and obtain Floor Official approval prior to the opening when extremely high market-wide volatility could cause Floor-wide delays in opening of securities on the Exchange

In a market where there is fear and uncertainty regulators seem determined to add to it rather than reduce it….

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20 thoughts on “Comparing Japan’s economic situation with Greece has lessons for us all

  1. Surely japan’s answer is to get more competitive borrowing via international bond markets, thus forcing domestic savers down a path where they cannot really save, thus forcing them to spend?

    I assume Japans private current account is in huge surplus if everyone is a saver? Surely what Japan needs are policies to push domestic spending?

    Is it really that hard to force inflation? Just whack tapered consumption taxes on everything over a 5 year period. offsetting the drop in prices?

  2. Japan’s population is not just ageing, it is declining — it peaked a few years ago. And although its government debt is held overwhelmingly by domestic savers, these savers are cashing in their bonds as they are retiring. And as they are getting older, there are fewer Japanese savers to purchase government bonds. The adjustment Japan needs is far worse than Greece’s.

    js

    • Hi John
      I agree and back on the 30th December I looked at a rather apocalyptic view on this front,which remains rather disturbing and unsettling I have to confess.

      “One rather apocalyptic view predicts that if current trends continue then the Japanese population will fall to 50 million by the turn of the next century. Now this may be good in terms of addressing global overpopulation as Japan is overpopulated but think of the debt levels supported by less than half the population! Of course economic trends and population trends that far ahead are very unreliable but they are disturbing.

  3. The latest figure for the Greek debt, reported in today’s Kathimerini, is 131% of GDP.
    As of 31 December 2009, the debt was 298.5 billion euros. At the end of March 2010, the debt has increased to 310.38 billion euros, which (per the article) amounts to 131% of GDP. In other words, there was an increase of 11.86 billion euros in 3 months (perhaps it reflects updating the books).

    js

  4. Latest word is that the EUR/JPY is blowing out, as is the GBP/CHF.. some would suggest capital flight from Europe ??

    Despite their overwhelming debt, the strength of Japan lies in her hard working, frugal people, much like Germans. Were Greeks like this I dare say we would not be discussing them so much.

    Whats the difference between Singapore and Zimbabwe ?? Zimbabwe has rich natural resources and they were left a wonderful infrastructure by the Brits at the end of WWII. Singapore is a rock with no resources that was utterly destroyed in that war. Yet today Singapore contributes millions to help feed starving Zimbabweans. A nation’s greatest resource is the people that inhabit it.

  5. Annual work hours (source: OECD (2004))

    You can accuse Greeks of many things (efficiency, low and high level corruption, high temper etc. etc.) but not for not working hard. Having lived in many different countries I believe that the quoted statistics represent the reality I had perceived.

    • Hi Basil
      I remember Ioannis making a similar point and coming up with with statistics to back this up. So if we take the issue of Greeks working long hours as fact as independent bodies support this conclusion it poses a question, where do things go wrong? Any thoughts from the inside so to speak?

      • Shaun…No clue! I am privileged to work in a positive work environment where, for instance, I can go to work at 10:00 and leave at 18:00 if I want to, instead of 09:00-17:00, but this is not the norm.

        As we discussed before, I think the problem is systemic. Watch my reasoning for a second.

        Many employees in Greece work for comparatively low wages (especially factoring the cost of living in Greece, with Athens easily in the top 30 most expensive cities in the world each year. Example link: http://www.guardian.co.uk/news/datablog/2009/jul/07/global-economy-economics ). However, there are irregularities at hand:

        *”Freelance professionals” including doctors, lawyers, notaries, et al, blatantly evade tax for years and years. I don’t believe that the average Greek is “rich”, but I do indeed believe that if the profits from certain professional categories were correctly reflected to the GDP, and taxed for, we would find a dramatic shift in GDP per capita / productivity.

        The usual threat of “pay me 100 EUR “black” or 150+ if you actually want a receipt” had worked wonders for years in many dealings taking place here.

        *However, in the private sector employees we find a different picture: The majority of the employers, be it corporations or SME’s hire (young) people for peanuts. There are many cases where overtime pay is never mentioned or enforced, and I can…vouce for that personally. The usual attitude of the employer would be “put up with this, or walk”. I sincerely believe that in the private sector people tend of work more than 40 hours per week, without ever being paid for their overtime.

        *Other employers may delay payment(s) for considerable time periods, wage psychological war to force someone to resign without compensation, or even hold dozens of small companies and shut some down while opening others, transferring employees between them, to avoid heavier taxation.

        *The authorities supposed to ward employees against these situations are effective sometimes, but lazy or corrupt in other occasions. Most people do not summon the authorities to assist unless they are truly desperate, since they do not believe in their power to assist.

        *The state authorities are supremely corrupted in many levels. A “normal thing to happen” would be something like this:

        -You open up a new business, for instance, and it’s been 2 years since you opened it up. You have little or no profit from it, yet.

        -The tax inspector might pay you a visit for any reason. Demand to look into books. He’ll find irregularities that will certainly exist, because the Greek corporate/personal taxation system is so complicated, it hurts. No amount of good accountants can remedy this, in any company I know of.

        -The inspector will then usually say “Alright. You’re in for 100,000 EUR worth of fines. But you do have an alternative – 5,000 to me, and I never found anything, until someone comes back in a few years”.

        *What would you do, Shaun? Turn him in? Call his superiors? Heh. His colleagues would find out you are ‘unruly’ and would follow up, normally, writing fines but offering no compromises the next time around.

        It’s the state (mostly) that is in disarray, and this causes the citizens to be in disarray. The prominent line of logic here is “Why should I pay my fine/tax/whatever going to the state? So that they’ll turn my money into villas and strip-dancers? Hell no!”.

        This leads to a black hole where the state has no money, and cannot ward off bribery and corruption through service improvement, and then more corruption goes on, blah blah blah.

        I’ll have you know that Greek hospitals do not have a shred of electronic services, and drug prescription goes unchecked. In the UK, under NHS, I’ve seen drugs being linked to patients, personalized prescriptions, et al. These things are now (2010) being slowly implemented at a snail’s pace in Greece.

        Thievery of public / private funds through mismanagement is legendary.

        Of course, this leaves ordinary employees and pensioners, who cannot hide tax, and cannot enjoy “free services” (Try to get a major operation carried out in a state hospital, normally free, without bribery. In many cases, you’ll be put to a waiting list. And die before you have the operation done. You can pay up a doctor, of course…), out in the cold. But precisely because they cannot have their income hidden, they are the first to pay through tax hikes and indirect tax increases.

        Greece now proudly sports the most expensive gasoline price in Europe. Maybe even the most expensive in the western world. 3 cheers for us.

        I made a ludicrously long post again, but I hope you get it – some things are beyond fixing over here. I sometimes wish we could outsource politicians and regulators, and bring UK ones instead.

        Working in the telecoms sector, I know for sure that Ofcom is about 100 times better compared to EETT, our own telecoms regulator. Sigh…

        Cheers,

        Ioannis

        • Hi Ioannis

          I have just been reading your reply and it fits with a theory that I have. You see as global capitalism has spread internationally many countries internally have embraced a type of socialism/communism. What you are describing inside Greece is the way that most socialist systems have ended up with corruption and inefficiency and of course the moment this collides with the capitalist money markets then there is conflict… Indeed even inside Greece you are describing workers suffering from unprotected capitalism in the private sector whilst the socialist type public-sector holds it hand out for bribes. It is like two economies in one.

          I see many commentators saying that the current crisis is a failure of capitalism. I think what this ignores is that if you look around the world many countries have tried to build socialist structures inside a global capitalism.What we are seeing now is the two trends colliding and it is not pretty…Some elements of this are true in the UK where the private sector has had a severe recession whilst the public-sector (up until now) has been barely touched. Greece is further ahead than us as a full austerity programme is hitting her.

          In another way this reinforces my conclusion that we need reform from todays article. You see the banks in Japan have been so protected they are no longer capitalist entities they are a facade of capitalism that hides the worst part of socialism. If you look at RBS and Lloyds in the UK they are now in effect on that path…. I do not be;lieve that we can continue with socialism hidden inside capitalism it has caused many of the problems we have now. Those in charge do not want to admit it because it exposes the games they have been playing.

          An example of this in the UK is the NHS. I am a big fan of the original idea behind the NHS and the healthcare for all its founding fathers dreamt of. But it now provides all sorts of what are really lifestyle treatments for example rather than care and is very inefficient. Yet in the election we just had in the UK there was a race between political parties to “ring-fence” the NHS. To hold to the visions of its founding fathers what it most needs is regular reform and yet minds are closed, just when we about to be short of finance too. It is very sad I think.

  6. Anand,
    There is something wrong in treating people like cattle, and “forcing them to spend”. Saving is a good thing, when those savings can be invested to generate wealth.
    As shaun says, it’s banking reform that is required, to enable a healthy economy.

    • I think there is are more difficult issues than banking reform, that need to be addressed.

      The Greek and US/UK troubles are caused by similar manifestations of the same problem.

      The manipulation of Renminbi/US Dollar relationship which essentially creates a fixed exchange rate needs to be solved by the US putting a tariff on all Chinese goods, until the Renminbi is allowed to float.

      The fixed exchange rate between Greek/German Euros needs to end (!) or Greece needs to put a tariff on German imports (!).

      The two other solutions to the free trade vs. fixed currency problem are movement of people, and political union (often with wealth transfers).

      The first is difficult is where people do not speak the same language or where borders are closed.
      The second is often very unpalatable.

  7. My comment on Greece was more towards the “frugal” part instead of the “hard working” part. Hard working I grant you. Please don’t ask me to call your nation’s government frugal.

    • You said Greeks, not the government. The government is not only non-frugal and non-hard working but vastly incompetent and corrupt. I think the main problem is Greece is that it has a system (starting from the very top) that does not reward competency, there is no meritocracy especially at the low and high managerial levels. Hard-working employees working for incompetent managers favourites of the corrupt governemnts. The tragedy for Greeks is that all political system is corrupt. There is no good option. Unfortunately.

  8. Shaun,

    I’m afraid that I don’t have anything economically technical to add to the debates going on in the comments, but I just wanted to say thank you for such an insightful blog, that you write every day. My first love (!) is working as a computer programmer (I know, us geeks are just soooo weird!), but I have always had a keen interest in economics, as a layman, you understand. And after having read your blog for many, many months (it came highly recommended on Robert Peston’s, BBC, blog), I find your comments insightful into a World that I find highly fascinating.

    I know writing a blog every day is time consuming and challenging to keep fresh & up to date, so well done.

    On a personal note, and I can here the sniggers coming from the technical amongst you, but have you ever thought about creating a section on your blog which would give one or two sentences on various techical economic phrases. Such as, I’m not fully aware of the difference between “gross national debt” & “fiscal deficit”.

    Just a thought. And Ionnis: extremely insightful on the Greek economy, thank you.

    Thanks again for a great blog.

    RS

    • Hi Robert and welcome
      Firstly thanks for the compliment. I started this venture for two reasons.One was that I felt (and still do) that many public organisations such as the BBC have economists who do not sufficiently enlighten the debate and take the easy follow the crowd cop out route. Secondly when the credit crunch began I felt that I had a solution to the problems developing in 3 month LIBOR etc. but I only had limited personal contacts etc. as a way of spreading my views. So in a sense there is an element of a crusade about this blog…. As time has gone by my commitment has strengthened as I feel the general standard of debate has if anything deteriorated and I also feel that the general public is being misled on quite a few subjects.

      As to definitions I do try to avoid acronyms and explain things as much as I can. However your call for some definitions sounds a good idea and do not be embarrassed about asking because many who should know better (seeing as your mention the BBC stephanomics for example) play somewhat fast and loose at times with such things as national debt in my view.

      National debt is a stock concept which addresses how much the public sector of an economy owes in total. A fiscal deficit (also called budget deficit) is a flow concept measuring how much a government has to borrow in a year to finance its spending. So if you like you could consider the national debt to be the sum of all previous fiscal deficits and surpluses.These days both concepts are often compared to economic output for which Gross Domestic Product (GDP) is usually used. This allows international comparisons. These are (hopefully) fairly clear concepts, however they are measured in different ways by different organisations and so as ever whilst theory is clear I am afraid reality is often a little cloudier!

    • Robert pencil me in as another reader of this blog with keen layman’s interest in economics.

      Another useful definition would be for “primary deficit”, which means that a budget is in a deficit position even excluding the payment of interest on the debt. If a debt-burdened country were to consider defaulting on or restructuring its debt or rescheduling its interest payments, it could reduce or even eliminate its interest expense. But if it is running a primary deficit, that means it would still need to either cut spending or borrow money in order to fund its expenditures, and having just defaulted it presumably would not be able to borrow.

  9. Shaun

    If you want to add any new features to this site (like Robert’s glossary / definitions idea) I would be happy helping you do this for free as a thank you for the great service you are providing to readers like me. Give me a shout via my site or email and we can work out the best way to spread your great insightful thoughts futher afield!

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