It Is Japan We Should Be Worrying About, Not America

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by Ambrose Evans-Pritchard: Food
Will Never Be So Cheap Again

The rocketing
cost of insuring against the bankruptcy of the Japanese state is
telling us that the model has smashed into the buffers. Credit default
swaps (CDS) on five-year Japanese debt have risen from 35 to 63
basis points since early September. Japan has suddenly decoupled
from Germany (21), France (22), the US (22), and even Britain (47).

in Tokyo and the arrival of Yukio Hatoyama’s neophyte Democrats
– raising $550bn (£333bn) to help fund their blitz on
welfare and the "new social policy" – have concentrated
the minds of investors at long last. "Markets are worried that
Japan is going to hit a brick wall: the sums are gargantuan,"
said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson,
former chief economist of the International Monetary Fund (IMF),
told the US Congress last week that the debt path was out of control
and raised "a real risk that Japan could end up in a major

The IMF expects
Japan’s gross public debt to reach 218pc of gross domestic product
(GDP) this year, 227pc next year, and 246pc by 2014. This has been
manageable so far only because Japanese savers have been willing
– or coerced – into lending for almost nothing. The yield
on 10-year government bonds has been around 1.30pc this year, though
they jumped to 1.42pc last week.

"Can these
benign conditions be expected to continue in the face of even-larger
increases in public debt? Going forward, the markets capacity to
absorb debt is likely to diminish as population ageing reduces saving,"
said the IMF.

The savings
rate has crashed from 15pc in 1990 to near 2pc today, half America’s
rate. Japan’s $1.5 trillion state pension fund (the world’s biggest)
has become a net seller of government bonds this year, as it must
to meet pay-out obligations. The demographic crunch has hit. The
workforce has been contracting since 2005.

Japan Post
Bank is balking at further additions to its $1.7 trillion holdings
of state debt. The pillars of the government debt market are crumbling.
Little wonder that the Ministry of Finance has begun advertising
bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If
Japan’s bond rates rise to global levels of 3pc to 4pc, interest
costs will shatter state finances.

No one knows
exactly when a country tips into a debt compound trap. But Japan
must be close, even allowing for the fact that liabilities of the
state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

the rest of the article

3, 2009

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