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News : International Last Updated: Dec 8, 2009 - 7:58:19 AM


Japan’s economy in valley of tears with record public debt heading for 300% of GDP
By Michael Hennigan, Founder and Editor of Finfacts
Aug 20, 2009 - 6:24:52 AM

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Deutsche Bank Research, a unit of Germany's biggest bank, says in a paper published on Wednesday, that Japan’s economy is in a valley of tears with record public debt heading for 300% of GDP (gross domestic product).

The world's second biggest economy reported on Monday that growth of 0.9% was achieved in the second quarter of 2009, after a steep slump. However, reckless fiscal management over the past three decades and an aversion to reform in a system  of cronyism with bureaucrats protecting entrenched interests, has left the uncompetitive domestic business sector as a stark contrast with world class exporters such as Toyota.

As in Ireland, the insiders have left a trail of misery in their wake.

Pay increases have been miniscule in recent years and in early 2008, the then prime minister, Yasuo Fukuda, pleaded with big companies who had reported rises in profits from surging demand, in particular from China, to provide reasonable pay hikes.

Leading exporters such as as Toyota, Honda and Toshiba, agreed to pay rises for the third straight year but while the principal electronics union had demanded a ¥2,000 (€13, £10, $19.44) monthly wage increase, the companies only conceded a ¥1,000 increase (€6.50, £5, $9.72).

Toyota's monthly increase in wages would have paid for three cups of regular coffee at Starbucks, in the high cost economy. 

Bloomberg News reported that Toyota workers were on average monthly pay of ¥348,530 (€2230) and Honda paid ¥363,085 (€2,324).

From 1997 to 2007, average pay in Japan fell about 11%, according to labour ministry reports.

In a crucial sign of the collateral impact of monumental mismanagement, about 35% of workers hold a part-time or temporary position, compared with 20%, 13 years ago.

The workers earn less than the Irish hourly minimum wage of  €8.65 ($12.30).

Toyota employs about 110,000 "temps" in Japan. They have few rights and can be dismissed at short notice.

A ageing society, rising public debt and growing imports from low-wage China, are among the challenges, which will face the new government that will follow the general election on August 30th.

Deutsche Bank Research says at the end of the 1990s four 20-64 year-olds financed the pension of one person aged 65 and over. If this ratio continues to shrink as in the last two decades, by 2020 the ratio of 20-64 year-olds to people of at least 65 will have fallen to two. And with birth rates heading steadily down, no relief for government finances is to be expected from younger generations in this respect either. Japan's current birth rate of only 1.2 children per woman remains one of the lowest in the world. Traditionally, burden sharing through immigration is not a solution for Japan.

Currently, most of Japan's public debt is financed domestically and interest rates have been at or close to zero for years but this scenario may also change in coming years.

A series of public stimulus programs in the past two decades coupled with the strong links between the ruling Liberal Democratic Party (LDP), which has only been out of power for nine months since 1955, and the construction industry, has given Japan the best public infrastructure in the developed world, but at a huge cost.

Deutsche Bank Research says that even before the spurt in growth resulting from the acceleration of world trade since 2002, Japan's export industry expanded rapidly between 1993 and 2008 relative to domestic demand. Shipments to its neighbours South Korea (1993 – 2008: 8.0% p.a.), China (14.2%) and Russia (17.4%) multiplied during that period, whereas deliveries to the industrialised countries USA, Germany and the UK registered only moderate growth averaging roughly 2% p.a. In the early 1990s trade with China accounted for a scant 6-7% of Japan‟s total foreign trade. Today, about 20% of total imports and exports stem from trade with the People‟s Republic. Taken together, shipments to mainland China and Hong Kong now exceed aggregate deliveries to the United States.

DBR economist Jochen Möbert says that low transport costs and the consumer demand potential as purchasing power rises in China are making the Middle Kingdom an increasingly important sales market for Japanese products. But China will also use its low wages, growing working population and abundance of raw materials to deliver more goods to Japan in future. Imports from China are already posting similarly dynamic rates of growth to exports. China has now taken over from America as Japan‟s major supplier. Imports from China such as iron and steel, for example, tend not to feature such a vertical range of manufacture or such quality as exports to China, like electronic systems.

Möbert says that since the bursting of the heisei property bubble in the early 1990's and the “balance sheet recession” that this triggered, the Japanese government has passed a string of economic stimulus packages. Before the present crisis gross government debt in Japan stood at 172% of GDP, but net government debt was considerably lower, at 87.8%, owing to the financial assets held by the public pension system. However, since these assets are automatically counterbalanced by spending commitments, DB consider the gross amount. He says long before the current crisis and the bursting of the heisei bubble, governments in Japan had switched to a lax fiscal policy. The Tanaka Kakuei doctrine of 1972, conceived by a man subsequently to become prime minister, is often cited as the political rationale behind increasing government debt. The doctrine advocated freedom from the idea of annually balanced budgets, with a focus on balanced public finance over the long run.

Borrowing as a percentage of GDP averaged 9.7% in the 1980s, 8.6% in the 1990s and 4.2% from 2000 to 2009. Even in the boom years 2004 to 2007 debt of more than 3% was raised per annum on average. As a result of this debt policy, Japan now has the highest gross government debt of any industrial country, at 172%. The comparable figure in the USA is 73%, in Germany 66%, and in Italy 113% in 2008.

DBR says despite the strong escalation in debt, net interest payments  - - that is, the effective interest burden on the public budgets - - as a ratio of GDP are currently noticeably lower, hovering above 1%, than before the heisei bubble burst and are also much smaller than in other industrialised countries (USA 2.2%, Germany 2.4%, Italy 4.6%).

In the DBR baseline scenario, government debt climbs by an average of around 3% p.a., with the rate of increase gradually slowing in the coming decades. Trend economic growth is on 1.2% p.a. and the interest payable on government debt not quite ½%, as in recent years. On these assumptions the interest burden ticks up to just 2% of GDP and the interest burden on the government budget to 5.4% in 2050.18 But at the same time the debt ratio spirals above 500% of GDP. With borrowing running at such a high level, risk premiums are likely to be upped or purchasers of government bonds less willing to invest. Japan will probably have a higher interest burden even before 2020 - - the year in which the baseline scenario sees the 300% limit being surpassed.

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