Shirakawa noted that monetization is happily chugging along: “We are buying JGBs in order to inject ample funds into financial markets in a stable manner and we are buying Y21.6 trillion of JGBs annually” and he made it clear that adjusting for scale differences, the Japanese monetization program is three times faster than the Fed’s Treasury QE - in other words assume that Japan has bought the equivalent of nearly $1 trillion of its own bonds, adjusted for something or another.
Uber-deflationista and bond bull Dave Rosenberg has this interesting piece of data in his “Breakfast with Dave” newsletter:
Have a look at the household balance sheet:
- Households own $18.2 trillion of residential real estate, even after the value destruction of the past three years.
- Households own $18.1 trillion of equities, despite the vicious bear market.
- Households own a near-record $7.7 trillion of deposits and cash — earning next to nothing in yield.
- Households own $4.6 trillion of consumer durable goods.
- Households own $3.5 trillion of corporate bonds and municipal/agency paper.
What do households own in Treasury notes and bonds? Try $800 billion.
It seems like we are really in Japan 2.0. With the exception that Japan 1.0, the original one, might actually blow up in the mean time.
Awesome inteview with Nomura’s Richard Koo (full text).
Maybe you didn’t know that:
- the value of land collapsed 83% in Japan since the top of the bubble in 1989
- total amount of wealth destruction since the bubble burst equals 3 years of GDP vs 1 year of GDP in the US during the Great Depression
- nevertheless, nominal and real GDP of Japan never went below its 1989 peak thanks to public borrowing, while US GDP was almost cut in half between 1929 and 1939
The whole interview is really worth reading. Two ideas I found most interesting. First, in a balance sheet recession, companies and individuals need to pay down debts that are worth more than their assets, no matter how low interest rates are. In other words, the strategy shifts from profit maximization to debt minimization.
Second, to keep GDP levels constant, the government simply has to borrow the same amount that is being saved by individuals and companies. In other words, fiscal deficits will be financed by those same savings, with no need of external borrowers. That would explain how long-term interest rates in Japan declined to 1.4% over the past twenty years even with growing public debt borrowing.
My fear is that the public debt buffer only represents a way to postpone the day of reckoning as the obvious political least resistance path. The tipping point could probably be reached as the debt rollover risk becomes sensitive to demographic trends (average population getting older and spending its lifetime savings in retirement, health care expenses or support to unemployed younger family members) or companies switching back to profit maximizing mode or the public sector getting accustomed to higher level of spending, waste and corruption or simply a bout of bond market panic. An interest rate shock at high public debt level would quickly trigger a devastating snowballing effect.
I am afraid that Paul Krugman is right when he says that, although a few bullish news are to be expected, the economy is still fundamentally ill:
During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.
What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.
I also believe that the United States have the luxury to afford to temporarily run even higher fiscal deficits to keep propelling a sick economy. Something that Japan is probably not able to afford any longer …
Betting on the currency of a country on the verge of bankruptcy is an interesting play. But traders are betting on the yen as we speak. It sure could work on a short term basis, but I still think that Japan will face the wrath of the bond market in the next 18-24 months.
But I am not a trader …
David Rosenberg says that, actually, Japan GDP was more or less flat nominally while deflation boosted real GDP 4.8% …
Speaking of Japan, while many pundits waxed over the “real” GDP expansion of 4.8% at an annual rate in Q3, the entire increase was due to the negative deflator. In fact, the economy continues to deflate at such an extent that GDP in nominal terms contracted at a 0.3% annual rate — the sixth quarter in a row of decline.
