But the economic disasters of our time—which involve big banks in rich countries, call into question the viability of government debt, and seriously threaten the reach of even the most self-confident nations—will not end with the euro debacle. The euro zone is well down the path to severe crisis, but other industrialized democracies are hot on its heels. Do not let the euro zone’s troubles distract you from the bigger picture: we are all in a mess.
Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system? Think about Japan.
Japan’s post-war economic miracle ended badly in the late 1980s, when the value of land and stocks spiked dramatically and then crashed. This boom-and-bust cycle left people, companies, and banks with debts that took many years to work off. Headline-growth rates slowed after 1990, leading some observers to speak of one or more “lost decades.”
But this isn’t the full picture: after a post-war baby boom, population growth in Japan decelerated sharply; the number of working-age people has declined fairly rapidly since the mid-’90s. Once you account for that, Japan’s economic performance looks much better. The growth in Japan’s output per working-age person—a measure of productivity for those who have jobs—has actually kept up with most of Europe’s, and has lagged only slightly behind that of the United States. Japan is a rich country with low unemployment. Its private sector is by no means broken.
So why is Japan’s government now one of the most indebted in the world, with a gross debt that’s 235.8 percent of GDP and a net debt (taking some government assets into account) that’s 135.2 percent of GDP? (In the euro zone, only Greece has government debt approaching the Japanese level.)
After World War II, Japan built a financial system modeled on those of Europe and the United States. Financial intermediation is an old and venerable idea—connecting people with savings to other people wanting to make investments. Such a sensible use of savings was taken to a new level in Japan, the U.S., and Europe in the decades following 1945—helping to fuel unprecedented growth for entrepreneurs and a genuine accumulation of wealth for the burgeoning middle class.
But such success brings vulnerability. Modern financial systems also permit governments to borrow large sums from investors, and as finance has evolved, that borrowing has become easier and cheaper. In the most-advanced countries, governments have increasingly taken advantage of expanding markets for short-maturity debt, whose principal is due soon after the loan is made. This has allowed them to borrow far more, and at cheaper rates, than they otherwise would have been able to do. Typically, these governments then take out new loans as the old ones come due, “rolling over” their debts. This year, for example, the Japanese government needs to issue debt amounting to 59.1 percent of GDP; that is, for every $10 that Japan’s economy generates this year, the government will need to borrow $6. It will probably be able to do so at very low interest rates—currently well below 1 percent. (...)
About half of the Japanese government’s annual budget now goes to pensions and interest payments. As the government has spent more and more to support its growing elderly population, Japanese savers have willingly financed ever-increasing public-sector debts.
Elderly people hold their savings in the form of cash and bank deposits. The banks, in turn, hold a great deal of government debt. The Bank of Japan (the country’s central bank) also buys government bonds—this is how it provides liquid reserves to commercial banks and cash to households. Similarly, Japan’s private pension plans—many promising a defined benefit—own a great deal of government bonds, to back their future payments. Few foreigners hold Japanese government debt—95 percent of it is in the hands of locals.
Given Japan’s demographic decline, it would make sense to invest national savings abroad, in countries where populations are younger and still growing, and returns on capital are surely higher. These other nations should be able to pay back loans when they are richer and older, supplying some of the funds needed to meet Japan’s pension promises and other obligations. This is the strategy that Singapore and Norway, for example, have undertaken in recent decades.
Instead, the Japanese government is using private savings to fund current spending, such as pensions and wage payments. With projected annual budget deficits between 7 and 10 percent of GDP, Japanese savers are essentially tendering their savings in return for newly issued government debt, which is not backed by hard assets. It is backed only by an aging, shrinking population of taxpayers.
by Peter Boone and Simon Johnson, The Atlantic | Read more:
Photo: Koji Sasahara/AP
