Guest Post: Is the World’s Second Biggest Economy On the Ropes?

Washington’s Blog

Iceland has approximately the 101st biggest economy in the world.

Dubai is also tiny.

Greece is somewhat bigger, with the 27th biggest economy.

When Iceland, Dubai and Greece tanked, that was horrible … but not catastrophic.

Portugal – the 37th biggest economy – may be next. It would be horrible if Portugal tanks.

But Spain is also in real trouble. As the 9th biggest economy, a default by Spain could be major.

But none of these are in the same ballpark as Japan – the world’s 2nd biggest economy (by nominal gdp). Only the U.S. is bigger.

So it is newsworthy that S & P cut Japan’s sovereign credit rating in January.

And that, as Bloomberg wrote April 2nd:

Japanese National Strategy Minister Yoshito Sengoku said the country should have a greater sense of urgency about the nation’s fiscal situation, comparing it to the plight of Greece. “So far some have been crying wolf, but Greece’s situation isn’t entirely unrelated to Japan’s,” Sengoku said at a news conference in Tokyo today. “At the end of the day, Japan’s situation right now is not that good. There hasn’t been a sense of crisis about this, including from ourselves.”


Sengoku is not the only policy maker to compare Japan with Greece, whose fiscal woes weakened the euro and forced the government to adopt austerity measures as its borrowing costs surged. Bank of Japan board member Seiji Nakamura said in February that Greece’s example shouldn’t be regarded as “a burning house on the other side of the river.”

And AFP reported yesterday:

Greece’s debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation.

Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population.

Based on fiscal 2010’s nominal GDP of 475 trillion yen, Japan’s debt is estimated to reach around 950 trillion yen — or roughly 7.5 million yen per person.

Japan “can’t finance” its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“Japan’s revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010, ” he said. “Its debt to budget ratio is more than 50 percent.”

Without issuing more government bonds, Japan “would go bankrupt by 2011”, he added.


The system of Japanese government bonds being bought by institutions such as the huge Japan Post Bank has been key in enabling Japan to remain buoyant since its stock market crash of 1990.”Japan’s risk of default is low because it has a huge current account surplus, with the backing of private sector savings,” to continue purchasing bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities.

But while Japan’s risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt.

“There is no problem as long as there are flows of money in the bond market,” said Kumano.

“It’s hard to predict when the bond market might collapse, but it would happen when the market judges that Japan’s ability to finance its debt is not sustainable anymore.”

In addition, Japan’s population is declining rapidly, due to a combination of delay in age of childbirth, declining fertility and a society unfavorable to immigration. As Business Week wrote last August:

Japan’s Internal Affairs Ministry published the latest numbers on the country’s declining population on Aug. 11. The data doesn’t make for pleasant reading. In the year through the end of March 2009, the number of births in Japan fell for the first time since 2006 to 1.08 million, while there were 1.13 million deaths. Put together, that adds up to a record decline in the population of 45,914. That bests (if that’s the right word) the previous biggest decline of 29,119 in 2007. Just as worrying, the number of Japanese 65 or older increased to a record 28.21 million out of total population of 127 million. Meanwhile, the current recession—Japan’s GDP may shrink 6% this year—will likely make things worse as couples decide to delay or have fewer children.

Japan Times adds some details:

The population dynamics estimate of the Health, Labor and Welfare Ministry indicates that Japan’s population decline is accelerating. The report, based on birth and death registers submitted from January 2009 to October 2009, estimates the number of births in Japan in that year at 1,069,000, or 22,000 less than in 2008, and the number of deaths in 2009 at 1,144,000, or 2,000 more than in 2008. The death figure is the highest since 1947 and represents the ninth straight yearly increase.

As a result, Japan’s population is estimated to have shrunk by 75,000 last year, 1.46 times the decrease marked in 2008.

Japan’s population will continue to decrease at an accelerating rate, the ministry noted. The number of women able to bear children is on the decline, and the number of deaths among the nation’s graying population will continue to rise.

The National Institute of Population and Social Security Research estimates that Japan’s population will dip below 100 million in 2046, below 90 million in 2055 and down to 44.59 million in 2105. If this trend continues, the labor force and consumer markets will shrink, having a strong impact on the economy.

Here’s a visual representation of forecast Japanese population decline courtesy of Alex Dalmady:

Morever, Japan also has very unfavorable age demographics. As I wrote last October:

The following chart shows that Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:

Chart 2: Old Age Dependency Ratios for Selected Countries



And see this chart from the Statistical Handbook of Japan:

On the other hand, as AFP notes, Japan has some good things going for it, including a large current account surplus, and the fact that Japanese are largely financing their debt themselves:

The system of Japanese government bonds being bought by institutions such as the huge Japan Post Bank has been key in enabling Japan to remain buoyant since its stock market crash of 1990.

“Japan’s risk of default is low because it has a huge current account surplus, with the backing of private sector savings,” to continue purchasing bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities

And, as AFP points out, Greece is part of a currency union with strict exchange rates, while Japan has a fiat currency with flexible exchange rates:

The likes of single-currency Greece and non-eurozone countries are also different in that the latter group have flexible currency exchange rates which are more closely calibrated to their fiscal conditions, [Nomura Securities economist Takehide Kiuchi] said.

The Bank of Japan is also taking radical measures to keep interest rates low, but I don’t think that’s a very helpful approach for the long-term.

Of course, no country can be analyzed in a vacuum. It is – to some extent – a beauty contest, and bondtraders could change horses when they decide that the horse they’ve been backing is a nag.

As Bruce Krasting comments:

Japan sure looks like it is trouble. But some comparisons to the US are more troubling.

From the CIA fact book:

Japan External Debt = $2.13 Trillion

Japan Reserves = ~$1 Trillion

US External Debt = 13.45T

US Reserves = 75b

From this you get the Japanese External Debt/Reserves as 2:1. For every dollar of debt they owe outside the country they have 50 cents in a piggy bank in real reserves.

The US External Debt/Reserves is 180:1. Our reserve coverage ratio is 1/2 cent for every dollar of external debt.

GW makes the case that Japan is broke because they owe 200% debt to GDP. He is right. They are broke. But the real question of solvency come down to “Who do you that debt to?”

Japan’s GDP to external debt is 2:1.

The same ratio for the US is 1:1.

So by this calculation Japan has a much more managable debt load than the US. They owe it largely to themselves. We owe it to non US persons.

Please don’t tell me that the US has the ability to print reserves. That argument is not going to fly in 2010. We have a much bigger problem that does Japan.

And if Exeter is right, then the holders of all nations‘ bonds might get nervous and flee into cash or gold. This would drive many debt-heavy countries into default.

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George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. purple

    Japan is the future; a declining population, swollen public debt and shrinking domestic market. But their hostility to immigration makes matters more urgent.

    1. Thomasina Jefferson

      A naturally shrinking population is good for everyone.
      Nature has its own way of correcting things. You see that at work here. Within 100 years, Japan will be back to population levels of the 1880. Levels that are actually managable, although with a bit higher percentage of elderly.
      In terms of polution and use of natural resources this is a good thing.

  2. Greg

    But Japan isn’t Argentina + MIRV’ed thermonuclear weapon delivery systems.

    So, in the immortal words of Carl Spacker, we got that goin’ for us, which is nice.

  3. Mattay

    All of that effort, and yet you somehow neglected to mention that not only does Japan have a fiat currency with flexible exchange rates whereas Greece has a currency union with strict arbitrary fiscal constraints, but also that many people have been asking whether Japan is “on the ropes” for years, and that Japan has decidedly given the answer – no.

  4. i on the ball patriot

    Everyone is on the rope’s, except for; the wealthy ruling elite, their central bankers, and the politicians they own that control the government’s they bought and paid for with your money. They got the world by the credit balls. Aided by sell out, scum bag voodoo economists, this is the biggest credit ball squeeze in the history of humankind!

    It is have against have not on roids!

    Deception is the strongest political force on the planet.

  5. BenE

    holy crap, it is expected that in 2050, 75% of Japanese adults will be over 65 years old!? Do I read that correctly?

  6. AK

    Japan has systemic problems. America doesn’t need it anymore (and can’t really afford to economically “support” it) and it has no friends in Asia.

    So, Japan has to break up with the U.S. Empire if it wants to survive in the world. To start, it has to expel American military bases one by one as quickly as possible IMHO.

    1. ndk

      Japanese public opinion, from what I’ve read, would agree with you on most of those points. They’re deepening ties with China to the extent they can, but many of my colleagues in Japan are of the opinion that their government is still very much operating at the beck and call of Washington. I don’t think they’ll be free of American rule for a long, long time.

  7. duffolonious

    I agree with Mattay. Japan going down would be scary, but I don’t see them in the front of the line. This is Japan after all – with all that debt financed publicly they might just take a haircut on that debt (Japan is probably the best country in the world equipped to do this, culturally or otherwise).

    As for population and immigration. Immigration does not help a limited island nation. If there is no room (I think Japan is more-or-less at maximum capacity), there is no point. Immigration is deflationary anyways. purple: I see no reason how Japan is helped by immigration (they are better helped by emigration).

    Japan has much more important things worry about: keeping it’s account surplus up, oil imports (peak world oil production), and food imports.

  8. Fair Economist

    BenE, the chart says “ratio” so I think it mean the over 65 group will be 75% of the under 65 adult group, not 75% of all adults.

  9. tagyoureit

    “The US External Debt/Reserves is 180:1. Our reserve coverage ratio is 1/2 cent for every dollar of external debt.”

    A lever that big would make even Archimedes blush!

  10. Dan Duncan

    Bruce Krasting writes:

    “So by this calculation Japan has a much more managable debt load than the US. They owe it largely to themselves. We owe it to non US persons.”

    That statement doesn’t make much sense.

    First off, regardless of the creditor, Japan clearly needs debt to fund its operations…

    If Japan can’t pay back it’s own citizens, what other investor is going to loan it the money? Either way, Japan’s entire way of life is in peril.

    The demographics suggest that Japan’s creditors are not in a position to extend terms. Their working life is just about completed and they need their money back.

    The fact that Japan cannot and will not pay back its very own citizens makes for an extremely volatile and unmanageable situation.

    1. Chicken Little

      I often find life an extremely volatile and unmanageable situation.

      (actually serious this time…)

  11. Greg Johnson

    Did the fed just bail out Greece and Europe at the tune of 480 billion, according to Karl Denninger. Would like to know.

  12. zanon

    Japan has debt denominated in Yen.

    It need never default.

    Ratings Agencies should be fired. They have no idea what they are doing.

    1. Adam

      How did this article get posted on this site. The author obviously doesn’t know a thing about what he/she is talking about!

      The fact that Japan has $1 trillion US dollars in reserves is meaningless. Why in gods name would it spend it to cover debts owed in Yen when printing presses can quite quickly handle that? I mean, its not like a nation mired in deflation is worried about inflation from covering costs associated with printing a fiat currency.

      Reserves have no barring on debt owed in your own currency. They only matter when you have debt owed in another nations currency. It would be important for Japan to have a trillion dollars in US reserves is it owed 2 trillion US DOLLARS to someone, but since it owes Yen they can print all they need (and they don’t care if you don’t like that idea anyhow!!!).

  13. cyberseer

    I used to think that Japan is doomed too, but I did some research and I don’t think so anymore.

    Japan has the highest debt to GDP ratio yes, but it is Japan itself which owns that debt.

    Only 5% of that debt is owned by foreigners.
    The rest is owned by the Japanese government themselves and a large portion is owned by Japanese mega-corporations.

    One thing to know about Japanese politics is that there are 2 main fractions – the ones who the USA put in power after the war and the Meiji Era Zaibatsu who the USA never uprooted, but rather cut them a deal to work for them against the communist explosion in Asia.

    So it appears the pro-Western government’s debt is owned halfway by those Zaibatsu, so in case of a default Meiji era power players will be back in mainstream politics.

    I don’t see Japan going into some kind of financial crisis or collapse or massive poverty.

    Other major economies on the other hand… The USA is collapsing no doubt about it, Europe is totally screwed with the South and UK and East totally imploding and the North cannot bail them all out. China has a terrible bubble and will go bust and into Depression most likely.

    Trade wars between USA and China will empower guess who? Japan, Germany and Russia.

    In addition,
    Japan also has the best and most ue p to date infrastructure in the World. In case of a massive stagnation it will continue providing all the services and the people will continue being able to function.

    Japan is using a highly urbanized model in which having a car is more of a luxury than a necessity, the trains which run on nuclear-derived electricity will continue running.

    This cannot be said about the USA which has an aging, decaying infrastructure and a imbecile suburban model which makes it 100% dependent on gasoline and if the dollar crashes and oil imports are unaffordable the whole of the USA grinds to a halt. Then the suburbs become gulags and cannibalism starts.

    1. Vinny

      “This cannot be said about the USA which has an aging, decaying infrastructure and a imbecile suburban model which makes it 100% dependent on gasoline and if the dollar crashes and oil imports are unaffordable the whole of the USA grinds to a halt. Then the suburbs become gulags and cannibalism starts.”

      Yeah, but the US can always conquer Venezuela and get the oil it needs for free. Few other countries in the world can do that.


  14. rjs

    Life After Japanese – Not breaking news, but I wanted to mention that Japan’s population is shrinking. This is hardly unique in the world, since a number of other countries are also suffering from population decline, mainly in Eastern Europe. What makes Japan different and has demographers all over the world (all 25 of them) drooling in anticipation, is that they were expecting this, and there is really isn’t much Japan can do to avoid a dramatic depopulation in this century on a scale not seen since the bubonic plague ravaged Europe in the 1300s. Here are the projections. It’s a really great graph, so click on it, put it in a big window and take some time to look it over.The estimate is that by the year 2105, the population in Japan will have plunged from its current 127 million to around 45 million. A 65% drop for those keeping score.

    1. Borealis

      After the depopulation of the Black Death Europe had that terrible time called the Renaissance.

      I don’t know why people think a population decline on a crowded island is some nation-breaking catastrophe that can’t possibly be managed. (And yes, the Plague struck hard among those in their working prime.)

      (I also don’t know why people think they can confidentally predict fertility trends generations into the future.)

  15. RobW

    Maybe it’s the paranoid socialist in me speaking, but I can’t help but wonder if bankers talking down Japan’s health and bond agencies threatening to lower it’s rating isn’t some saber-rattling by the powerful against the new government’s promises to move Japan towards a more European-style welfare state.

  16. Cathryn Mataga

    Is the credit rating affected the currency

    Right now, I’d say Japan has
    the advantage of ‘not being China’ who
    has become the main target of US paranoia
    these days. I’m figuring while the sparks
    fly with regard to the China peg, the Yen
    quietly decreases in value. I wouldn’t
    mind seeing a handy 100Y/1$ peg just to
    make the conversion easier during trips
    over there.

  17. scraping_by

    Japan’s economic nationalism has, perhaps, been too successful. By keeping social security payments within the country, they’ll eventually get it back. By keeping debt in the country, they’ll eventually get it back. Their import/export thing is no longer growing in leaps and bounds, but with enough money cycling around in the Japanese economy, within their borders, perhaps it doesn’t need to.

    You’ll note the MSM story only mentions higher social security costs. It doesn’t note the rise in defense spending or the continued subsidies to business.

    The conventional wisdom has been that Japan’s economy has been in the doldrums since the early 1990’s. But perhaps, they’ve simply taken up the Western idea of a steady-state system. Or the Taoist idea of balance. Maybe they’re doing exactly what they want to do, and to heck with the neoliberals.

  18. Vinny

    “So by this calculation Japan has a much more manageable debt load than the US. They owe it largely to themselves. We owe it to non US persons.”

    I fail to see how Japan is in a better position than the US in this regard. Should Japan default on its debt, that would be money clearly lost by the nation. Should the US default on its foreign debt, that would be money clearly gained by the nation.

    Besides, what could possibly those “non US persons” do if the US tells them to take a hike? Are they going to send the Chinese navy to blockade America’s ports?

    America is in the best spot it can possibly be in this regard.


    1. Cathryn Mataga

      I’m not really sure myself how exactly
      Japan’s debt becomes a problem. What is
      to stop them from just rolling it over
      to themselves endlessly at near 0% interest

  19. Yancey Ward

    Well, the aging, non-working Japanese will have to be redeeming all the bonds they bought from the Japanese government. Are the working Japanese able lend even more of their income to accomplish this? Are the working Japanese able to pay more taxes to do true debt reduction?

    I am sorry, I see no good end to this for the Japanese regardless of how much reserves they have or how little of the debt is held outside of Japan. I am guessing a Samarai haircut, just about 1 inch above the brow is coming to all the Japanese that have lent their government money to build non-productive assets.

  20. run75441


    Where does worker productivity stand? Or does it really matter that the population ages as long as productivity increases. They do the same with worker to retiree ratios in the US which are simply untrue.

  21. Paul Tioxon

    Japan has expelled the US military from Okinawa. The military is relocating to Guam. About $20 billion in infrastructure improvements are budgeted. It will include berths for nuke carriers, the marines, NSA, Army, Air Force etc. Land rush is on. I thought I posted this before, but obviously, I am a really minor luminary on this site. Yea, Japan, it is so last week.

  22. KD

    Japan is clearly on the ropes. But those ropes are so thoroughly comfortable that nobody knows where they are!

    1. EmilianoZ

      They won’t dare! If they do, I can assure you that we will find more problems on those shoddy accelerator pedals they’ve been peddling.

  23. PJ

    Japan’s domestic bond buyers have been pension funds who will be net selles not buyers in the future. Japaan will not be able to sell bonds overseas at low interest rates so their debt bomb will blow-up. No Asian nation has “friends” in Asia. India, China, Japan, Indochina etc. have disliked and mistrusted each other for centuries, that will not change for a long time.

  24. Rebecca Wilder

    It looks to me like Bruce is confusing external debt, Treasury debt owed to countries outside of the US, with foreign currency debt, non-dollar denominated Treasury liabilities. As of December 2009, the stock of non-dollar denominated Treasury debt is 8.9% of the total stock (the $14T or so to which he refers, In essence, comparing Gross external debt to FX reserve holdings for the US is meaningless because they don’t require FX reserves to meet obligations! Same for Japan – they issue debt almost exclusively to their household sector in yen partially because the country exports a lot and accumulates FX reserves.

    The Treasury can always print money to satisfy the obligations of its foreign and domestic bond holders alike. I don’t care if China or the City of New York owns the Treasury debt, that’s the beauty of issuing in domestic currency, there is no true binding constraint. If you are Argentina, though, with north of 77% of non-peso denominated liabilities, then there is a real government constraint and FX reserve ratios apply.

    That would be silly for bondbuyers to flee to cash, there’s no return. They’d just see their income dwindle while wage growth is dropping quickly. There is no solvency issue here.

    And Japan’s credit rating didn’t drop – they were put on Negative outlook by one rating agency only (the rating agencies should be ignored anyway). I wouldn’t even get in it with this guy – his argument makes no sense.

    “GW makes the case that Japan is broke because they owe 200% debt to GDP. He is right. They are broke. ”

    Why are they broke? What??? They’re running surpluses in the private sector and the current account – this makes absolutely no sense.


  25. Rodney Scott

    Japan has been in the economic doldrums to put it nicely for decades, and they’re going downhill just as fast as the rest of us.
    72 out of 98 airports are virtually unviable entities.
    Their economy, real-estate and stocks values never really recovered from their Plaza Accord.

    They’re in a big bubble and it’ll only take one prick to burst it ;-)

  26. not your homey

    Japan is doomed to fail. Prices are monstrous. Example: A strawberry costs nearly 1 dollar. Yes, 1 strawberry for 1 dollar. A melon costs 70 dollar. One tuna fish can cost up to 150.000 dollar. Unemployment, suicides and poverty is rising. No wonder government revenues shrink. Not only is Japan doomed to fail; Europe and Russia too and to a lesser extend the U.S.. 400 Mio people in the U.S. is a dream. Where are all these jobs coming from? The U.S. is becoming like Europe. Why work if you can steal? That´s how things work in Europe like centuries. There are already 40 million muslims in the EU. And these are just the official figures. Double game-France, Cocain-Spain, Mafia-Italy, Corrupt-Greece and the overpaid self-loving governments are unable to fight their large coasts against illegal aliens. Greece is already overwhelmed but nobody pays attention. The war in the Middle East and Africa is driving the people west. These are not thousands, not hundreds of thousand – Millions of people! And they all are muslims. This continent will be overthrown in the not so far future. At this time the muslims are not united but when it happens, and it will, the future is bleak. These people are thinking in centuries not quarterly like the U.S.. Since the fall of communism crime rates have shot up. But hey, thats democracy, isnt it?
    The U.S. should pay more attention to the president of Libya. This man is a clairvoyant. The only country´s that will survive the coming tsunami is the Jewish state, the Middle East, Africa and South America. Eventually China but in the long run they are doomed too. Allah will win. Its unavoidable. The Americans should get used to it. Tighten your belts!

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