The odds are against it, and most market prices are performing well, noting that the yen hit 160 to the dollar. More importantly, Japanese stocks have rebounded over the past two years, at the same time as the yen was weakening. This is a sign that this is a necessary adjustment, rather than an impending collapse. Noah has a good article on the whole subject. Here are some related observations:
1. When it comes to a mature, functioning economy, don’t bet on a financial crisis. Such crises are exceptions. Furthermore, financial crises, by their very nature, are almost impossible to predict in economies with functioning financial markets. If the prediction was correct, the crisis would already be here.
2. That said, crises happen and economies can have hidden sources of leverage. The Asian financial crisis of the 1990s was not obvious in advance, and throughout South Korea it was greatly affected. long-term budgetary situation, due to growing export potential. So talking about it is not a waste of time.
3. The real question is what Japan will do with all of its public debt, combined with a shrinking population. Note that the debt/GDP ratio is sometimes estimated at 260%, even if a large part (half?) is held by the Bank of Japan. That said, I’m not sure the relevance of the debt held by the BoJ should be dismissed. entirely. This still means the Bank is less creditworthy and debt monetization/money printing is an automatic way to overcome this dilemma which I discuss in point 4. Institutional barriers are still important somewhat.
4. Japanese short-term interest rates are very close to zero again. This makes it difficult to inflate debt through an asset swap, as the “new money” might simply be saved and turn out to be useless. It is true that the Japanese central bank could attempt to credibly promise to continue inflating real paper money until price inflation increases. But this type of inflation is difficult to predict and control, so perhaps such a promise would be a) implausible and b) misguided. “We’re going to print money (literally, not metaphorically) until price inflation exceeds double digits!” » doesn’t do wonders for a country’s credibility, fiscal or otherwise.
4b. It is difficult to raise real interest rates because the government’s long-term fiscal situation is very difficult.
5. Japan as a whole has a very strong external position and portfolio of foreign assets. However, it remains an open question to what extent all this can help Japan solve its long-term solvency problem. Will the Japanese Treasury Start Confiscating the Toyota Plant in Kentucky?
In this regard, I am a little less optimistic than most optimists. A falling yen redistributes wealth to Japanese consumers who buy imported food (directly) and energy (indirectly), as well as to Japanese multinational corporations holding dollars. But to what extent does a one-time increase in “corporate equity solvency” protect against unsustainable long-term growth? I wouldn’t bet the house on that one.
6. Likewise, I’m not as impressed with the strength of the Bank of Japan’s dollar holdings. In times of currency crisis, these reserves can be quickly depleted, as South Korea demonstrated just before the Asian financial crisis of the 1990s. Let’s say your total public debt is approximately $9 trillion, and the BOJ holds a trillion dollars in dollars. It’s a good cushion, but it won’t save the situation, especially since Japanese public debt will continue to accumulate due to unfavorable demographics.
7. If we think about the political economy of the status quo, the situation is a little worse than we think. Inducing “austerity” through changes in the exchange rate means that the redistribution of citizens goes to Japanese companies, rather than to state coffers, to repay or repay the debt. This makes tax increases later that much more difficult. You might now have preferred direct government austerity instead of the exchange rate adjustment. How effective is the following political message? : “We know you’ve been hit by rising prices for energy and imported food, but don’t worry, we’ll take care of everything with a big tax hike. »
8. Ultimately, do markets believe the Japanese government could overcome a large tax hike? With the tax levy currently at around 34% of GDP, well below Western European levels, I would still say yes. And if markets believe such a tax hike is possible, it may not be necessary anytime soon. This is one of the main reasons I would bet against a financial crisis here.
9. The real unknown may be China and the risk of contagion, regardless of which direction it spreads. Who really knows what is happening in the Chinese economy right now? Certainly not. It would, however, be a nightmare scenario if the world’s second and third largest economies simultaneously experience major financial difficulties, including capital flight.
