The thing about Japan is that it may have high debts – very high debts actually – but it has lots of savings too.
It’s classic stuff. Households saved rather a lot. This meant lack of demand across the economy, and the economy played with recession for nigh on two decades. But you might ask: where did all those savings go? Why they went into government bonds – or a lot of them did. Therefore, goes the argument, does it not make sense for Japan’s government to borrow this money which its people are so keen to lend to it, and spend it on their behalf?
This is what has happened. Some say it hasn’t happened enough, that Japan’s government has been too slow to borrow and spend this money, but even so, Japan’s public debt right now is around 250 per cent of GDP. That’s rather a lot.
Its new Prime Minister, Shinzo Abe (to be precise he is sort of new, for Mr Abe has been Prime Minister before), has ideas.
He wants to see Japan’s central bank print a lot more money. It has engaged in QE in the past, but this time he wants to see QE big time, and has pretty such said to the country’s independent central bank: ’You’d better independently decide to agree with me, or you might lose your independence’.
He also wants to see a lot more fiscal stimulus and as an aside (it’s an important aside, but not relevant to this article) wants to ditch Japan’s pacifist constitution and play hardball with China. (As another irrelevant but important aside, that worries some people.)
There are snags.
Snag number one is that Japan still has lots of zombies, and could well benefit from some creative destruction. (As a kind of aside of an aside: have you seen the drubbing experienced by Japan’s consumer electronics industry at the hands of Apple, Samsung and co?)
There is another snag. And that is savings.
For alas Japan’s households are not saving like they used to. Its saving ratio is now down to 2 per cent; why it’s higher than that in the UK. Some fear that as more of Japan’s public debt is funded externally, interest rates will rise.
So what happens if Japan’s households stop saving, but public debt keeps rising? Oh and what happens if Japans’ population shrinks at the same time? Let’s put it this way – if Japan’s population shrinks, GDP per capita stays put and public debt does not fall, then Japan‘s public debt to GDP per capita will start looking pretty scary.
There is another point. Japan’s demographics are like those in the West, but just further advanced.
At stage one, many Japanese looked at their forthcoming retirement and said: ’Cripes, I need to save more’. So they did, hence the rise in Japan’s saving.
The West, including the UK, is at that stage now.
But Japan may have passed to stage two. Now big chunks of its population are no longer worrying about how they will fund their retirement because they are retired. This means they are now drawing down savings, hence the fall in savings ratios.
In the UK the baby boomers are just beginning to retire. The process of their retirement will last around 20 years. If you want to know what that means for the economy, look at Japan.
©2012 Investment and Business News.
Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here
The Money Spy 