A Tale of Two countries, Greece and Japan

[larryswedroe]

http://www.cbsnews.com/8301-505123_162-57567904/why-the-u.s-wont-go-the-way-of-greece/

Given the huge budget deficits we are facing so many seem to think that for sure we have been headed on path to be the next Greece in terms of interest rates, and so on. Interesting that no one seems to consider the other example of Japan and what happened to their rates.

Hope you find it of interest
Best wishes
Larry

[Dr. Market]

I agree that no one knows what will happen. There are also unique circumstances in the case of Japan that make comparisons to the U.S. difficult.

A few differences:
1) Japan has had a mostly positive balance of trade over the past 20 years while the U.S. has not
2) The Japanese people hold most of their own debt.
And, 3) While the U.S. population is aging, the age distribution is nowhere near as skewed toward the elderly as Japan

While these factors may not necessarily contribute to where interest rates go for either Japan or the U.S. in the future, they certainly alter the politics of the debt.

[schwarm]

One difference between the US and Greece that is bigger than any difference between the US and Japan is that we control or own currency, Greece does not.

[Karamatsu]

If the point is just that high deficits don't (immediately) lead to rising rates or devaluation, then I guess it is a data point, but for anything beyond that there are many other factors that would need to be taken into account. I don't think Japan's case should in any way serve as a source of comfort for Americans looking at their own fiscal situation. The cultural, historical, financial, and political backgrounds are completely different, and in any case, Japan is in an extremely precarious position right now.

[EDN]

Good article, I agree (we can't forecast this stuff). But I wouldn't go out 10 years in a bond portfolio. 5YRs is more than sufficient.

Eric

[larryswedroe]

Karamatsu

My point was only that there was more than one possible outcome. FWIW, personally I think the Japanese economy is in very serious trouble given their demographics (country imploding) and culture which prevent immigration. It is hard for me to see anything but a very bad outcome for Japan.

Eric
If your talking an AVERAGE maturity of 5 years I don't have an issue.

Best wishes
Larry

[Karamatsu]

It is hard for me to see anything but a very bad outcome for Japan.

I feel the same way, unfortunately, but for some reason it's like we're all deer in the headlights. This NBER paper proposes some future scenarios: Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?. I have to share their sense of a looming train wreck.

[larryswedroe]

Karamatsu
Thanks will read the paper
Here is my take, knowing I can be wrong

1) The Japanese interest payments are now 25% of all revenue
2) That is with interest rate average on debt of close to 0.5%
3) say just make that 2% and 100% of that makes it 100% of revenue goes to just pay interest, nothing left for anything else
4) population imploding, set to collapse and aging population, ratio of worker to retiree awful--you think we have problem?
5)no natural resources and now no nuclear plants
6)Japanese companies see this so they are buying up overseas companies to move their assets offshore
IMO this is what all the issues are related to the fighting with China over "rocks"---the natural resources are there.
This is how wars start---pretty scary scenario

IMO, if I could take a bet and willing to due it would be to short Japanese debt. Some very smart guys I know are doing just that, they know they might be early but they are sure they are right and based on analysis I have seen IMO they are
We'll see.

Larry

[Beat The Street]

If you were making a bet would you short Japanese debt over US debt?

[DaveS]

I just finished reading a fascinating article over at Bloomberg. South Korea has the same demographic problem as Japan, a rapidly aging population with a very low birthrate. The government is actively promoting immigration. It's rational is that the US has avoided the Japanese "lost decade" economy because here we have immigration which avoids the aging population demographic. Young people move here. The Koreans believe that is what has prevented us from heading down the lost decade route and thus want to be like us rather than Japan. My bet is we won't become like either Japan or Greece. Dave

[Jack]

Karamatsu
Thanks will read the paper
Here is my take, knowing I can be wrong

1) The Japanese interest payments are now 25% of all revenue
2) That is with interest rate average on debt of close to 0.5%
3) say just make that 2% and 100% of that makes it 100% of revenue goes to just pay interest, nothing left for anything else
4) population imploding, set to collapse and aging population, ratio of worker to retiree awful--you think we have problem?
5)no natural resources and now no nuclear plants
6)Japanese companies see this so they are buying up overseas companies to move their assets offshore
IMO this is what all the issues are related to the fighting with China over "rocks"---the natural resources are there.
This is how wars start---pretty scary scenario

IMO, if I could take a bet and willing to due it would be to short Japanese debt. Some very smart guys I know are doing just that, they know they might be early but they are sure they are right and based on analysis I have seen IMO they are
We'll see.

Larry

I think you need to check your numbers. Japan's interest payments are running about 13% of revenue, just a little higher than the U.S. Japan's interest burden as a percentage of GDP is just 1%, which is even lower than the U.S, hardly crippling even if interest rates rise. Note that the U.S. interest burden was more than four times as high through the 80s and 90s and survived just fine. Further, the Bank of Japan owns about 10% of the debt and refunds the interest to the treasury.

Your numbers might be distorted by the recession of 2008-2009 which temporarily lowered tax revenues.

An aging and declining population means less crowding, cheaper housing, higher employment and higher wages for the young. Even with an aging population, rising productivity means a higher GDP per capita and higher living standards. What's not to like about that?

[larryswedroe]

Beat the street
Definitely Japan, but I don't have to bet and I don't bet

Dave,
completely agree

Jack
I did not check the numbers, they came from a presentation I attended (unfortunately the presenter would not hand out a copy) recently and IMO he is not only well connected (talks to top US economists and government officials but also Japanese, he recently met with them) but his analysis was excellent. I don't know whose numbers are correct, but I would trust his.

Larry

[Grt2bOutdoors]

Karamatsu

My point was only that there was more than one possible outcome. FWIW, personally I think the Japanese economy is in very serious trouble given their demographics (country imploding) and culture which prevent immigration. It is hard for me to see anything but a very bad outcome for Japan.

Eric
If your talking an AVERAGE maturity of 5 years I don't have an issue.

Best wishes
Larry

What is your opinion of the U.S., given the persistent unemployement and low level of interest rates. The WSJ had an article in it's weekend edition about 2 weeks ago that spoke about the declining fertility rate in the U.S., we are still higher than some Western European countries but if the trend continues we may finds ourselves in a similar boat with them and Japan - bloated costs, slow/no growth, high unemployment, etc.

[Grt2bOutdoors]

Beat the street
Definitely Japan, but I don't have to bet and I don't bet

Larry

I take it you will not be buying the new Vanguard International Bond fund then? I hear 23% of the weighing is in Japanese fixed income.

[Cut-Throat]

I read an article about 5 years ago that countries would be 'Competing' for immigrants.

This explains how this is sooner rather than later!

[NYBoglehead]

[Political and economic policy comments removed by admin LadyGeek]

[Grt2bOutdoors]

[Political and economic policy comments removed by admin LadyGeek]

Before you can have families caring for aging parents you have to address the 2 income trap, taxation issues and low wages.

[NYBoglehead]

[Political and economic policy comments removed by admin LadyGeek]

Before you can have families caring for aging parents you have to address the 2 income trap, taxation issues and low wages.

Agree 100%. There are definitely multiple issues that need to be addressed before we can adequately solve our problems.

[larryswedroe]

grt2boutdoors
too big an issue to discuss here but short answer
IMO we are much more dynamic society, in nowhere near as bad a shape and our problems IMO are easily fixed/addressed. We know the solutions. Now that doesn't mean we will fix them but the American people eventually tend to figure it out.

Best wishes
Larry

[Alex Frakt]

Political and economic policy discussions are off topic on this site.