Forget Europe and the US, start worrying about Japan

November 19, 2012, 5:47 pm Michael Pascoe Yahoo7

It has long amazed me how little notice we take of Japan’s simply unsustainable budget, dysfunctional politics and appalling demographics.

If you think Greece has debt problems, you should try Japan. Worried about Washington’s fiscal cliff? Check out Tokyo’s. Think American politics are bad? You won’t believe Japan’s.

And our second-biggest trading partner is showing signs that it will take a dangerous turn to the right at the elections that have been called for December 16.

It has long amazed me how little notice we take of Japan’s simply unsustainable budget, dysfunctional politics and appalling demographics while whipping up a frenzy about European debt and the American Tea Party. I suspect it is further proof of how little notice we take of our most important neighbours despite the rhetoric of the Asian century.

The election might well focus a little more attention on the steadily-building disaster.

Japan’s public debt is running at 230 per cent to its gross domestic product, a figure that makes Greece look almost thrifty. According to Bloomberg, Japan’s debt works out at about $93,000 for every man, woman and child while the same figure for the US and Greece is about $33,000. Tokyo budgets to borrow more than it raises in taxes.

About a quarter of Japan’s population is already aged 65-plus and the country has a negative birth rate. With a xenophobic culture, there is virtually no migration, meaning the country is about to start shrinking quiet dramatically. There will be some 25 per cent fewer Japanese by 2050 than there are today – about 30 million fewer people, depending on which estimates you want to use. The dependency ratio – the proportion of working-age people to the those not of working age – has already crashed to just 2.4, which makes raising taxes to pay for an aging nation all the harder.

And now a change of government next month might well make things worse. The present Prime Minister, Yoshihiko Noda, of the Democratic Party, at least managed to increase Japan’s consumption tax this year in an effort to start to rein in the deficit nightmare, but he’s expected to lose power to the Liberal Democratic Party with its recycled and unimpressive leader, Shinzo Abe. Abe says he wants the Bank of Japan to further crank up the printing presses, among other things.

And the LDP is seen as taking a turn further to the right at a time relations with China are already strained.

Can it get worse? Yes – two nationalistic minority parties are merging to form what could become a powerful ginger group. You can glean something of the flavour of the two by their names – the Tokyo-based Sunrise Party and Osaka’s Japan Restoration Party. The merged entity will be known by the latter name, led by Osaka’s popular major, Toru Hashimoto, along with the former Tokyo governor, Shintaro Ishihara.

It has long been a mystery to me how a country that can produce so many world-class companies and is populated by such polite and law-abiding people somehow has such appalling inept, compromised and corrupt major political parties.

The big danger is that one day, the trusting Japanese population of aging savers will suddenly realise how unsustainable Japan’s public finances are and make a rush for the exit. It’s called capital flight.

Why anyone would want to hold Japanese bonds yields yielding almost nothing is beyond me. Throw in the inevitability of the Japanese bond bubble at some stage popping and it’s no wonder why the Japanese appetite for Australian bonds grows apace.

Japan is a delightful place to visit, but I wouldn’t want my money to stay there.

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