Like most Americans, we’re happiest when others suffer with us.
Consider the downtrodden Japanese.
From the late 1970s through the mid-1990s, Japan, Inc. seemed unstoppable. The signs of Japanese prosperity were all around us.
Every VCR, stereo or T.V. seemed to be a Sony. Toyota and Honda were kings of the road. Skylines from Chicago and Atlanta to L.A. and New York were owned by massive Japanese financial concerns.
Even Bruce Willis acquired big-screen fame with 1988’s “Die Hard,” when he single-handedly whipped a band of international baddies at the fictional Nakatomi Plaza.
At one point, Japanese even began lecturing us about our out-of-control debt and inability to save. If we didn’t get our act together, they threatened, we would be sent to bed without our supper. In other words, they would stop financing our debt.
Then the bubble burst.
The Slipperiest Slope
With sudden swiftness, the Japanese economy slipped into a dark economic malaise that lasted for nearly 13 years. Japanese economic historians refer to it as the Lost Decade.
Kabukicho is a famed Tokyo entertainment and bar district. Since the post-war boom, it has been filled with nightclubs, hostess bars and love hotels.
Stepping off the train at Shinjuku Station, you are assaulted with a neon circus that makes Times Square or the Las Vegas Strip look like a candlelight procession. From sundown until the last trains leave the platform at midnight, the streets are jammed with revelers heading from one glitzy night spot to the next.
Until the bubble burst, unemployment was virtually unknown in post-war Japan. The legendary expense accounts of Japanese executives seemed limitless.
When times were good, rounds of sake and Suntory whisky seemed to flow like water from an endless spring.
Record government spending, interest rates that kept the cost of borrowing near zero, and sweeping banking reforms helped breathe life back into the Japanese economy. During the past five years, Japan’s economy appeared to have regained its footing. The deflation that had plagued the Japanese economy seemed to have been defeated.
Despite the rise of China as a force to be reckoned with, the sake cups in Kabukicho were filling to the rim again.
Then the Great Recession of 2008-2009 hit.
Although the Japanese banks were not at the epicenter of the financial crisis, five years of economic progress were wiped out. With the U.S. economy in the gutter, Japanese exports collapsed.
By Far the Greatest Debt Load
Japanese deflation is back in full force, eroding profits and wages. Industrial production levels are 20 percent lower than a year ago, and unemployment is a whopping 5.3 percent. To an economy that has rarely experienced a modicum of joblessness, this figure is astronomical.
The Japanese yen looks poised for its biggest tumble since 2005. Japan’s unprecedented debt, near-zero benchmark interest rate, a ballooning budget deficit, sinking savings rates and the worst postwar recession all are aligned against the yen.
The dreadful state of the Japanese economy is also reflected in the price of insuring its debt.
As the newly elected Japanese government plans record stimulus spending and borrowing, the price of hedging against losses on $10 million of the country’s bonds with credit-default swaps soared this month to as much as $76,160 a year from $37,000 in August. This rise in debt protection costs contrasts with that of the United States where spreads on credit swaps have fallen to their lowest level in a year.
In simpler terms, with Japanese tax revenues quickly sinking, investors believe the Japanese economy is remarkably more at risk than our own.
Since 2007, option traders in the currency market have been uniformly bullish about the Japanese yen. The yen has outperformed all 171 other currencies tracked by Bloomberg over the past two years, appreciating 24 percent, to 89.23 per dollar today. The currency is up 12.9 percent from a five-month low on April 6, and it has gained 1.3 percent this year.
Looking strictly at the momentum of short positions building up against the yen, all of these gains may rapidly evaporate. Now a growing majority of currency strategists are forecasting a 10 percent drop in the value of the yen, the steepest decline in four years. Goldman Sachs is predicting the Japanese currency to fall nearly 15 percent from its current perch, at 89.23 yen to the dollar, all the way to 105. (The higher exchange rate reflects a weaker yen.)
The Japanese economy may get far worse before it gets better.
For the quarter ending Sept. 30, outstanding government loans and bonds totaled a record 864.9 trillion yen ($9.6 trillion), making Japan the world’s most indebted nation. That’s 181 percent of gross national product, up from 94 percent a decade earlier.
Japan’s debt load is by far the greatest of any industrialized nation. Among the 30 countries that make up the Organization for Economic Cooperation and Development (OECD) the debt ratio averages 79 percent of GDP. The U.S. has about $7 trillion of marketable debt outstanding, approximately 50 percent of its GDP.
Although no one really expects Japan’s export-driven economy to default on its debt, the sake cups in Kabukicho are likely to remain half empty for the foreseeable future.
Now doesn’t that make you feel a little better?
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
