Powerpoint presentation: “Japan Past the Point of No Return”


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Hi Blog.  Here’s an eye-opening presentation, done by a person who knows a helluva lot more about financial particulars than I do.  Food for thought.  Courtesy of MMT.  Arudou Debito in Sapporo

Japan – Past the Point of No Return – By Vitaliy Katsenelson


18 comments on “Powerpoint presentation: “Japan Past the Point of No Return”

  • This is an interesting presentation and not the first variation I have seen. This presentation does however lay out the situation very well. I believe it is 3 years old (if you look at the last slide) and since China has surpassed Japan as the largest holder of U.S. treasuries.

    What does the date have to do with anything? In my opinion the situation in Japan is now much worse than he has projected. Even the PM now is very openly talking about a Japanese default on debt (which is amazing coming from a Japanese PM and sounds like a sort of nemawashi toward the Japanese public). Furthermore the global situation is also much more fragile with most nations in the same boat (nearly all of Europe) and the U.S.

    I think the true disaster is shown in slide 7 and 8, the public is depleting their savings and I do not think the younger generation has the ability to sacrafice that past generations have had. What happens when Japan’s population spend through their savings? Then page 12 shows the implications for the U.S. and actually the world economy. Although Japan is no longer the highest holder of treasuries (first is the US public, second China, and third Japan). If Japan starts to liquidate treasuries the dollar will spiral and a global depression will likely ensue.

    The future for Japan economically is bleak. Higher taxes are certainly going to be in order and will likely reach the point of being oppressive. One can almost imagine Japan and China reversing roles in Asia, with China being the dominant force and Japan becoming a source of cheap labor.

    Of course this type of presentation can be used to legitimize more lax immigration laws but I do not think any type of immigration reform would reverse this course lacking a global economic miracle. The situation is just too far out of hand.

    Unfortunately, the U.S., which in the past was infamous for trying to tell Japan what to do, is actually following the same path as Japan. Our present administration has spent more than all previous administrations in U.S. history and is leading the U.S. population down the path to debt enslavement. The present spending will likely devastate the U.S. economy, which will in turn further exasparate the situation in Japan.

    A chilling and eye opening presentation for sure, but it does not only relate to Japan but the rest of the world as well.

    Of course Japan needs immigration; it will help the situation but definitely not solve Japan’s ills.

    Furthermore it appears the Japanese public would rather live a life of enslavement, serving the country’s debt rather than accept more foreigners or the population has been too dumbed down with anime, sports, silly TV shows and other distractions to even notice what is happening.

    A very good and thought provoking presentation.

  • What this means is what? There will either be higher taxes or inflation in the future.

    Ninety-six percent of the debt is held either by other branches of the government or by the Japanese public. So the risk of default versus outside parties is very small.

    If Japan runs at 3% or 4% inflation over 10 years, most of this debt would be whittled down. I expect to see that, plus a tax increase.

    It just means don’t hold yen if you can avoid it–unless it’s something that will adjust for inflation (like kokumin nenkin).

  • I am a bit perplexed as to why something like this is not published in Japanese. Japanese people need to know this information en mass. I can jump ship any time and actually prefer my home country but the Japanese, native or naturalized are here to stay forever. I do not understand why people are not interested in the future of their country.

    On any given day you will hear more people saying that they have no choice but to live overseas because Japan will crumble than people who are saying that Japanese need to get together and change their country for the better.

    Debito, are you afraid of publishing this blog in Japanese out of fear towards the Japanese right wing? I am fairly sure that everyone is wondering what the deal is. I would probably post here even more if everything was in Japanese. It gets old typing comments to people who ultimately agree with you, and by the looks of Japanese blogs that quote your articles and these comments and subsequently translate them in Japanese, there are a lot of misconceptions on the Japanese side pertaining the your writings.

    Anyways, I hope you have a pension when you retire debito. lords knows I probably won’t be here to pay it to you.

  • This is all something most who watch the global economy have been aware of for a while.
    At one time Japan was unique in it’s debt to GDP ratio, but I thought as in many things it
    was just ahead of the curve. And this appears correct now:


    See “Graph 4 Public debt/GDP projections” on Page 9.

    Japan is in good company. Or put another way, the solution to this will have to be global
    even though Japan may get to figure it out first.

    Oh, and Hoofin is just wrong… he missed the part where Japanese savings rate no longer
    will support internal borrowing. And the part where BoJ would have loved to have any
    meaningful inflation for the past 20 years. If he has a recipe for inflation (other than
    QE, which isn’t working), someone needs to buy him a plane ticket to the G20 meeting.

    The only thing that kicks the can down the road right now is the fact that Japan has it’s
    own currency. Unlike the EU countries. Soon enough, everybody will come to the same
    place, however.

  • GiantPanda says:

    This is chilling and depressing reading!

    The image one gets is that the senior members of society are becoming a crushing burden, which is actually depriving the younger members of society of the resources and the will to reproduce. They get paid more salary and bonuses, spending on healthcare for seniors is much much more than is ever spent on children and babies, and they are sucking the life out of the pension system, which is all coming from the sweat of generation X & Y.

    Ironically, this is the same generation that made Japan great, and it may be the same generation that drags it down…

  • Jeff @6 says:

    Oh, and Hoofin is just wrong… he missed the part where Japanese savings rate no longer will support internal borrowing. And the part where BoJ would have loved to have any meaningful inflation for the past 20 years. If he has a recipe for inflation (other than
    QE, which isn’t working), someone needs to buy him a plane ticket to the G20 meeting.

    Well, I am not sure where I am ‘wrong’. From what I remember from my economics days Total Domestic Output (GDP) = Consumption + Government + Investment + Net Exports.

    This is usually written as Y = C + G + I + NX (NX = X-M, with X as exports and M as imports.)

    Additionally, Y = C + S + T (Y equals consumption plus savings plus taxes.)

    So, two things: you notice that “C” cancels, and that G relates to T, and S relates to I. (Taxes cover government spending if savings equals investment. Let’s leave net exports out.) If government does not raise enough taxes, then it is compelled to borrow from the savings pool. Or the central bank can always inflate the money supply, which this model doesn’t easily show.

    You are saying that there won’t be enough savings to cover the “G”. And so, I am saying, yes, that’s why the Japanese government will have to raise taxes–probably by enough to bring the full government budget into balance. (This would be the budget for current spending, plus the budget for interest payments.)

    But additionally, if there is an inflation, this will reduce the amount of government debt outstanding. Because the people will be getting paid in yen that is worth marginally less in each additional year.

    Remember, the gross DEBT is something like 200% of GDP. But the interest payments on this are only something like 4% of GDP (four yen out of every 100 yen of government spending.) And at least half that big 200% number is held by other government entities. The net is something like 80%-100%.

    You say, I must have some special magic to cause inflation that no one else knows about. But in fact, the current U.S. central bank chairman, Ben Bernanke, made a speech in 2003 to the effect that a central bank operating with a fiat currency (a currency that is really just a powerfully-backed piece of paper) can always create inflation–if even just by dumping currency notes out of a helicopter. This is why he is sometimes called “Helicopter Ben”.

    The game that has been going on is that the Bank of Japan has been trying to go for inflation of 0%, when it’s clear that in a deflationary environment, you set the target for a higher number, like 2% or 3%. Yes, of course, it would make it harder for the Japanese government to get a low rate of interest–but if taxes are being raised the government doesn’t have to borrow as much anyway. The losers are the bondholders, who probably get the value of their coupon inflated away.

    Why you don’t see the problem getting fixed is for the same reason you NEVER see problems getting fixed around Japan. It’s a game of egos among powerful people, and the unwillingness of vested interests to compromise for fear of “losing face”.

    This is why problems so often go on and on here.

  • I agree with Jerry.

    Hoofin brings out the classic macroeconomic justification for the problem Japan faces. Y = C + G + I + (X-M). And because S – I = X – M, Japan will always have excess savings as long as it runs a current account surplus. At least, that’s what the accounting identity says on paper. What it overlooks is that the savings rate is falling, and that Japan’s export-led economy and current account surplus only exist because of profligate consumption elsewhere in the world that probably won’t last much longer with the slowing global economy. But even if we ignored those concerns:

    The government, we’re told, can always tax its citizens to correct the fiscal imbalance.

    Were that life so simple. In the real world, when you start raising taxes you start to effect consumption patterns, too. And because consumption, C, also effects economic growth, Y, it tends to make matters worse, not better. Consumers tend to buy less when their disposable incomes (gross income – taxes) fall. Businesses are forced to cut back on supply. Intermediary and primary goods suppliers suffer. Cost-cutting is required, thus sometimes throwing people out of work, etc. As the economy contracts, so do the tax revenues. In short, the fiscal imbalance never *really* gets corrected. Just ask the Hashimoto Cabinet when it tried to raise the consumption tax in 1997-98. Japan ended up issuing more bonds because tax revenues ironically fell when they raised the tax rate!

    Japan just keeps issuing more debt to cover its burgeoning expenditures of an aging society that is incapable of jump-starting its own economy. This is an extremely serious problem. Sooner or later, the bond market will demand higher interest rates.

    If the mutual funds and pension funds, who buy many of the government bonds, stop believing that the government can cover its positions, or if they start cashing out their funds for their own retirements, the conventional wisdom then tells us that the Bank of Japan (BOJ) will become the buyer of last resort. In theory, if the BOJ starts buying bonds like wildfire we’ll be threatened with long-term inflationary risks from all the created money pumped into the economy that supposedly will drive up the aggregate price level. Then, we’re told, that inflation will lower the real cost of debt; real interest rates (nominal interest rates – inflation) will fall; consumption will become cheaper relative to future spending; Japanese exports will boom because the yen will depreciate; and rising asset prices will create a “wealth effect.” Once again, we’re all saved and Japan’s debt problem goes away and the economy will recover.

    First assumption: an independent BOJ will cooperate suddenly with the government. Second assumption: people will suddenly borrow a lot more just because more funds are made available in banks. Neither has happened so far, so why do some people *still* assume it will happen in the future if it hasn’t happened in the past?

    Inflation will only occur if demand exceeds supply. And increased demand for goods and services can only take place if “animal spirits” exist and people want to spend now rather than later. All the talk about setting an inflation target and a BOJ printing more money assumes that people will respond favorably to it. Will they? Where’s the evidence to suggest it will happen?

  • Gary, but the problem is, have the Japanese really tried to do any of this?

    There was only a brief period of QE during the Koizumi Government. Once it looked like things had moved to a non-deflationary (non-inflationary) stance, the QE ended. (QE is quantitative easing, by the way, for anyone wondering if it has to do with Queen Elizabeth. It’s the idea that the central bank will make sure the money is available to any and all who want to borrow, for however much they want to.)

    QE in a prospective deflationary environment is useless. This is why, when the Japanese shut it off around 2006, everything began to move back into pre-QE mode.

    The ultimate maneuver in QE is when the government is that borrower who wants to borrow however much it wants. The central bank already buys JGBs on the open market. There is no saying that it can’t buy more, except that the people running the Bank of Japan want to maintain inflation at 0%, not 2% or 3%. And the Japanese government itself has been afraid of interest costs rising in the absence of an offsetting inflation.

    That is why, to me, the Japanese have just been kicking the ball downfield for the last 15 to 20 years. They can always inflate—just start handing out an extra 100,000 yen in preprinted 10,000 yen notes to every adult resident of the country, every year. The problem is, they’re afraid they’ll set off an inflation they can’t control.

    I am not a believer that tax hikes choke off growth. I think that’s just what people who don’t want high taxes say to scare everybody else. The taxed money goes right back out into consumption—when the government spends it, where do you think it goes? Someone will say, “it’s wasted”, but the fact is it ends up in someone else’s (non-governmental) pocket. Is it wasted then, when that person spends it? No, it isn’t, right? Because that’s by definition “private” spending. And so it goes right down the multiplier of the consumption function. (The consumption function is the idea that money being spent becomes mostly someone else’s money to spend, less what they save. In the end, one dollar of spending might pass through the economy eight or nine times.)

    The idea that “immigration” is going to solve this is a little silly. When the immigrants show up, how are they going to get paid? With money that the Japanese would be spending internally anyway. So what magic will bringing in other people do, unless they come here with a lot of their own money? I am all for civil rights, I just want to know what immigration will do to solve it.

    The Japanese can keep borrowing from each other, and shrinking their population and economy, until it’s down to two people. One can be the bureaucrat and creditor who goes “moshiwake gozaimasen” to every request, and the other the debtor “public” who refuses to pay any taxes (“Moshiwake gozaimasen” back, I suppose.) In which case, the Japanese public debt will have no significance.

    (If this happens, the people worrying about the future better hope the two are a Noah and the Ark pair by the way . . . )

  • The author is going for shock value and deliberately making assumptions to aggrandize people.
    “If interest rates double, interest payments will go to 55% of tax revenues!”
    If interest rates double, interest payments on NEW BONDS will go up. Not all bonds instantaneously. If interest rates double, the Japanese government will be under enormous pressure to stop borrowing under new bonds. They will adjust spending. Also, if the yen gets hammered, these interest rates won’t look so bad; in fact, it would mean that the amount Japan has to repay to borrowers goes down.

    There is a lot of crazy talk in this presentation, which diminishes from the extent to which I can take it seriously. You all should stop believing everything you read on the Internet.

    — We don’t. That’s why we’re discussing it.

  • I think Gary lays out the situation the way I see it very well.

    For Hoofin (and BTW, sorry, I didn’t intend to make my original a snark or sound personal).

    “Or the central bank can always inflate the money supply…”

    Default by any other name… IMHO, this is where it goes if you can print your own currency.
    …and eventually, the government changes after kicking the can a little farther down the road…

    “You are saying that there won’t be enough savings to cover the “G”. And so, I am saying, yes, that’s why the Japanese government will have to raise taxes–probably by enough to bring the full government budget into balance.”

    That is what I’m saying, and I agree with Gary, a T increase that big kills the economy. GoJ will not do it.
    IMHO, this is where it goes if you don’t have your own currency
    …and rapidly, the government changes, so governments print money instead if they can…

    But you can’t ignore NX either. Everyone is looking for an export lead “recovery”. For Japan, net
    exports have been a large part of the economy, this is not new. Where is this demand going to
    come from, enough to repair budgets everywhere, when everyone is looking to be a net exporter?

    Default: it’s not just for “profligate” South American Dictatorships anymore!

  • crustpunker says:

    Does anyone else not think it strange that a country that went from feudalism to industrialism in under 50 years now finds itself unable to change in the slightest? What is the deal with that?

  • Mark Hunter says:

    Crustpunker. Japan is still a very hierarchical country. Those that have power, want to keep it. This means greasing an awful lot of palms along the way. As long as there is cash enough to buy votes through public ‘works’ projects, to keep the yakuza and their construction cronies happy, to keep basic services running like education and health, there is very little incentive to change. It’s the old adage, if you put a frog in a pot of water and turn on the heat, it won’t jump out. Throw a frog in a boiling pot of water and it will immediately jump out. Japan in the former.

  • Here is an interesting article. Although it’s written from a US/UK/EU perspective, I think that a lot of the points can apply to Japan.

    1) A lot of right wing politicians use the debt scare to destroy public programs.
    2) Printing money is not always a bad thing.
    3) Low inflation or deflation is better for rich people than it is for regular people.

    “The financial sector, which controls the money supply and can easily capture the media, cajoles the populace into compliance by selling its agenda as a “balanced budget,” “fiscal responsibility,” and saving future generations from a massive debt burden by suffering austerity measures now.  Bill Mitchell, Professor of Economics at the University of New Castle in Australia, calls this “deficit terrorism.”  Bank-created debt becomes more important than schools, medical care or infrastructure.  Rather than “providing for the general welfare,” the purpose of government becomes to maintain the value of the investments of the government’s creditors.”


    I think the GoJ needs to be careful it doesn’t fall into the “giant corporations are more important than regular people” trap while still bringing its spending under control.

  • “If interest rates double, the Japanese government will be under enormous pressure to stop borrowing under new bonds. They will adjust spending.”

    Bob, sorry to say: that’s highly unlikely. Politicians love to talk about cutting spending (but notice how it’s always someone else’s program, never theirs). The minute politicians start looking at the budget, voters complain. The DPJ has NOT been very successful at significantly cutting costs to finance their own pet projects, let alone correcting the primary balance (i.e., expenditures, excluding interest payments and debt servicing, covered by tax revenues only and not more bonds).

    Koizumi tried to put a 30 trillion yen cap on further debt financing in 2002. He failed.


    Politicians have made similar promises thereafter. They also failed to live up to them.

    Part of the problem is that tax revenues keep falling. In 2010, the government has an estimated 37 trillion yen in tax revenues versus 92 trillion yen in government spending. What are they supposed to cut?

    Take a look at slide 7 on the Ministry of Finance’s budget breakdown:


    There’s “Local Allocation Tax Grants, etc.” The government is forced to give these monies to local governments. That’s 19 percent, or 17.5 trillion yen right there. Now we’re down to 19.8 trillion yen in tax revenues to work with.

    Then there’s social security. Good luck trying to cut that. That’s another 30 percent, or 27.6 trillion yen. Voters won’t stand for anyone messing with social security. Now the government is in the red and they haven’t even completely covered social security costs like medical and health-care expenses, let alone education, science, national defense, research and development, energy, etc. Achieving a primary balance on the national budget is virtually impossible without a lot of pain. No government that wants to stay in office will ever risk cutting the budget to such an extent. No voter will ever stand for it.

    And that’s just the primary balance. The truly scary thing is the debt servicing.

    22.4 percent of the national budget is debt servicing. That includes both the interest payments on debt and the eventual bond servicing. 22.4 percent of 92.3 trillion national budget is another 20.5 trillion yen. What is the government going to do? What are they going to cut? Defense? Good luck trying to make that argument. I thought people wanted the American military out of Okinawa. How can the Americans leave if Japan starts cutting their defense budget? Incidentally, defense is only about 5 percent of the budget anyway so even if the GOJ were to cut it, it won’t correct the problem.

    This is an extremely serious problem. Cost-cutting ain’t gonna fix it, I think.

    (P.S. Apologies to Jeff. I accidentally wrote “Jerry” before.)

  • Mark in Yayoi says:

    Meat67, I see a few problems in that article. First, I disagree that inflation is less of a problem for non-rich people. Regular people earn salaries and save cash (and have to negotiate for raises), whereas richer people have more opportunities to store their wealth in stock and real estate, which protect against inflation — Taro Q. Salaryman’s small nest egg in the bank will see its value stripped away if the government doesn’t protect the value of its currency. He’d be ruined if hyperinflation or even non-hyper high inflation came about, but the moneyed class, who own buildings and physical assets, wouldn’t. Inflation is the same thing as a default on debt; it’s just done a few percentage points at a time and without fanfare. A stable currency is essential for hard-working poorer people who want to save money and secure their futures.

    Increased taxes would be better than inflation, because (1) taxes only affect money earned or spent now, and not savings from previous years, and (2) as Hoofin has said earlier, the taxes cover things that the government would have gone into debt to spend money on anyway.

    As for the immediate elderly pension problem, rather than force today’s workers to pay huge taxes on their consumption, I think the government simply has to cut the pension payments being made to all these retiring baby boomers, and they need to make the retirement age for women significantly higher.

    These graphs (by the US Census Bureau; not sure what methods they use to make projections for Japan) show Japan’s population distribution by age, and they look troublingly top-heavy enough today, but the projection for 2050 is just head-shakingly scary — a massive cohort of 80+ women that not only vastly outnumbers any other cohort, but, at over 8 million, is in fact bigger than any 5-year cohort in Japan’s history! (Men aged 80+ number about 5 million.)

    Women live seven years longer than men — let them retire seven years later!

  • Another point in regards to cutting spending is that it can paradoxically make the problem worse.

    Who/what is financing the debt? Older Japanese with their savings. If you cut any of their services (nenkin, healthcare, etc) or make their taxes more burdensome, they will have to use more of their own money to finance their lifestyle. This will mean less is available to service the debt and the government gets in deeper trouble.

    You could also increase the income tax rate or heavily tax goods favored by younger people, but they’re already scraping by and have virtually no savings (but at least they don’t vote as much as the older generation).

    As far as I can tell, the only realistic way to get rid of Japans debt is inflate their way out through quantitative easing combined with some way of forcing salary/price increases. Of course, this will screw over anyone with substantial savings (again, older Japanese) and I think they know it. As soon as the government moves towards an inflation rate over the interest rate, anyone with savings in yen will move it into other currencies and again you have less money available to finance the debt.

    I’d love to hear of any other ideas on how to deal with this, but honestly I don’t think there’s any way to gracefully wind things down without economically destroying half the population. I’m expecting the GOJ to continue kicking the can down the road until a major event (China bubble pops, Tokyo earthquake, etc) that causes the house of cards to fall.


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