Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.
No, Japan is not about to become the next Greece. Trust me, I am fully aware of the risks of making bold predictions, but someone has to speak up. While it has become popular to proclaim that Japan is about to face a sovereign debt funding crisis similar to the tragedy now afflicting Greece, the facts suggest the opposite. Yes, Japan’s fiscal and economic dynamics stand in stark contrast to Greece—or Portugal, Italy, Spain, or any other country currently talked about as a candidate for a sovereign debt crisis.
First of all, let us be clear that Japan’s fiscal deficit is actually significantly worse than Greece’s. At the start of the Greece sovereign crisis, her public debt to GDP stood just below 120 percent. Japan currently records just about 200 percent, and the IMF now forecasts this will climb to 250 percent by 2015.
With deficits, bigger is definitely not better. Japan’s future generations face an unprecedented burden to pay off debt left by the current generation. Make no mistake, Japan’s ability to create future wealth will be increasingly limited as debt repayments “crowd out” income that would otherwise be available for investments. Clear speak: Taxes will go up. However, the inevitability of rising taxes, and thus lower free purchasing power of the people, does not mean that there will be a funding crisis like the one witnessed in Greece.
This is where things get interesting. Yes, Japan has a significantly worse budget deficit than Greece, but unlike Greece, Japan’s deficit is not only entirely self-funded, but it is all funded in its own sovereign currency. To be clear, Japan continues to be the second biggest creditor country on earth. Every day there is about $1 billion more coming into the country than going out. The current account surplus—Japan exports more goods and services to the world than she consumes at home—fully funds the domestic fiscal deficit.
Importantly, Japan Inc. earns U.S. dollars or euros from its exports, and uses this foreign currency to fund its all yen-denominated domestic fiscal deficit. So if the yen weakens, those dollar-, or euro-denominated earnings actually buy more yen. It’s a very stable system—the domestic private sector’s overseas earnings surplus funds the domestic public sector’s deficit.
Greece worked exactly the opposite: Grants and transfers from Germany and other EU countries funded the rising domestic deficit and excessive consumption. Greece never “earned” its deficit, its private sector never generated a surplus, while Japan’s economic power has always been large enough to not only fund its own growing deficit, but also remains the second biggest buyer of U.S. treasuries and other global budget deficits. Japan is, and always has been, a creditor nation, while Greece has basically been a debtor nation who has a seemingly endless supply of credit from Europe in general (Germany in particular).
When does the music stop? When do countries reach their limits of debt? It’s not enough to simply run out of savings. Greece has been running on negative savings for multiple years, but there was no problem because the creditor was healthy and willing to keep funding. No doubt, the strong political consensus that Greece must be supported to keep Europe and the euro viable was a big driver keeping credit lines open and flush for longer than hard-nosed credit analysis might have warranted. However, the moment of truth came when the creditors went on a strike, i.e. when the Germans and others became rational and were no longer prepared to treat Greek borrowers as an exception to the normal rules of credit for the sake of the some larger good, i.e. the goal of European integration.
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