What About Japan?

Article: The Economist, Japan's Debt: The Domino that Never Falls

Courtesy Japan National Tourist Organization

One of the reasons that I love The Economist is that it does not ignore the world's third largest economy.  There is always one article, and often two or three on Japan each week, even when the country is not being devastated by earthquakes and tsunamis.  Last year, China passed Japan as the second largest economy in the world, but China has a population that is ten times Japan's, and all manner of natural resources.

From a 2007 BBC News Article

Japan, despite myriad problems --natural disasters, the largest government debt in the world (225% of GDP, compared with Greece's 144% and USA's 100%), few natural resources, a shrinking, aging population, a hidebound government-- is still a prosperous country where a large majority of the population is middle-class and well-educated.   And as pointed out in this week's article in the Economist, it is the place where bond investors run when there is uncertainty in other developed countries.  Because of debt problems in the US and Europe, the Japanese yen is now stronger than ever, at around 78 yen to the US dollar.  This is bad news for Japanese exporters, as well as tourists who visit Japan from overseas.  When I visited in 2007 I remember I got 140 yen for each dollar.  Economically, at least, I'm not looking forward to my next visit.

I'm not sure why Japan is still a safe haven for investors.  I think it has something to do with how their debt is funded.  The article points out that households alone have assets of nearly twice the national debt.  The Japanese are great savers, and tend to put their money in savings accounts, traditionally in the postal banking system.  The banks invest the deposits in Japanese Government Debt (JGBs).  Most JGBs are owned domestically, not by foreigners--in contrast to the US, where close to half the debt is owned by foreigners, who, at least in theory, are free to divest at any time.  In Japan, perhaps, there is more political and social pressure to keep the deposits in JGB's.  Not to mention that it would be difficult to find safe and liquid investments in which to place such a huge volume of deposits ($16 trillion in household assets).  They would probably have to move overseas, and be subject to all manner of exchange rate and political risk.

According to the Economist, referring to the JGB market, "...the risks of a confidence crisis, though not necessarily imminent, cannot be ruled out."  Who can tell what would happen in such a case?    Would the crisis of the PIGS (Portugal, Ireland, Greece and Spain) look small in comparison?

from www.uprofish.com

I think we can learn about the importance of education from Japan.  They became the world's second (now third) economy not because of a huge land mass, oil or minerals, or military and political dominance.  It was largely due to their talented, disciplined, educated population.   When we think about what is going on in the USA, I hope we don't forget an important long-term priority:  not deficits, jobs, healthcare or energy, but education.  In my opinion education is the most important item in the list, because even if we botch the other priorities, educated future generations will be able to make additional progress.