Let’s face it, as conservatives, we’re a little bit obsessed with the Eurozone crisis. Obviously, it is big news. Also it’s not often that one is proved as spectacularly right as eurosceptics have been on the issue of the single currency.
And, yet, the likelihood is that future historians won’t be looking back on the Eurozone crisis as a unique event, but as just one in a series of sovereign debt disasters. The design flaws of the single currency may have brought matters to a head in the Eurozone first, but that doesn’t mean that other major economies aren’t faced with sovereign debt time-bombs of their own.
Consider the case of Japan – still the world’s third largest national economy after the US and China. Writing for CaixinOnline, Andy Xie sets out the horrifying facts:
- “Japan's nominal GDP in 2011 was 9 percent lower than in 2007 and 2.5 percent lower than in 1992! In 1992, the national debt was only 20 percent of GDP. It is now 230 percent.”
Think about that: over twenty years, the country’s debt has gone up tenfold as a proportion of GDP – and still the country has not recovered from the property crash that precipitated the crisis:
- “Essentially, 200 percent of GDP in fiscal stimulus hasn't turned the economy around.”
That’s certainly one in the eye for Keynesian economics, but how does the Japanese government get away with borrowing so much money?
- “Japan's problem doesn't get much attention because it has funded its debt with domestic savings. The home bias in Japan's national savings is very strong. Hence, the thinking goes that if the Japanese government isn't viable in the long run, the country is. One could assume that Japan can reshuffle its balance sheet and ask its savers to take a big haircut in their savings one day to solve the problem.”
That said, the government still has a massive deficit to finance – the annual revenue shortfall currently stands at 40% of expenditure. If the state starts defaulting on its existing debt, savers would be unlikely to advance further funds.
Except that the money’s drying up anyway. Japan is the world’s fasted ageing society and as people get older they save less. To make up the shortfall, the Japanese government will have to borrow as other governments do – i.e. from outsiders:
- “If the fiscal deficit doesn't decline, there isn't enough money at home to fund it. The emergence of a trade deficit now and current account deficit soon reflect a savings shortage in Japan. What foreign investors think of Japan will begin to matter to its bond market.”
The fact that, up till now, Japan hasn’t had to rely on international finance to fund its debt has allowed it to keep its currency strong:
- “At the peak of the Japan bubble, the yen was trading at around 140 against the dollar. It is now at 80. Ten years ago the yen was at around 160 against the euro. It is now at 100. It is essentially suicide for a deflating economy with declining competitiveness to have a strong currency.”
Andy Xie believes it won’t be long before Japan is forced to devalue. Such an event would have major global economic consequences, not least in prefiguring the inevitable humiliation of another, even more important, country – one also noted for its vast deficit and over-valued currency.