It’s time to start worrying about Japan again

Sometimes you have to wonder whether most people understand the enormity of our national debt, let alone the debts of other nations. Perhaps the problem is one of terminology. We hear talk of trillions of pounds or euros, but what proportion of the public knows what a trillion actually is?

Here's a quick reminder (not that you'll need it, of course): a million is a thousand thousands, a billion is a thousand millions and a trillion is a million millions. In other words, for every thousand-fold increase there’s a new name for the numbers we’re talking about.

According to Jay Zawatsky in the National Interest, the Japanese have moved beyond trillions to  the next level:

• “In actual currency, Japan’s debt has crossed the quadrillion yen threshold. That is a 1 followed by 15 zeros. Of course, with a yen being worth a (U.S.) penny, Japan’s debt is equivalent to $10 trillion. But with a GDP equal to one-third the size of U.S. GDP, Japan’s debt is like the U.S. having a $30 trillion national debt, about twice its actual size of just under $17 trillion, which is the largest absolute national debt of any nation in all of modern history.”

So, what are the Japanese doing about their quadrillion yen debt? Well, much like the British and the Americans, they’re turning on the printing presses – only more so:

• “The Bank of Japan (BOJ), under its new governor, Haruhiko Kuroda, just announced that it will purchase 7.5 trillion yen (that’s $75 billion) per month in Japanese government bonds. Yes, $75 billion is less than the Fed’s $85 billion, but Japan’s GDP is only a third the size of the U.S. GDP…”

Indeed, the BOJ’s actions are set to double Japan’s monetary base in the space of just two years. But why? What could have possibly prompted the Japanese to follow such an extreme course of quantitative easing? The answer to that is is the failure of fiscal stimulus. The kind of expansionary spending policies that Ed Balls wants us to try in Britain simply haven’t worked – and not for want of trying:

• “Despite spending more than 60 trillion yen (approximately $600 billion, but equal to approximately $1.8 trillion in U.S.-GDP-equivalent spending) on Keynesian stimulus programs (scores of roads and bridges and other shovel-ready projects to nowhere) in fourteen supplementary budgets since 1998, the Japanese GDP has risen at less than one half of one percent, on average, over the last three fiscal quarters.”

If the Japanese economy isn't growing, then how are they funding all that stimulus?

• “Japan’s public debt has grown from about 60 percent of GDP in 1990 to over 230 percent today. At the rate of deficit spending planned by Japanese prime minister Shinzo Abe for the rest of 2013, about 10 percent of GDP, that ratio could top 240 percent in 2014.”

Hence the extreme QE – when your debt burden is so huge, it’s vital that interest rates are kept low. For rates to stay low, you either need the confidence of the money markets or a population that’s willing and able to lend to the state. For decades Japanese governments mostly borrowed from their own citizens, but in the world’s fastest aging society that’s not the option it used to be. Thus it is increasingly vital that foreign investors see Japan as a safe haven.

Unsurprisingly, Japan’s aggressive monetary expansion has led to a weakening of the yen – which, in an export-orientated economy, should be a good thing. Unfortunately, the theory isn’t working out so well in practice:

• “For the first six months of 2013, Japan treated itself to its largest trade deficit in history, courtesy of the lower yen. As the yen has fallen, the prices of goods imported into Japan have risen quickly, much more quickly than exports have increased.”

And to think we used to worry about Japan's economic strength.