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Japan’s economic situation is can be described as a “happy depression,” writes Jim O’Neill in a piece for the Financial Times. The country has a staggering debt-to-GDP ratio of 230 per cent, yet strong domestic bond demand and deflationary pressures keep its government bond yields low.However, O’Neill, the Chairman of Goldman Sachs Asset Management, says this “happy depression” could soon give way to something worse.
For starters, he writes that many Japanese investors he spoke with said they bought Japanese bonds because of their nation’s external surpluses. But just last month, Japan reported its first trade deficit since 1980, and O’Neill thinks these deficits are like to continue. And with low yields and a relatively strong yen he doesn’t expect international investors to continue buying Japanese bonds.
To avoid a crisis he thinks Japan needs to do two key things. First, it needs to curb public spending, implement tax reform, and bring about strong productivity gains to drive GDP growth – all with the aim of bringing its long term debt under control.
Second, it needs to intervene like the Swiss National Bank did and commit to halting further yen appreciation. The strong currency has been chipping into corporate profits and is impacting competitiveness abroad. If Japan fails to act, O’Neill writes, “it looks as though Japan’s ‘happy depression’ of the past 20 years is set to become less happy and more depressed.”
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