Photo: Ivan Walsh via Flickr
Since the earthquake hit, a lot of people have been wondering: Will this event finally break the fiscally-stretched Japanese government?The answer, we’re glad to say, is no. Amid the incredible tragedy, Japan can be relieved about the fact that it’s incredibly wealthy, and its government will have no problems financing the cleanup.
This will come as a surprise to a lot of people, who note that the country’s debt-to-GDP ratio is already at 200%, and that the country borrows more each year than it receives in taxes.
Michael Schumann at TIME’s Curious Capitalist blog writes: “….even though Japan is not yet showing signs of following Ireland, Greece and the rest of the euro zone periphery into a full-blown debt crisis, pressure has been mounting for Tokyo to finally put in place a credible plan to reduce its yawning budget deficits and contain its debt levels. Standard & Poor’s just downgraded Japan’s credit rating in January.”
Actually, Japan hasn’t faced any real pressure to reduce its yawning budget — at least not from the market, which is what matters — and the comparison to Ireland and Greece is absurd, since the monetary system in those countries is nothing like Japan’s, which has its own currency and its own central bank. Ireland and Greece are at the mercy of the ECB to ply them with freshly printed Euros. Japan isn’t.
To starkly see how Japan’s monetary system is fundamentally different than the PIIGS, consider that earlier this month there was a report about Portugal having just 4 billion euros left in its treasury. Portugal literally could run out of euros if it can’t borrow. Japan doesn’t have a pile of yen somewhere that it’s counting. It creates them at will, and though you might think that a Japanese move to create yen would destroy the value of the currency, that simply hasn’t happened, despite decades of monetary policy that would make Ben Bernanke blush.
Japan’s government — despite what you might think — isn’t the financial basket case you think it is. Yes it borrows a lot, but it borrows a lot from citizens who like to save a lot. As we’ve pointed out before, the only thing that would cause the government to have less access to money is if its citizens started spending more (saving less) which would then reduce the need for the government to spend money. Unlike Greece and Ireland, where finance ministers do have to go hat in hand to borrow around the world (from, say, the Chinese, or Greek citizens living abroad), Japan’s system is closed and fine.
That’s not to say things won’t be stretched there. Japan faces a shortage of food, energy, usable infrastructure, equipment, etc., and that’s why the rest of the world is pledging support. A shortage of yen is not one of its problems and we already now that on Monday the BOJ will flood the economy with even more liquidity.
Remember, the bond market is pretty smart.
There’s a reason the yen and JGBs rallied on Friday, while equities tanked. That side of the ledger is OK.