Understanding the Japanese Debt-ridden Economy

- OECD estimates that Japan's debt to GDP ratio is expected to rise to twice it's economy this year, significantly higher than Greece's 123 percent
- The Finance ministry estimates that Japan's public debt is expected to swell to 973.2 trillion yen by next year
- On 26 Jan 2010, S&P lowered it's outlook on Japan's debt to negative from stable and issued a warning that it was concerned with the large deficit and sluggish growth outlook of the Japanese economy, which currently ranks 2nd in the world economies.

Qn: Is Tokyo's fiscal foundations really shakier than those of Athens?

Optimists have insisted that it is wrong to focus on Japan's gross debt, since in net terms, the state only owes the equivalent of slightly over 100 percent of its GDP. This is because Japan is the holder of more than 100 trillion yen in foreign exchange reserves and also holds a large portion of it's own debt.

So in net debt terms, it puts Japan's debt burden in the same category as Italy, but its ability to attract local buyers (domestic savings and institutional investors)for its debt have been the key to the low JGB yields. Investors this week have snapped up an offering of 10-year Japanese government bonds carrying a coupon yield of 1.4 per cent.

However, institutional purchases by Japan Post Bank and Japan Post Insurance peaked at 29 per cent of market share in 2008 and have since been declining as they suffer from a structural decline in deposits and seek to diverisfy from holding JGBs.

Currently, the main buyers of JGBs are private Japanese banks and insurance companies. Banks are buying to meet new liquidity rules, because they lack alternatives in deflationary Japan and as they have excess deposits due to a lack of demand for corporate loans. Meanwhile insurers are buying JGBs to better match liabilities that they will have to mark to market from 2013.

In recent months, the government's ability to raise revenues have been called into question. Nanto Kan, the finance minister, and his colleagues are trying to draw up plans for fiscal sustainability to be implemented once economic growth strengthens, but their ability to reassure markets in the meantime will only mean more volatilty for the Yen till then.

Eric Tan, London

A Chinese Bubble? Markets for the week ending 23-Jan-09

As the Chinese government made moves to suppress escalating lending growth driven by excess liquidity, it's worth comparing the similarities with the Japanese experience during it's boom years.

1) At its 2007 peak, the Shanghai A shares traded at more than 7 times book value. Japan's Nikkei index in 1989 peaked at 5 times. Chinese stocks has since halved in value
2) Price to earnings ratio of Chinese stocks using past 10 year average earnings (Graham and Dodds PE ratio) is 50X compared to about 15x in US
3) Residential real estate of Chinese cities is at a multiple of 15-20 times household income versus 12-15 times during Japan's real estate boom
4) Fixed asset investment as a proportion of GDP in China is currently 50% and Japan had similar growth rates then with 30-35% GDP
Finally a thought to hold:
A decrease to 10 year ago investment-to-GDP rates for China would have a disasterous effect on all emerging economies and countries exporting to China.

Eric Tan,
London