by Cato 11/2/14
The central government in Japan borrows ¥40 of every ¥100 it spends. Sovereign debt now equals 260% of ¥GDP. Total debt, including corporate and individual debt, exceeds 600% of ¥GDP. Japan is demographically the oldest and least fertile nation on the planet.
The Bank of Japan (its version of the US Federal Reserve) has just committed to buying 100% of 2015 new sovereign debt. And presumably 100% of 2016 and 2017 and 2018 issues as well. This is called “monetizing the debt” and is always self-defeating. Like a snake eating its tail, at some point the process becomes internally paradoxical and collapses. From Weimar to Zimbabwe history is clear: sooner or later failure is certain.
One analyst with 30 years trading foreign currencies opined recently that if … when … the Yen hits ¥120 to the $US1.00 (it’s currently about ¥112) it will spark a new “currency war”; a new race to the bottom, forcing China, the US and UK, and the Eurozone to respond in kind to defend their export industries. So if … when … Japan becomes a failed, bankrupt state they will not go that road alone.
Keynesians are openly cheering this “bold, aggressive” move by the BOJ. They praise Japan’s economic wisdom. This represents precisely the approach they are demanding of Germany and the ECB in the Eurozone; the ending of which in the US and UK Keynesians are jeering.
I think, however, that the motive behind the BOJ’s action is not economic but cultural. The Japanese have a tradition of ritual suicide when the path to victory has closed, when defeat is eminent. It would appear that ritual is alive and well, though now employing Yen rather than Wakizashi.
Cato blogs at Cato’s Domain.
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