Investment Contrarians

Why Japan May Be Headed for a Financial Abyss

By for Investment Contrarians |

Why Japan May Be Headed for a Financial AbyssJapan just elected in Shinzo Abe of the Liberal Democratic Party as Prime Minister, and based on what we are hearing, Abe is looking to spend significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to boost the country’s gross domestic product (GDP) growth and drive Japan out of its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012.) While this all sounds great, there’s a problem. Japan’s debt levels are some of the highest in the world and make the U.S. situation seem like a cakewalk.

Japan’s debt as a percentage of its GDP was a humongous 208.2% in 2011, the worst in the world, according to the International Monetary Fund (IMF). Greece, with its financial crisis, was comparatively better at 160.8%, and the U.S., with its crippling debt levels, was relatively strong at 102.9% in 2011. (Source: “Country Comparison: Public Debt,” CIA World Factbook, last accessed December 17, 2012.)

The problem is that the newly elected Liberal Democratic Party appears to want to spend the country into a financial abyss in order to pump up the country’s GDP growth.

Japan continues to be in an economic abyss, void of any GDP growth.

Along with its minimal growth, the country is mired in a multi-decade-long comatose state that requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis; and it appears set for another recession, given GDP growth is estimated to fall in the fourth quarter. (“Japan Economy Shrinks 0.9% in Third-Quarter, Points to Recession,” CNBC via Reuters, November 12, 2012.)

Japan’s new government will likely try to push expansive fiscal and monetary policy to try to re-ignite what used to be the “Pearl of the Orient,” but so far, it has probably helped to prevent a deep recession, rather than driving GDP growth.

The country’s interest rates are already at zero, so there’s little space to maneuver. Given interest rates have been at zero percent since 2010, the failure of the country’s GDP growth to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency, last accessed December 17, 2012.) That’s seven years with extremely low interest rates, and not much has improved with the country and GDP growth.

The Markit/JMMA Purchasing Managers’ Index (PMI) came in at a dismal 19-month low of 46.5 in November. It was the sixth straight month of contraction.

If I was a betting man, I would not bet my money on a turnaround coming soon for Japan.

Japan is blaming the stagnant GDP growth on the stalling in Europe, and the high level of the yen and its impact on exports. The yen’s higher value makes it tough for Japanese exporters and is preventing an export-led recovery for the Japanese economy.

And just like the U.S., Japan’s GDP growth is driven by domestic private consumption that accounts for about 60% of the economy, versus about two-thirds for the U.S.

The problem is that consumer spending is down, as the country’s unemployment rate hovers above four percent. In 1980 and 1990, a mere two percent were unemployed, according to GoCurrency.

I’m not optimistic when a turnaround will occur, but the idea of adding massive debt to an already mounting pile of debt is worrisome.

My advice is to stick with China, South Korea, Malaysia, and Singapore.

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