Japan Syndrome

I’ve mentioned on numerous occasions the Japanese roadmap that we are following. This week’s Economist provides a nice update.

Before getting too carried away with strict adherence to the roadmap, it is worth noting a couple of points:

  • Going into the bubble collapse, Japan had a huge savings base. While it is now much eroded, it has served to cushion the economic consequences to a great extent. The U.S. and Europe are much more dependent on unfunded government plans to support retirement and therefore do not have the savings base.
  • Japan continues to run a trade surplus, thanks to strong exporters such as the auto manufacturers. This has allowed Japan to fund its deficits internally, rather than running up large debts to less sympathetic holders. The U.S., in particular, has runs trade deficits for many years and is therefore much more reliant on international credit markets. While these markets remain supportive, they can turn on a moment’s notice and a rise in interest rates will be catastrophic.

These differences will probably shorten the West’s road, compared to Japan’s. But we still do not know know how long the road can become, or what lies at its end.  Japan continues to run up government debt (now over 200% of GDP) in the name of stimulus, but growth is elusive.  As the chart shows, nominal GDP has not grown in 20 years. What cannot be sustained, will not be sustained tells us that this must end, but how? Hussman’s sudden shift in liquidity preference? Something else? Inquiring minds want to see. The eventual dénouement of this kabuki play will be most instructive.

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