Jan 30, 2012
Japan Faces the Moment of Truth
In the ongoing saga of the financial crisis, Greece has been grabbing the lion's share of the headlines. If it doesn't received a bailout by mid March, it will be forced to default. Since Greece's $400 billion debt is small potatoes compared to the total world GDP of $100 trillion, I'm not losing any sleep over a Greek default. I think Japan is a far greater risk to the global economy.
It is already well known that Japan has the highest national debt of any industrialized nation on earth. Its debt now stands at 220 percent of GDP. The U.S. has a GDP debt of 100 percent.
In the current fiscal year, Japan's public debt will finance 50 percent of the federal budget. That means for every yen that the Japanese government takes in from taxes, it has to print another yen to cover its expenses.
Japan’s Finance Ministry said the nation’s public debt now stands at 985.4 trillion yen ($12.7 trillion) for the year ending March 2012. In about three months, the debt will reach the 1 quadrillion yen mark.
There is no end to the sea of red ink. The official government forecast calls for the country to have a deficit of 3.3 percent of GDP in fiscal 2015 and 3 percent in fiscal 2020.
For the past two decades, the Japanese government has been able to keep piling up debt because of a high national savings rate. The Japanese people just love to buy government bonds. That era has now come to an end.
In 2011, Japan had its first trade deficit in thirty-one years. A prolonged European recession, coupled with stubbornly high oil prices and a slowdown in China, is the disaster scenario for Japan. The new trend is expected to last until at least 2014. The shortfall will erode the country's ability to fund its huge public debt with domestic savings.
The rapidly aging population is starting to drag on the economy. Currently, the ratio of retirees to working-age Japanese is 38 percent. In just eight years, retirees will make up 49 percent. Japan is now at the point where the average citizen is running down his or her savings.
The Japanese government has been unable to come up with a plan to combat the debt load. The government did announce a draft proposal to hike the consumption tax rate from the present 5 percent to 8 percent in 2014 and to 10 percent in 2015. When you're on the brink of collapse, it's ridiculous to wait two years for any action.
Europe's recent spike in interest rates poses a huge risk to Japan's ability to manage its debt load. As nations like Greece and Portugal play "Let's Make a Deal" with it bond holders, the higher risk will cause investors around the world to demand better rates. Japan would be wiped out if its bond yields were to rise. By just going from the current 1 percent to 3 percent on government bonds, it would require 100 percent of all taxes to pay the interest.
The Japanese economy now has a new risk to worry about. The earthquake research institute at Tokyo University has warned that the chances of a powerful earthquake striking Tokyo in the next four years could be as high as 70 percent, an alarming scenario for the city's 13 million people. According to the government, a magnitude-7.3 earthquake would kill about 5,600 people, injure 159,000, and destroy 850,000 buildings. Last year's massive earthquake in the north may have already doomed Japan to an early financial meltdown. An earthquake in the capital would signal instant bankruptcy.
Some people are trying argue that Japan is not in as bad shape because it owns a trillion dollars of U.S. bonds. The question is what would happen to the value of those bonds if they ever tried to sell them. Since America doesn't have any assets to give in exchange for the money we owe other nations, the bonds would become worthless in any large-scale redemption.
The longer the global financial system holds together, the more convinced Terry and I have become that the delay is part of God's plan. The Lord may intend to use the Rapture as a pin to pop the debt bubble.
End-time Christians already have a good reason not to be fixated on the cares of this world. The hopeless state of our financial system should add to the urgency of being focused on promoting the kingdom of God.
"Watch ye therefore, and pray always, that ye may be accounted worthy to escape all these things that shall come to pass, and to stand before the Son of man" (Luke 21:36).
Todd