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Questo articolo è stato pubblicato il 06 novembre 2012 alle ore 04:57.
L'ultima modifica è del 06 novembre 2012 alle ore 05:52.


There’s a recurring joke among my colleagues: “Do you know the difference between Japan and Greece?” The chilling answer: “Three years.” They are referring to the condition of the two countries’ public debt. Paradoxically, the comparison between the great Asian industrial powerhouse and the small, struggling Hellenic state is not as absurd as it may seem. With a public debt-to-GDP ratio of 230 percent and a public deficit at 10 percent of GDP, what should strike one as absurd is not the comparison between Japan and Greece but the years it would take for the same scenarios to occur in both countries. After all, when Greece went into crisis in 2010, its public debt-to-GDP ratio was only 143 percent, with the public deficit at 10 percent of GDP. And what is even more absurd is the fact that the markets aren’t even concerned. With a yield on 10-year government bonds of only 0.78 percent, Japan seems far from a Greek-like catastrophe. Who’s wrong, my colleagues or the market? I fear the market. But it is worthwhile to examine why.

Regardless of its much higher debt level, Japan has many advantages compared with Greece.

First off, it has an industrial system that is capable of exporting. It then has a functional fiscal system, which corroborates a future increase in tax revenues. Thirdly, Japan borrows in its own currency and always has the option to monetize its debt. Finally, the Japanese people have always been great savers. Thus, the majority of debt is held domestically. It is as if the Japanese government financed its debt in money, but its obsequious citizens, instead of spending it, saved the money under the mattress.

This accounting game cannot, however, go on much longer. The biggest group of Japanese, those born immediately after WW II, is about to retire. Soon, instead of saving, it will begin to spend its money. The following generation is less numerous. Thus, saving is destined to decrease. The group that is entering the labor market is much less numerous than the one that is about to retire. So, not only will there be a decrease in saving but GDP is also destined to drop. Soon Japan will be forced to finance itself at least in part on the international market, which is less obsequious than Japanese citizens and will demand higher yields. But with a debt-to-GDP ratio of 230 percent, a hike in the cost of debt rapidly translates into a higher deficit, which is destined to scare international markets and will lead to a rise in yields. As Italians have learned, the cycle quickly becomes a dangerous one. Can Japan come out of it?

To reduce debt, Japan can increase taxes. But for every percentage point of increase in the cost of debt, the Japanese government would have to increase taxes by 2.3 percent of GDP. And this would have recessive effects on the GDP and would increase the risk of a negative cycle made of tax hikes, recession, an increase in deficit and the need to raise taxes once again.

Japan can monetize its debt. But as soon as the market takes noticed of what was happening, the cost of debt would be destined to increase to compensate international creditors for the risk of inflation/devaluation.

But if the context is so dramatic, why don’t the markets penalize Japanese government bonds? The simple answer is that downward speculation is of a bearish nature. As I have written many times, those who take a bearish stance risk a lot: infinite losses for the chance of infinite gains. For this reason, “bears” move only when they see the chance of an immediate advantage. With the Bank of Japan engaged in a round of bond acquisitions, the chances of losses for bears are too high. They await for this reason. The market is anesthetized by the central bank.

But this anesthetic is not healthy because it delays the time of the compensations. The later Japan wakes up, the more dramatic its awakening will be. This is a warning to all those who want the European Central Bank to be as tolerant as the Japanese central bank.