Japan – The Country Most Ignore, But May Be the Massive Trigger We All Least Expect
Many people do not know how big the Japanese economy truly is relative to most of the world. For such a small geographical country it is massive. It has been stagnant for 27 years, as their stock and real estate markets peaked in 1989 and have done little ever since other than continue to fall. There have been periods where the markets showed signs of life but have always fallen back down to low levels. Real estate is estimated to be still down more than 50% on average, and the stock market is still down over 60% from its peak – remember that is a peak hit 27 years ago. A look at a land that may cause the systemic failure many are fearful of…..
First, it is important to understand the size and scope of the risks Japan present. It was not long ago that the world was afraid of what a bankrupt Greece could do to the banking and monetary system overall. There ended up being massive bailouts to the anger of many Germans, as in the end the European Central Bank is primarily a German institution – sorry rest of Europe but that is a reality. Other Europeans should be happy as let Germany have the monstrous liabilities that the ECB is taking on.
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Let’s look at the top 40 world economies based on gross domestic product (GDP):
So if Greece was such a big concern, why are they not even on there. They must be an inconsequential empire to the rest of the world – but they are not, and the risk was real a few years ago. Their GDP in 2015 was $242 billion; Japans was over $4 trillion. Greece’s economy is only 5% that of Japan and their debt is minuscule compared to the Japanese government. As you can see, Japan has the third largest economy in the world. It was second, before the Chinese economic miracle.
To try to stimulate their economy, President Abe introduced Abenomics to the country. Drastically increasing debt as well as increased Central Bank intervention. Initially, there was hope that it may succeed, but as you can see, it looks to be drastically failing:
Since these policies were implemented, there have been 17 quarters. Nine have seen positive growth and eight have been negative. That is not envious results, and there is fear that Japan will show negative results this quarter and enter a recession once again.
Adding massive amounts to their debt and having the Japanese Central bank institute negative interest rate policies (NIRP) as well as monetize record levels of debt is failing. Here is a look at how big the debt to GDP ratio is for Japan:
Japan is the highest by a mile at 245%. Greece follows them up at 197%, and Italy is at 133%. Historically, any country with a debt to GDP ratio more than 75 to 80 was considered to be in a high-risk zone. All 20 of the countries on the chart are well over this level. The US did not make this chart although its debt to GDP ratio is over 100. It is the way that the World Bank looks at the data. Since much of the US debt has been monetized by the Federal Reserve, they do not include it. The reality is, it should be, as it is debt that still has to be paid back at some point. Canada is also over the 80 level if you include all levels of government. It is closing in at a ratio of 90, and with the current policies of the new Liberal Federal Government, it will get there very soon.
Here are two more charts that show the gravity of the Japanese situation:
As you can see, the Bank of Japan (BoJ) assets they have taken on is soaring (Abenomics) but the velocity of money is crashing to levels never seen. This simply means how much a dollar creates growth in an economy. Money is being hoarded and not spent. This is dangerous for both the national and international economy. We have to remember the interconnectedness of the system. Greece should be a good teacher for that argument.
As we stated, Japanese spending has crashed. Basically since April 2014, consumer spending has been down 20 months and only up 3 – that is a massive contraction. It is no wonder that the massive action by their government and Central Bank has had a muted impact and for that matter, looks like it has made the situation worse. Watch out world; Japan may be the trigger that causes major fiscal and monetary collapses that few expect. It is a massive economy and the country is dead broke and a breaking down economy. On top of that, they have the worst demographics the world over as they basically have no immigration program. Nobody worldwide is big enough to save Japan if its debt ends up imploding. It is critical to watch their longer-term interest rates, as once they start to rise, the world will be clearly losing confidence in them.
Canada | USA | Europe | China | Japan | Emerging Markets