Japan Headed Towards Disaster?

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WASHINGTON – Unfortunately for Japan, smashing political victories do not translate into good economic performance. Prime Minister Shinzo Abe held a snap election and won handsomely, even though the turnout was small. Despite another recession caused by a collapse of consumer spending, it would appear that the voters have confidence in his strategy to revive the Japanese economy.

Abenomics is not working

And yet there is very little evidence that he is succeeding. He has helped exports somewhat by forcing a currency devaluation. But his consumption tax caused people to stop spending thereby freezing the economy.

Now he has suspended any further consumption tax hike, while his government just launched yet another stimulus package worth about US $ 29 billion, in the hope that this would spark some kind of new miracle.

However, based on past performance, it is unlikely that the economy will respond, while Japan’s truly colossal national debt, now at 240% of GDP, keeps growing.

The Bank of Japan is bent on forcing a currency devaluation in order to boost exports, while it buys all the new government bonds. How long can this go on?

Negative savings rate

In the meantime, the traditionally thrifty Japanese people have stopped saving. For the first time since 1955 the savings rate has gone negative, and it now stands at -1.3%.

In all this, the currency devaluation means higher cost for all imports. Of course, right now Japan is benefiting from lower oil costs, just like all other energy consumer countries. But a lower yen also means that everything else costs more. Real wages in Japan are not growing. And this means less disposable income and lower standards of living.

If this were not enough, please note that even with artificially depressed interest rates debt service now absorbs a staggering 40% of all government revenue. As debt keeps growing, interest on the national debt soon enough will swallow  almost all revenue.

If you want to add another touch of gloom, Japan is experiencing population decline. This means a shrinking working population that soon enough will have to support a growing number of elderly retirees.

Japan is in decline

So, here is the picture. Notwithstanding its coveted position as the number 3 economy in the world, (after the US and China), Japan has a declining population, and a stagnating economy with little prospect of new growth. The average Japanese has stopped saving. In the meantime, in just a few years the state has piled up a gigantic mountain of debt that weighs heavily on everything else.

Will more debt cure the country?

And what does Prime Minister Abe do to improve all this? He creates more debt, in the shape of the just announced US $ 29 billion stimulus package. Shinzo Abe may be a clever politician who knows how to win elections. However, with the active complicity of the Bank of Japan, he is doing his very best to steer Japan towards ruin, maybe even bankruptcy.

How much more debt can this anemic Japan withstand before the system cracks? I am afraid we shall find out fairly soon.

 

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