Is Japan the next major world economy to tank?

Commentary about business and finance.
Dec. 21 2010 6:29 PM

Too Big To Bail

Is Japan the next major world economy to tank?

(Continued from Page 1)

Another way for Japan to dig itself out of this hole would be to cut spending. But already, Grice says, Japan's tax revenues can't cover debt service combined with social security. So where the hell do you start?

Those who believe in historical precedent point to examples like Weimar Germany and say Japan is going to swing from deflation to hyperinflation. The Bank of Japan, they say, will print yen in order to pay down debt. "Cash-strapped governments," observes Grice, often resort to "currency debasement." That story never ends happily.

But at least so far, the consensus is that this dire scenario won't, can't, happen. Indeed, it's often said that you aren't a real macro trader (someone who bets on global trends) until you've gotten burned shorting (i.e., betting against) Japan. "You'll find 10,000 people saying I'm an idiot and that people have been saying this, and been wrong, for 15 years, and kid, shut up," laughs my source. The Bank of Japan says the economy is improving; analysts say the government has lots of options, including raising the value-added tax or having the banking system put even more assets into government bonds. (Already, the Bank of Japan is engaged in its own form of "quantitative easing," or purchasing government bonds, which, just as in the United States, is supposed to help the economy recover.) Japan's relatively healthy corporate sector could take over from households in investing its surplus cash into government bonds. "Everyone acknowledges the long term seriousness of Japan's fiscal position," writes Grice. "But people seem almost fatigued with the idea that a country which has defied bond market logic for so long now is ever going to change."

Advertisement

But just because things haven't changed doesn't mean they won't. While any deterioration in Japan's finances should, mathematically speaking, happen gradually—savers don't yank their money out of the system all at once—modern markets have a way of accelerating underlying problems into crises with remarkable speed. If there's a lesson we should all have learned, it's that once fear takes hold, anything can happen. And if Japan is a problem, it's a problem for all of us. After all, Japan is still the world's third-largest economy. Unlike Greece and Ireland, it is simply too big to bail out, even if the world were willing to do so. China and Japan are the largest foreign holders of U.S. debt. One obvious question is, what happens here if Japan starts selling?

There's another way in which Japan's problems might matter, too. In some important ways, the United States is following in Japan's footsteps—for instance by taking advantage of low interest rates to issue a slew of cheap debt. Japan's "more profound influence might be psychological," Grice writes. What he means is that Japan's benign experience with debt (so far) has led other countries (notably ours) to think that it can have a worsening fiscal condition yet still pay a low interest rate on its debt. If bond markets begin to act like that notion is wrong, this story doesn't end happily for anyone.

Like Slate on Facebook. Follow us on Twitter.

TODAY IN SLATE

Frame Game

Hard Knocks

I was hit by a teacher in an East Texas public school. It taught me nothing.

Republicans Like Scott Walker Are Building Campaigns Around Problems That Don’t Exist

Why Greenland’s “Dark Snow” Should Worry You

If You’re Outraged by the NFL, Follow This Satirical Blowhard on Twitter

The Best Way to Organize Your Fridge

The World

Iran and the U.S. Are Allies

They’re just not ready to admit it yet.

Sports Nut

Giving Up on Goodell

How the NFL lost the trust of its most loyal reporters.

Chief Justice John Roberts Says $1,000 Can’t Buy Influence in Congress. Looks Like He’s Wrong.

Farewell! Emily Bazelon on What She Will Miss About Slate.

  News & Politics
Politics
Sept. 16 2014 2:11 PM Spare the Rod What Charles Barkley gets wrong about corporal punishment and black culture.
  Business
Moneybox
Sept. 16 2014 2:35 PM Germany’s Nationwide Ban on Uber Lasted All of Two Weeks
  Life
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
  Arts
Brow Beat
Sept. 16 2014 1:27 PM The Veronica Mars Spinoff Is Just Amusing Enough to Keep Me Watching
  Technology
Future Tense
Sept. 16 2014 1:48 PM Why We Need a Federal Robotics Commission
  Health & Science
Science
Sept. 16 2014 1:39 PM The Case of the Missing Cerebellum How did a Chinese woman live 24 years missing part of her brain?
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.