Japan's outlook revised to negative by S&P, keeps AA rating

[loweyecue]

Just saw this apologize if double posting. What does this mean to the Japanese Economy and to us?

http://www.zerohedge.com/article/sp-...ll-rated-aa%20

[mooncliff]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

Just saw this apologize if double posting. What does this mean to the Japanese Economy and to us?

http://www.zerohedge.com/article/sp-...ll-rated-aa%20

Having lived in Tokyo for 20 years, I can say that up until 2008, you really could not tell that anything bad was happening if you didn't read the paper or watch TV. The buildings, infrastructure, telecom, and most things in daily life improved, and prices for things like food did not change at all at my local supermarket. Prices of appliances and clothing went down substantially. However, overall, things seemed to be about the same over 20 years.
Then came January of 2009. Suddenly, a lot of people were laid off, apartment and office rents dropped by 20-30%, and finally even the most delusional denialist expat friends said "Oh, oh..."

The thing that makes it very hard to figure out what is going on is that we use money as a proxy for goods and services when in fact what we are really interested in is goods and services. Looking at my electric bill, one might think that I cut back on electricity use because of the poor economy, but in fact, my bill went down because I replaced 16-year-old stuff with energy efficient devices. I replaced the five light bulbs I use the most with LEDs that use 4 or 7 watts, and I now actually have more light but use less energy. I started cooking more, so my eating out expenses went way down, and the quality of the food I eat went way up. Again, this would not be indicated just by looking at the money. I think many people are doing these kinds of things, so money as a proxy for quality of life is not at all a good indicator, I think. The financial problem this deflation will cause, of course, is an entirely different matter.

[ASH]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

Just saw this apologize if double posting. What does this mean to the Japanese Economy and to us?

http://www.zerohedge.com/article/sp-...ll-rated-aa%20

It doesn't mean much until the Japanese government has to start looking outside its captive internal market for government bonds to fund its budget deficit. If the Japanese government had to pay interest rates similar to those offered by the United States on its outstanding debt, its budget would be completely unworkable. If the Japanese government sold most of its debt to markets that demand compensation for risk, then a reduction in its debt rating would be fatal. However, up to now, Japan has been able to sell most of its debt to its own people, who -- up to now -- have not really "shopped around" for better risk/return. There is a putative problem with declining domestic savings rate in Japan that suggests the captive internal market for Japanese government bonds will soon be unable to absorb all of the debt that the Japanese government needs to issue. I personally think this is likely, and will likely trigger a major sovereign debt/budget crisis in Japan. For me the question is when. Ever since we entered the recession and countries with export-driven economies like Japan started suffering from lower demand from the US, I have been expecting this to precipitate a problem for the yen, because without strong exports, Japan and the yen don't have much going for them. On the other hand, others whose opinion I respect -- notably c1ue -- have said they think the talk of a debt crisis in Japan is overblown.

[FRED]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

Having lived in Tokyo for 20 years, I can say that up until 2008, you really could not tell that anything bad was happening if you didn't read the paper or watch TV. The buildings, infrastructure, telecom, and most things in daily life improved, and prices for things like food did not change at all at my local supermarket. Prices of appliances and clothing went down substantially. However, overall, things seemed to be about the same over 20 years.
Then came January of 2009. Suddenly, a lot of people were laid off, apartment and office rents dropped by 20-30%, and finally even the most delusional denialist expat friends said "Oh, oh..."

The thing that makes it very hard to figure out what is going on is that we use money as a proxy for goods and services when in fact what we are really interested in is goods and services. Looking at my electric bill, one might think that I cut back on electricity use because of the poor economy, but in fact, my bill went down because I replaced 16-year-old stuff with energy efficient devices. I replaced the five light bulbs I use the most with LEDs that use 4 or 7 watts, and I now actually have more light but use less energy. I started cooking more, so my eating out expenses went way down, and the quality of the food I eat went way up. Again, this would not be indicated just by looking at the money. I think many people are doing these kinds of things, so money as a proxy for quality of life is not at all a good indicator, I think. The financial problem this deflation will cause, of course, is an entirely different matter.

If only our policy makers permitted goods and services prices to deflate against wages. Our policy is to support the FIRE Economy at all costs, and that means deflating wages against goods and services. Go to a store or restaurant in the U.S. and though the recession prices went up! That must mean we're all "rich!"

[loweyecue]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

But how does the largest net creditor end up with a 115% Debt to GDP ratio?

[mooncliff]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

It doesn't mean much until the Japanese government has to start looking outside its captive internal market for government bonds to fund its budget deficit. If the Japanese government had to pay interest rates similar to those offered by the United States on its outstanding debt, its budget would be completely unworkable. If the Japanese government sold most of its debt to markets that demand compensation for risk, then a reduction in its debt rating would be fatal. However, up to now, Japan has been able to sell most of its debt to its own people, who -- up to now -- have not really "shopped around" for better risk/return. There is a putative problem with declining domestic savings rate in Japan that suggests the captive internal market for Japanese government bonds will soon be unable to absorb all of the debt that the Japanese government needs to issue. I personally think this is likely, and will likely trigger a major sovereign debt/budget crisis in Japan. For me the question is when. Ever since we entered the recession and countries with export-driven economies like Japan started suffering from lower demand from the US, I have been expecting this to precipitate a problem for the yen, because without strong exports, Japan and the yen don't have much going for them. On the other hand, others whose opinion I respect -- notably c1ue -- have said they think the talk of a debt crisis in Japan is overblown.

Yes, Japan could have a blow up. January 2009 was like an earthquake here. I wouldn't be surprised if bigger shocks come. I am surprised they could keep all the balls in the air this long.

[ASH]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

But how does the largest net creditor end up with a 115% Debt to GDP ratio?

I should take the time to look up the numbers, but let me hazard a guess:

By buying dollar-denominated bonds to manipulate the exchange rate of the yen to support exports, and by running huge budget deficits year after year during the lost (two) decades.

[jpatter666]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

I should take the time to look up the numbers, but let me hazard a guess:

By buying dollar-denominated bonds to manipulate the exchange rate of the yen to support exports, and by running huge budget deficits year after year during the lost (two) decades.

I recall reading an article recently about a hedge manager who refinanced their house in yen because they were convinced then yen would crash (and if you consider a 30-year timeframe, you'd think odds on their side....hmmmm)

[loweyecue]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

If the japanese could borrow at the abysmally low rates they have by issuing bonds and then use the money to buy treasuries and other USD denominated bonds (higher interest rates) isn't that pretty good arbitrage? I would think they would have made some money doing carry trade against their own currency...sorry I know I am being dense and too simplistic. Just trying to understand how this works, that's all.:confused::confused:

[mooncliff]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

Ha ha! They have been trying to stop the deflation for 20 years, and they managed to... up until last year.

I would say that the quality of food and service in family restaurants in Tokyo has gotten a lot better over the last couple of years, and the cost has gone down. Breakfast at Denny's is, for example, a plate with salad, rice, scrambled egg, and a slice of bacon (which is actually a reasonable serving for one person) and bottomless coffee is $7 including taxes and tip (well, actually, you don't tip in Japan). A full Japanese breakfast with grilled salmon, poached egg, rice, dried seaweed, pickled vegetables, and miso soup is $8. Lunch is generally less than $10 even in the downtown business district, and is $7 including all you can drink at the neighborhood family restaurant, again, tax included and no tip. Posted prices for everything are required to include tax, so you can see what you actually have to pay. The consumption (sales) tax is 5% on everything. Everywhere was pretty empty in early 2009, but now the family restaurants are packed... although I hear the expensive hostess bars in Ginza are really hurting.

I recently asked seven Japanese people, three of them cab drivers, whether compared to 1990 during the peak of the bubble, our everyday lives now are worse, the same, or better. Each one of them thought about it and then chuckled and said "better". So, the wild parties and the drinking every night and the handbags are gone, but my everyday life is much better even though I make less because I work less and have more time to attend to things that matter. If salaries don't go down too much, deflation is great for me!

[ASH]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

If the japanese could borrow at the abysmally low rates they have by issuing bonds and then use the money to buy treasuries and other USD denominated bonds (higher interest rates) isn't that pretty good arbitrage? I would think they would have made some money doing carry trade against their own currency...sorry I know I am being dense and too simplistic. Just trying to understand how this works, that's all.:confused::confused:

I can't speak with any authority, but I think there is a difference in scale. The sources I can find put Japan's national debt at 192.1% of an estimated GDP of $5.049T, or about $9.7T. The Treasury puts Japan's holdings of US debt at $757.3B... I'm unclear if this includes private holdings by Japanese citizens and corporations. However, it seems to me that the majority of Japan's debt must have been accrued by actual government spending rather than accumulation of foreign reserves. I agree that there might be some potential for arbitrage, but Japan's debt in their own currency dwarfs their reserve position in our debt.

[cjppjc]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

money as a proxy for quality of life is not at all a good indicator, I think.

Very well put. It will not make the iTulip great truism list, but does reverberate with thruth.

[ST]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

... though the recession prices went up! ....

iTulip has gone from calling this a 'depression' to referring to it as a 'recession' and looking for the 'next recession'.

Isn't some explanation warranted?

[Mashuri]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

According to John Rubino, Japan, after 20 years of constant plundering, finally runs out of domestic savings this year and will need to finance from outside. That's why their CDS have spiked up and diverged way higher than the U.S. and Europe. The market smells blood.

[hayekvindicated]

Re: Japan's outlook revised to negative by S&P, keeps AA rating

Both the UK and Japan have massive debt to GDP ratios. But here's a difference (in my view):

if the Yen starts to drop (in a controlled fashion), Japanese wages (in real terms) will likely drop a lot - which in turn will make Japanese exports extremely competitive. I think Japan's industries could benefit greatly from a lower Yen and lower manufacturing costs because Japan still has a manufacturing infrastructure that could be cranked up quite rapidly. Another question is: who will they export to? This kind of question (loaded with accurate assumptions about the collapse of the US consumer's available credit) is fixated in the past. As a percentage of of its exports, Japan's largest export market now is Asia, not the US. This process will accelerate in the years to come. and Japan has a LOT to sell to both China and India. There will be more infrastructure building in both countries for decades to come (not to mention any number of smaller countries that are trying to play catch up) - Japan's manufacturers of heavy machinery (for example) would benefit from this greatly. The Chinese, for example, intend to spend hundreds of billions building rail infrastructure in China - and Japanese firms like Hitachi are best placed to supply this demand.

The above scenario doesn't work if the Yen starts to spiral downwards in an out of control fashion - moderate currency depreciation over time can help exports to some extent (to the extent that it cuts wage bills and lowers production costs). However, rampant and out of control inflation and currency depreciation will NOT help and if anything wreck whatever is left of Japanese industry. Which outcome is most likely? I think both are a 50-50 probability.

The UK (on the other hand) is unlikely to reap any significant rewards from currency depreciation. This is evidenced by the worsening trade deficit DESPITE the falling pound!!!! (which anti-Euro types like Amrose Evans Pritchard would dismiss as almost impossible). The problem is that the UK is a FIRE economy on steroids - with very little manufacturing left and little to sell by way of tradeable goods (and the shoddiest manufacturing quality and customer service I have ever seen), there is almost no chance that the UK will be able to avoid significant decline in living standards by cranking up its manufacturing base. As I have written on this forum before, only a fool looks at economies only in numbers. The character of populations DO MATTER. From what I have seen in my time in this country, the quality of education differs enormously between the people at the top and those at the bottom. I would actually venture to say that the bottom half of the population simply cannot compete with any country on even bare bones second world wages (and even there I think Im being charitable). Even in third world countries where education standards are poor, there aren't the kind of social problems afflicting the UK. This is why outside the South East of England, the state accounts for more than 50 percent of the economy - mostly in unproductive make work and activist jobs that the left loves but which add nothing to the economy and amounts to adding greater burdens on whatever is left of the productive population.

Japan, by contrast, continues to have a terrific education system which prepares its population for a competitive manufacturing economy. This does matter in the long run. I have been to Japan and what has always struck me is the discipline and courteousness of the people and the superb quality of the infrastructure. At least when the Japanese had to sort out their bubble and their government foolishly borrowed Trillions, they got a decent infrastructure in return. The US and the UK pissed their Trillions away trying to shore up banks which enriched the FIRE elite with obscene bonuses. The infrastructure on the other hand remains in bad condition and one only has to shudder in fear at the thought of what will happen when the government runs out of money and they cannot borrow any more. The economy will fall apart and the smartest will up sticks and leave. What will be left behind will be a crime prone, poor, violent and feral population in which incredible grotesque acts of barbarity will become commonplace.

Oh and one other crucial difference: the Japanese have $1 trillion in reserves. Until the Dollar is still worth something, these reserves can be spent. The UK is completely kaput by comparison.