When I was growing up, there was a grave perception that Japan was going to conquer the world. Not with bombs, but with its thought to be unstoppable economy. Then the Nikkei popped, Japanese property values curtsied to the ground, and the country entered its Lost Decade(s). Suddenly, Japan didn’t seem so formidable, and the idea of a Mothra-like economic threat from the East subsided.
Then came the noughties and China’s real leap forward. Now the Middle Kingdom is probably more feared than Japan ever was, not only due to its manufacturing muscle and huge population; but also thanks to its massive holdings of U.S. debt.
Last week Ambrose Evans-Pritchard made the case that Japan may actually be a bigger global risk right now than Uncle Sam. The problem is Japan’s ability to keep managing its preternatural debt levels. The fear is that it would only take a modest rise in Japanese bond yields to incapacitate Japan’s debt servicing and send the nation over the brink.
How might Japan raise funds to fight this off? If they try raising taxes, the horror film scenario is that their aging citizens would then sell their JGBs, forcing bond yields even higher and making Japan’s debt problem all the more calamitous. This could affect Japan’s ability to keep giving America loans to nowhere and leave us in our own debt service abyss.
All decade long we’ve been hearing that China was about to “foreclose on America.” How many times has the specter of China pulling the plug on our debt and sending us back to the Stone Age been invoked? Who would have guessed that Japan might be the U.S. creditor to blink first, not because of some maniacal strategy, but because of, well, a lack of strategy. How perverse would it be if the long forgotten fear of a Japanese takeover of the global economy finally did come to pass, only in the absolute wrong direction. There is a lesson here that America has refused to learn for itself, so it may be up to the Japanese to learn it for us. Deficits do matter.
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When I was growing up, there was a grave perception that Japan was going to conquer the world. Not with bombs, but with its thought to be unstoppable economy. Then the … [Read More]
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