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Unpopularity Contest at the Edge of the Japanese Abyss

While all eyes are on Europe and the ever expanding Greek farce, a much bigger fiasco on the other side of the globe is advancing at an inexorable pace—with another setback for Japanese Prime Minister Yoshihiko Noda, who was stuffed into that slot last September. All Japanese prime ministers since Junichiro Koizumi (2001-2006) slither down a bumpy and steep slope that lasts between 8 and 15 months. When their approval ratings drop into the low twenties, they're thrown out, and a new sacrificial lamb is stuffed into that slot. And Noda is on a straight line down to replacement hell. 

In a Kyodo News telephone poll over the weekend, Noda’s approval rating dropped to 29%, down 6.8 points from January, and down a dizzying 50 points in less than six months. The disapproval rating jumped to 55.2%. Only Taro Aso fell faster. But at the current trajectory in the prime-ministerial unpopularity contest, Noda might beat his records soon:


Approval rating vs. months in office

It seems the top item in Noda's job description is to get the unpopular consumption tax through a recalcitrant parliament along with some half-hearted reforms of the social welfare system that is bankrupting the country—if that were still possible.

The Japanese fiscal quagmire has no peers among developed nations—by March 2013, national debt will surpass one quadrillion yen, or $14 trillion, a mindboggling 240% of GDP. The budget deficit for fiscal 2012, with all its accounting shenanigans, will exceed ¥54 trillion yen, of which an astounding 56% will have to be borrowed. For more on that vertigo-inducing debacle, read.... The Endgame: Japan Makes a Move.

So, comes along the idea of an increase in the consumption tax. It’s currently 5%. The first phase would take it to 8% in April 2014; the second phase to 10% in October 2015. While the deficits are eating up Japan’s future right now, the proposed fixes, insufficient as they may be, won’t even kick in until 2014 and 2015. Sure, a consumption tax will further demolish consumption, and given that Japan’s fourth quarter GDP has shriveled by 2.3%, it’s not a good time to try to implement something like that. But in Japan’s economy, which is completely dependent on a flood of deficit spending, it’s never a good idea to implement any kind of tax increase or spending cuts. Meanwhile, as the problems get worse and more intractable, ineffectual and powerless prime ministers are shuffled in and out.

And the problems are getting worse, fast. Japan’s all-important trade balance has generated huge surpluses and $1 trillion in foreign exchange reserves and has been one of the pillars supporting the government’s deficit-addicted ways. Alas, the joyride is over. The trade balance for January, reported today, set an astounding record: a deficit of ¥1.475 trillion ($18.6 billion), the fourth consecutive month of trade deficits. Already, 2011 had seen the first annual trade deficit in 31 years, but it was a mild compared to what 2012 will look like.



Imports jumped 9.8%, liquefied natural gas being the most salient item. That won’t be getting better anytime soon: another nuclear power plant was shut down today for scheduled maintenance, and will stay off line. Due to opposition and controversy—Fukushima is haunting the country in a myriad ways—none of the reactors that have been shut down since March 11 have been brought back up. By now, only two of Japan’s 54 reactors are still generating electricity. On March 26, both are scheduled to be taken off line as well.

A mad scramble has ensued to replace their capacity. Old and inefficient fossil-fuel plants have been de-mothballed, and new ones are being planned. Companies are building their own in-house power plants as a matter of survival. They need LNG. Hence the jump in LNG imports. Other generating capacity is being brought on line, but it will be impossible to replace the massive capacity of 54 nuclear power plants over such a short period. With harsh consequences for power-hungry manufacturers.

Exports plummeted 9.3% from January 2011, as manufacturers reacted to the power shortage, the strong yen, and high production costs. Caterpillar was the latest when it announced that it would shift production of small track-type tractors and mini hydraulic excavators out of Japan to the US. And Japanese companies spent $70 billion on acquisitions overseas in 2011—a record. They’re going overseas to escape the pressures at home. But they’re doing it just when Japan can least afford it. For that coming fiasco, read.... Japan Inc. Seeks Salvation Overseas.

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Reader Comments (6)

I was watching new video of Fukushima last night and it was just sad.

When I lived there in the nineties, I wondered when they would turn the corner.

I suppose they did, but they went the wrong way. Again.

Sad, sad, sad.
February 21, 2012 | Unregistered Commenterwren
The real problem is the fact that buyers of JGB's are turning to sellers. The largest holders are Japan Post Holdings and the Retirement fund. Japan Post is the largest financial institution in the world ($3.5 trillion) and owns about 75% JGB's and is trying to diversify holdings (net seller of JGB's). The retirement fund is liquidating $80 billion of JGB's this year and more next (net seller) to pay benefits. Japan's banks have almost 25% of total assets in JGB's and the IMF is coming to Japan to run a stress test this summer to see what a doubling of the interest rate would do to bank capital. Banks are not likely to add to their JGB holdings. The savings rate has declined from 16% to 2% and is projected to go negative as the demographics are bad. With low interest rates, retirement is done off principal. Life insurance companies are also big holders and are going to be net sellers as older people die. This basically leaves the young people to step up to the plate but they lack income, as many are contract laborers with poor wages and benefits. BOJ buying is a temporary help but could destroy confidence in the central bank, the government bonds and/or the currency. Either would be a serious problem but the real problem remains a lack of buyers going forward for JGB's. The endgame is near for Japan. Short yen and JGB's is a low risk play.
February 21, 2012 | Unregistered CommenterA Sinclair
Wren - there are many aspects about Japan that are, as you said, sad. But all that government deficit spending has shown up in lots of big and small improvements and has helped along a very vibrant culture. Every time I go there, I’m surprised in many positive ways. The first time I went to Japan and spent three months there was in 1996 (subject of my book BIG LIKE). Since then, Tokyo has become much more livable and even more vibrant. So, government finances and the nuclear disaster are truly sad. But many other aspects of Japan are not. If you have a chance, go back and give it a look. You might be positively surprised!

A Sinclair – I agree with all your points (though be careful shorting the yen; the Fed is out in force to demolish the dollar). Except for your last point. Shorting JGBs. That may work in the future, but the future may be years away. The BoJ and MoF, along with the Post Bank and many other governmental institutions, and along with private institutions the government can lean on, and of course Japanese citizens: they control the market for JGBs. There are no major market participants outside of them. And if in the future outside buyers are needed, they’re going to be government institutions of other countries, like China, which won’t play ball with short sellers either. So, it’s possible that you’re in for a long, long wait.
February 21, 2012 | Unregistered CommenterWolf
Wolf, I haven't read much of your blog before so I don't know if you are being facetious or not, but it doesn't sound as if you are.

"Vibrant" to me is a codeword for "disaster" when describing someplace, especially somewhere like California. "It's a vibrant neighborhood with ethnic restaurants for lunch, but don't stay past dark," etc.

I'm sure life in the PIIGS countries was extremely vibrant until very recently, and maybe it still is, for all I know.

When I first went to Japan perhaps life was more difficult but there was real optimism. Now, life might be easier because the kids will foot the bill, but I don't see the optimism any more. I'm not sure what I see.

We had dinner with some Japanese friends the other night visiting the US from their home about fifty miles from Fukushima. It was a touchy subject. They didn't seem too alarmed. They are just a few miles away from another nuke plant, but that too, was not a concern.

They seemed most excited to discuss the new Costco and the drugs they are experimenting with for their daughter, who has some kind of learning disability.

What is going on over there?

Sorry to say it, but I was reminded of idiocracy. Very vibrant society in that movie, too.
February 22, 2012 | Unregistered Commenterwren
Wren - agreed, "pessimistic" in terms of how people feel about the government's fiscal policies and its inescapable consequences (in the US, we're going down the same route, just a decade behind, and we're using inflation to make retirement impossible). That doesn't mean that they don't create awesome food, fashion, literature, music, urban renewal, ads even, gadgets, etc., and that their human interactions aren't rich. These, and a million other things, make up a vibrant culture. There has been no cultural stagnation in Japan over the last decade. The "lost decade" is complete media BS. The problem they do have is what I have called Japan Inc. It makes and implements government policies, including fiscal policies--something I've written about in other posts. But that has nothing to do with "culture." A government's fiscal policies and the people's cultural energy are not the same thing!
February 22, 2012 | Unregistered CommenterWolf
I would love to see the data used to make this graph -- anyone know how I can get my hands on it?

Thank you,
Patrick patk@stanford.edu
July 30, 2012 | Unregistered CommenterPatrick Kennedy

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