Nuclear Power in Japan; Prescient Voices From the Past Catch Up With the Present

March 16, 2011 · Posted in General Economics · Comment

I thought I’d reference some older snippets from articles that I found with background and warnings about nuclear reactors and power companies in Japan, some of them eerily prescient …

An LA Times article from 1988 explains how government intervention has incentivized the production of nuclear energy in Japan:

Strong financial resources, combined with government-set rate structures that guarantee a “fair return” of 7.2% on capital investment, largely insulate the nine major power companies from the economic woes that have bogged down nuclear plant construction in the United States.

Furthermore …

Hirose maintains that numerous minor accidents and operational problems over the past several years have gone largely unreported in the mainstream news media. Though shutdowns are rare, he believes these incidents belie the industry’s safety claims and foreshadow an eventual disaster on the scale of Chernobyl or Three Mile Island, in Pennsylvania.

Tamai, the industry federation official, rejects such criticism. Japanese nuclear plants have the best safety record in the world, he contends, with fewer than one-tenth the number of shutdowns of other countries and an enviable 76% average rate of operation.

To correct “distortions” advanced by Hirose and others, the federation has spent more than $5.6 million on newspaper advertising since this year’s Chernobyl anniversary in April, trying to reassure people that Japan’s water-cooled nuclear reactors are far safer than the graphite reactor in Chernobyl.

August 2004, Four workers die in Japanese nuclear plant accident:

Prime Minister Junichiro Koizumi told reporters: “We must put all our effort into determining the cause of the accident and to ensuring safety.” His government would respond “resolutely, after confirming the facts.”

However, a review of the events leading up to the accident and the history of other nuclear industry incidents over more than a decade reveals that far from “ensuring safety”, the government, together with the self-regulated nuclear power companies, is squarely to blame for the horrific deaths and injuries suffered at the KEPCO plant.

KEPCO admitted this week that the burst pipe had not been checked in the 28 years since the nuclear reactor began operating, even after a maintenance sub contractor notified it of the urgent need for inspection in November 2003. Further reports emerged that up to 17 such pipes at up to 10 other nuclear power plants operated by KEPCO throughout Japan have never been inspected.

March 2006, Nuclear reactor ordered shut by Japanese court:

A district court yesterday ordered the first shutdown of a nuclear reactor in Japan, saying the country’s second-largest reactor has a high risk of causing accidents and leaking radiation if an earthquake strikes, media reports said.

July 2007, Japan nuke plant leak bigger than thought:

The malfunctions and a delay in reporting them fueled concerns about the safety of Japan’s 55 nuclear reactors, which have suffered a string of accidents and cover-ups. Nuclear power plants around Japan were ordered to conduct inspections.

The plant in Kashiwazaki-Kariwa, 135 miles northwest of Tokyo, eclipsed a nuclear power station in Ontario as the world’s largest power station when it added its seventh reactor in 1997.

The Japanese plant, which generates 8.2 million kilowatts of electricity, has been plagued with mishaps. In 2001, a radioactive leak was found in the turbine room of one reactor.

The plant’s safety record and its proximity to a fault line prompted residents to file lawsuits claiming the government had failed to conduct sufficient safety reviews when it approved construction of the plant in the 1970s. But in 2005, a Tokyo court threw out a lawsuit filed by 33 residents, saying there was no error in the government safety reviews.

Environmentalists have criticized Japan’s reliance on nuclear energy as irresponsible in a nation with such a vulnerability to powerful quakes.

“This fire and leakage underscores the threat of nuclear accidents in Japan, especially in earthquake zones,” said Jan Beranek, a Greenpeace official in Amsterdam. “In principle, it’s a bad idea to build nuclear plants in earthquake-prone areas.”

July 2007, Japanese nuclear reactor under-designed for earthquake?

An earthquake off the western coast of Japan yesterday hit a nuclear plant with more than twice the jolt that the plant was expected to have to handle. The shock seems to have done little immediate damage, but has raised concerns about whether Japan’s nuclear plants are designed to withstand the kind of shaking they are likely to experience.

May 2009, Delays at Japan’s ill-fated nuclear plant:

“The failure to produce vitrified waste with domestic technology shows that Japan’s reprocessing technology is 10 to 20 years behind Europe and the United States,” Koide said.

The source at the Rokkasho plant agrees with Koide. “We have to accept that we were too optimistic from the beginning,” he said. He also said that JNFL should change its policy, whatever it takes, to solve the difficulties with the current furnace at Rokkasho.

One possible solution would be to use French technology, but the Japanese government is bent on developing its own technology and unlikely to choose that option. If the plant suspends operations for more than three years, as the source at Rokkasho suggests, then the situation will be more serious as Japan’s nuclear power policy is premised on reprocessing spent nuclear fuel at the plant.

May 2010, Japan reactivates repaired nuclear reactor:

The BBC said the accident that forced the shutdown resulted in no injuries and no release of radiation, but coming just two years after starting operation raised concerns about the safety of the plant. The plant’s operators were criticized for concealing the extent of damage to the reactor, the BBC said.

May 2010, Japan restarts controversial nuclear reactor

The proportion of the country’s energy generated from nuclear plants is to increase to 50 per cent from the current one third, and the utilization of the power plants is to increase from 60 per cent to 90 per cent of their generating capacity.

Monju is already decades behind its original schedule, and the government has so far poured some 900 billion yen (9.7 billion dollars) into the project.

The Japan Atomic Energy Agency expects to spend another 23 billion yen a year on the fast-breeder programme in the coming years. The government wants to complete the development of a commercial fast-breeder reactor by around 2050.

As always, the best thing we can do to ensure a safer future for ourselves and our offspring is listen to those who saw things coming before everyone else suddenly became an expert on the causes of such earthshaking events.

Tags: Interventionism, japan, nuclear power, subsidies

Japan Faces Potential Nuclear Disaster; Nikkei Down Over 16% in 2 Days

March 15, 2011 · Posted in Global Economics · Comment

The NYT reports Japan Faces Potential Nuclear Disaster as Radiation Levels Rise:

The No. 3 reactor building of the Fukushima Daiichi nuclear plant burned Monday after a blast following an earthquake and tsunami in this satellite image.

Japan’s nuclear crisis verged toward catastrophe on Tuesday after an explosion damaged the vessel containing the nuclear core at one reactor and a fire at another spewed large amounts of radioactive material into the air, according to the statements of Japanese government and industry officials.

In a brief address to the nation at 11 a.m. Tokyo time, Prime Minister Naoto Kan pleaded for calm, but warned that radiation had already spread from the crippled reactors and there was “a very high risk” of further leakage. Fortunately, the prevailing winds were sweeping most of the plume of radioactivity out into the Pacific Ocean, rather than over populated areas.

The sudden turn of events, after an explosion Monday at one reactor and then an early-morning explosion Tuesday at yet another — the third in four days at the plant — already made the crisis at the Fukushima Daiichi Nuclear Power Station the worst nuclear accident since the Chernobyl reactor disaster a quarter century ago.

Right now the Nikkei is down 10.5 percent after already having dropped over 6 percent yesterday …

Tags: japan, nikkei, nuclear crisis

Disaster Upon Disaster – Japan’s Inevitable Plight

March 13, 2011 · Posted in General Economics · Comment

While Japan’s quake is a disaster of enormous proportions, it pales in comparison to its impending fiscal tsunami. Bloomberg writes …

Prime Minister Naoto Kan is also preparing a fiscal response, deploying about 200 billion yen left over from the budget for the fiscal year ending March 31 and planning a supplementary budget. Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile the additional package.

Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort, and Chief Cabinet Secretary Yukio Edano said later that such a step cannot be ruled out.

The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.

…

[Finance Minister] Noda said the nation’s growing debt load would not impede its rescue effort. Standard and Poor’s downgraded Japan’s credit rating to AA- in January and Moody’s Investors Service lowered its outlook on the nation’s Aa2 grade to negative from stable last month.

“We are going to do everything we can” Noda told reporters in Tokyo on March 11 after the quake. “The fiscal situation can’t be a constraint to addressing this natural disaster.”

The idea of creating paper and computer entries in checking accounts out of nowhere is a damn lazy non-answer. It’s all the more tragic in light of the magnitude of the underlying disaster.

That this event would be used as an excuse to pile on to Japan’s staggering national debt is such a predictable pattern that it warrants no further comment.

For sure the quake could become a welcome scapegoat to blame for Japan’s debt crisis which is now coming full cycle, akin to Germany’s high public debts being blamed on its reunification or the US financial crisis being blamed on the collapse of Lehman …

Tags: earthquake, japan, public debt, quake

Japan’s Debt & Pension Crisis Enters Final Stage

February 20, 2011 · Posted in Global Economics · 1 Comment

To follow up on Keynesianism’s Depredations and Futility in Action, there is more evidence that the train wreck that is the Japanese government is hitting a wall …

Bloomberg writes Japan Must Raise Sales Tax Above 10%, Kan Panel Member Says:

Japan needs to more than double its 5 percent consumption tax to shore up the government’s finances given soaring debt and welfare costs, a member of Prime Minister Naoto Kan’s tax and social security panel said.

“I don’t think an increase to 10 percent is enough,” former Financial Services Minister Hakuo Yanagisawa said yesterday in an interview at his office in Tokyo. “Our discussions must be based on new realities.”

Kan appointed the 75-year-old Yanagisawa to the panel that will meet for the first time on Feb. 5. Yanagisawa, a former colleague of Economy Minister Kaoru Yosano, who is leading Kan’s push for a debate on the sales tax and has advocated doubling the levy. The government is set to issue a plan on shoring up Japan’s social welfare system by June.

Concern over Japan’s rising debt, the largest in the developed world, prompted Standard & Poor’s to cut the country’s credit rating last week. Social security costs in Japan, the world’s most rapidly aging society, have risen more than 60 percent since 2000 and will account for 53 percent of government spending in the fiscal year beginning in April.

Again: In my opinion, if you’re looking for a prediction of economic developments in the US, look to Japan. I think it’s possible that things will happen a bit faster here, but Japan shows us how much the system can be stretched before it has to fold.

Japan’s debt crisis is now approaching its endgame fast. But With all the turmoil going on in the Middle East and in Europe, few people seem to be paying attention …

Tags: japan

Keynesianism’s Depredations and Futility in Action

January 7, 2011 · Posted in General Economics · Comment

Japan’s Prime Minister sounds the alarm bells:

Japan’s top government spokesman said the country’s fiscal situation is “approaching the edge of a cliff,” underscoring Prime Minister Naoto Kan’s call for a national debate on raising the 5 percent sales tax.

Kan is “expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,” Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. “The supporting fiscal conditions don’t allow for any delays, it’s finally approaching the edge of a cliff.”

Politicians don’t blow the whistle until it’s way too late. So this pretty much sounds like an open and official admission that Japan’s retirement avalanche has begun and is in full swing.

Here’s what I wrote about this a while back:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

This whole mess in Japan started over 20 Years ago!

Keep this in mind any time you hear Keynesian whackos like Paul Krugman alongside politicians in power propose more and more government spending and debt as a panacea to the US’s comparable problems. They are today laying the foundation for the depredations that are to come in 10+ years from now.

Note that Japan’s PM is proposing to raise the sales tax to cover the shortfall.

This kind of stuff is predictable. As I explained in What’s the Problem With Government Budget Deficits:

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.

Also don’t fall prey to the illusion that the newly elected Republicans in Congress will do anything meaningful to turn the tide. If anything at all, they may come up with half-assed measures to appease the public for a little while longer. But will they propose 50+% cuts in military spending, Medicare, Medicaid, or Social Security??

Just take military spending as an example:

Republicans claim to be anti-taxes, yet they gladly and openly support the wars and destruction that end up gobbling up more tax money than anything else. Democrats claim to be anti-war, yet they gladly and openly support the higher taxes that end up funding all those war expenses.

Could there be a more beautiful example for this mad and brilliant shell game called “public finances”?

Tags: budget deficit, deficit spending, japan, public debt

S&P 500 Now vs. Nikkei in 1989; How Low Can We Go From Here?

October 3, 2009 · Posted in General Economics · Comment

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:

As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Along with that would come several periods of renewed optimism and spectacular rallies. Just as an example, look at the Nikkei’s rally from 1998 through 2001, a 140% increase!

All this would be consistent with my long term outlook for the US economy:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Just for fun, I attempted an Elliot Wave count of the indexes above because I think that the EWave formation really screams at you in this case:

Tags: contraction, japan, nikkei, s&p 500, US

Deflation Continues in Japan

June 26, 2009 · Posted in Global Economics · Comment

The AP writes Record fall in Japan prices fuel deflation fears:

Japan’s key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.
…
With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent.
…
Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.
…
The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation’s capital are considered a leading barometer of price trends across Japan.

“This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Japan’s central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.

Note that in reality the price declines are probably move severe. I am not exactly sure how the numbers are measured in Japan, but in the US for example, real prices are actuall falling at a much faster pace than reported:

When we replace OER with the Case-Shiller home price index, which most recently indicated a year on year drop of 18.7%, prices overall actually fell by 6.3%.

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

As I referenced in The Long Term Outlook:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt to GDP ratio of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Update: I meant to say “public debt to GDP”, not ” public debt per capita”, even thought that, too, is likely to be accurate.

Tags: deflation, japan

Delevaraging, Contraction, Imploding Consumer Credit & Increased Saving – The Long Term Outlook

May 25, 2009 · Posted in General Economics · 1 Comment

Asia Times Online makes some good observations in Easy bets with other folks’ cash:

Why then are investors persisting with this course of action that adds risks? Many theories have been propounded, but a clear framing of the future outlook would help to understand the sheer “courage” that is involved in buying such assets now. To make things easier, I have used a modified decision tree wherein the basic trend has been used as the title, with financial market consequences being highlighted below each such possible trend. Such an approach is provided below:

1. Green Shoots of economic recovery are for real (hahahahahaha, but let’s take these bubble-spewers at face value for now; or else read “Truth is too hard to handle”).

a. This could only be due to the US and European consumer spending money on borrowed time; yet again
b. Over the short-term that would argue for buying risky assets such as stocks and high-yield bonds and going short US Treasuries;
c. Inflation will rise inevitably, so buy physical commodities including gold;
d. Go short anything near the government bond curve including US Treasuries and German Bunds, among others.

2. We are into a Great Depression

a. The monetization of the debt cycle would have failed for this outcome to percolate to the masses in Europe and the US;
b. Financial institutions in Group of Eight leading industrialized countries cannot raise any capital from the public;
c. Forget about stocks, high-yield bonds that will fall in price dramatically just as soon you buy them for your retirement account;
d. Buy some government bonds, but only of countries that can service their future debt obligations (that is, avoid the likes of the US and pretty much all of Europe);
e. You will need to have some stuff that has real economic value rather than the worthless IOUs issued by G-8 governments, so buy some gold;
f. This might also be a good cue to buy some weapons and ammunition.

3. We will have a Y-shaped recovery (see How about a Y-shaped recovery, Asia Times Online, February 23, 2008.)

a. The US and Europe are toast, but emerging markets will do well;
b. Financial institutions in G-8 countries cannot raise any capital from the public;
c. Buy emerging market equities and bonds, sell everything else;
d. As most emerging market currencies are quite funky and don’t really fit into your wallets, you will need some gold for your travels.

My comment: I am of the opinion that #2 is the correct assessment of the current situation and that we have a long period of debt consolidation, consumer abstention, and wealth deflation before us. We are repeating the playbook from the Great Depression. Gold and silver should continue to hold the line. Government bonds should do fine throughout this period, see Time for Treasurys. Shorting commercial property ETFs in addition to that is a decent addition to any portfolio.

What the average reader thinks for himself is one thing; what he is being told by the financial media at large (and G-8 financial media in particular) is altogether a different matter. Whilst I would normally lean towards the school of an incipient economic recovery after a couple of years of any economic bust, a number of factors conspire to deny any such notion in my mind at the moment:

1. This is very much a crisis caused by excess leverage in the US (and, less so, in Europe). Until the leverage is washed out, there is no chance of any economic recovery;
2. Governments have engaged in widespread monetization of such leverage, rather than addressing the core event itself. This has the effect of actually making the future even more uncertain. For example, General Motors or Chrysler as private companies would have entered bankruptcy many months ago; but thanks to government intervention now re-emerge as worker-owned companies that couldn’t possibly get bank financing down the road (due to the destruction of creditors’ rights by the Obama administration). Ergo, this is money wasted by the government at great cost to the average US taxpayer: not exactly the recipe for an economic recovery;
3. Then there is the question of bank funding. Most analysts point to a funding gap of around US$20 trillion for the G-8 banking system by 2011, made worse by the reduced velocity of money (that is, a lower money multiplier). This problem has not been addressed, and most likely will not be; unless banks can pledge more useless collateral with their central banks and in effect get “free” funding;
4. Export-driven markets are toast, be it China or Germany or Japan. All these countries will have to reinvest in their domestic markets: some to fruitful results (China) but others to no avail (Japan). Whatever they do, it is clear what they will NOT do – that is, they will not buy more US sovereign and state-guaranteed debt;
5. Many of the weaker emerging market countries are facing funding pressures; particularly those in Eastern Europe. The resulting increase in defaults promises to fell the rest of the European banking system that hasn’t already fallen victim to the US financial collapse. This will also divert more resources from the International Monetary Fund and so on, to the expense of the G-8;
6. Increased strategic risks: think Pakistan’s ongoing fights with the Taliban, Iran’s nuclear weapons program, Russia’s anger with the North Atlantic Treaty Organization over Georgia as just a few examples of what could go wrong in the very, very near future.Based on all this, it is clear to me that the only people who could possibly believe that risky assets such as high-yield bonds and common stocks are a good buy are either the people who currently own them (and therefore will post profits when they rise in price) or those that need to get out of their positions (that is, sell their bond positions or raise new equity).

In most cases, the answer is “both of the above”, namely US and European banks who are loading up on some securities to cause artificial shortages that in turn help to raise prices of the rest of their books. These institutions have the benefit of knowing that a good trade gets them out of jail, but bad trades only result in more government assistance being lavished on them.

They aren’t playing with their own money, but rather with yours. When you are only ever going to lose other people’s money, the rules change and an entirely different “game” takes hold. That is what you are seeing now; until the final blows of economic data help to chase these fake rallies out of the market. When that happens, the biggest losers will be the people who own these risky assets like high-yield corporate bonds in the US (or Europe) and stocks of banks across G-8.

My comment: I marked the most important point in the passage above in bold. There is no end in sight for the current correction of this business cycle so long as the bad debts on balance sheets remain overvalued and uncorrected. For a good estimation of how long this may take, we can take a look at a recent report by the San Francisco Federal Reserve Board, titled U.S. Household Deleveraging and Future Consumption Growth:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

The report concludes with the following outlook:

Conclusion

More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.

My comment: My word exactly. I call it The End of Consumerism:

We need to respond to the reality around us rather than deny it. It is time to cut back and restore sanity and balance. Individuals have realized this and are doing the right thing. The government has not understood this fact at all. It is trying to keep alive failed businesses that should release resources for more demanded projects. It is trying to make up for the “lack of consumption” in the private sector. All these attempts will fail miserably. All they will accomplish is to slow down the corrective phase and turn it into a decade of agony.

Tags: consumer debt, consumer spending, economic outlook, household debt, japan

Unbelievable Export Contraction in Japan

February 25, 2009 · Posted in Global Economics · Comment

Bloomberg writes Japan Exports Plummet 45.7%, Deficit Widens to Record:

Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

Imports fell 31.7 percent from a year earlier. The drop in exports was in line with economists’ estimates. Analysts predicted a 1.2 trillion yen trade deficit.

Yen Relief

The yen fell to 96.91 per dollar as of 12:28 p.m. in Tokyo from 96.72 before the report. The currency is at the lowest level against the dollar in three months as the weakening economy reduces its allure as a haven.

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at companies including Nissan Motor Corp. and Toyota Motor Corp. The exchange rate has also made Japanese exporters less competitive than their rivals in South Korea, where the won’s 16 percent drop this year has helped to shield earnings of companies including Hyundai Motor Co.

Still, the Japanese currency has weakened 7.2 percent this month, offering some relief to exporters while indicating investors’ growing pessimism about the economic outlook.

“People are coming to realize that Japan is in deep trouble,” said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. “Considering what’s happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.”

Falling Stocks

Japanese stocks touched a 26-year low yesterday and the government is considering buying shares to support equity prices, the Nikkei newspaper reported today, without saying where it got the information. The Nikkei 225 Stock Average has lost 17 percent of its value this year. It rose 1.6 percent in morning trading.

The world’s second-largest economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Japan may shrink a record 4 percent in the year starting April 1, according to economists surveyed. The worst contraction to date was fiscal 1998’s 1.5 percent drop.

Japan became more reliant on exports for growth in the past decade, making the economy more vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent in 1998, according to the Bank of Japan.

Production Cuts

Companies cut production an unprecedented 9.8 percent in December from a month earlier and the jobless rate climbed the most in 41 years to 4.4 percent. Economists predict a report on Feb. 27 will show factory output dropped 10 percent in January.

Nissan said this month it will fire 20,000 workers and post its first loss in nine years as the global car demand plunges. Toyota, which is forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year.

Central bank Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Prime Minister Taro Aso is struggling to get approval from the opposition-controlled upper house to spend 10 trillion yen to aid companies and households, whose sentiment is near a record low.

The Japanese government is actually buying stocks on the stock market outright in order to keep stocks expensive. This is nothing but sheer insanity. In addition the Japanese central bank is buying up corporate bonds. Japan has learned absolutely nothing from their own crisis.

All this, plus this incredible export contraction, is certainly a harbinger of a substantial and ongoing Dollar rally against the Yen.

A contraction of Japanese and Chinese exports to the US is of course direly needed to restore global balance. Ongoing large current account surpluses and deficits are simply unsustainable. The source of this problem is the credit expansion policy in the US as explained in The US Current Account Deficit. Everything I said in there about China applies to Japan minus the currency peg.

Tags: dollar, exports, japan, yen

US Repeating Japan’s Mistakes

February 14, 2009 · Posted in Global Economics · 2 Comments

Moneymorning writes U.S. Making Same Mistakes that Led to Japan’s Lost Decade, Say Analysts:

Experts on the Japanese financial crisis, which culminated in 10 years of stagnation known as the “Lost Decade,” are fearful that the United States is making similar mistakes with its recent bailout efforts.

The two meltdowns started in much the same way – with busted stock-and-real-estate bubbles. With both the United States and Japan, whose market manias ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.

The real estate bubble popped and Japan paid the price then, as the United States is paying now. Banks were left holding trillions of yen in loans that were virtually worthless.

By early 2004, houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its peak-market value.

The Nikkei 225 stock index had dropped by almost three-quarters from its heights. All told, an estimated $20 trillion in stock market and real-estate wealth vaporized (although one could easily argue that the peak values weren’t real to start with).

Over the course of a decade, a succession of government policymakers waded through the crisis and routinely fell short of solving it. The Japanese lowered interest rates, increased government spending, pumped cash directly into banks and even tapped private capital to help buy some of the bad assets from banks.

All of these measures failed. Japanese taxpayers are estimated to have recouped less than half of what it cost the government to bailout the nation’s banking sector.

Yet, the U.S. government has employed many of the exact same tactics.

The benchmark Federal Funds rate stands a range of 0.0% to 0.25%. More than $350 billion has been poured into financial institutions in an effort to shore up their balance sheets and spur lending. And last week, newly appointed Treasury Secretary Timothy Geithner outlined his proposal for a Public-Private Investment Fund, which will buy up many of the toxic assets that have bogged down banks’ balance sheets.

“I thought America had studied Japan’s failures,” Hirofumi Gomi, a top official at the Japanese Financial Services Agency, told the International Herald Tribune. “Why is it making the same mistakes?”

Indeed, many analysts believe the largest U.S. banks to be insolvent, with more liabilities on their balance sheets than assets. These analysts believe the only thing left for U.S. officials to do is the same thing Japan ended up doing: Force major banks to declare their bad debts, and then weed out the weakest and recapitalize the survivors.

Japan’s delay in aggressively seizing control of the banking sector cost the economy trillions of dollars and years growth.

“The historical record shows that you have to do it eventually,” Adam S. Posen, a senior fellow at the Peterson Institute for International Economics, told the New York Times. “Putting it off only brings more troubles and higher costs in the long run.”

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, estimates that total losses on loans by U.S. financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, with half of that risk falling squarely on the shoulders of banks.

“The United States banking system is effectively insolvent,” Roubini said.

However, the government is hoping that over time, the economy will start to recover and some of the bad debt that banks are currently holding will start to regain its value.

“If [financial institutions] had to sell these securities today, the losses would be far beyond their capital at this point,” Raghuram Rajan, a professor of finance and economist at the University of Chicago told the Times. “But if the prices of these assets will recover over the next year or so, if they don’t have to sell at distress prices, the banks could have a new lease on life by giving them some time.”

The strategy has worked before, notably during the Latin America debt crisis of the 1980s. The total risk to the nine money-center banks in New York was estimated at more than three times their capital, the Times reported. But regulators did not force those banks to value the loans at the hugely depreciated value of the market and averted a catastrophe.

Marking assets to market is the only way to allow for the correction of this business cycle. The longer we wait for it, the longer it will take. If we wait 10 years it will take 10 years, if we wait longer it will take longer.

Tags: financial crisis, japan, US