Thursday, January 27, 2011

Japan: Downgrading their Debt

On January 27th, 2011, Standard & Poors announced that they downgraded Japan's sovereign debt from AA to AA- because of concerns over the country's debt, deficit and deflation.  This follows a downgrade from Aaa to Aa2 by Moody's Investor Service back in May 2009.  

Since I had originally posted on these three issues back in August of 2010, I thought perhaps it was time for a brief update on Japan's fiscal situation, especially in light of this weeks news that the Congressional Budget Office is predicting a $1.5 trillion deficit for the United States in fiscal 2011.

Please note that for the purposes of this posting, I am using a conversion rate of 1 USD equals 83 Japanese yen.

According to Japan's Ministry of Finance publication Japan's Fiscal Condition dated December 2010, Japan's "long-term debt outstanding of central and local governments" at the end of the fiscal year 2010 was estimated to be $10.458 trillion (¥868 trillion) or 181 percent of GDP.  In the draft budget for the fiscal year 2011, this is expected to rise to $10.735 trillion (¥891 trillion) or 184 percent of GDP.  Here's a chart summarizing the situation:

Japan is budgeting for a deficit of $285 billion (¥23.654 billion) for fiscal 2010 and forecasting a $274 billion (¥22.749 billion) deficit for fiscal 2011 as shown in this chart:

Here is a very interesting graph showing Japan's growing gap between tax revenues and total expenditures since 1975; note that government tax revenues in blue are trending down while government expenditures in red are generally still trending upwards.  One has to wonder how much of this is due to an aging demographic and mounting interest payments on the country's growing debt.  As well, please note that the grey bars show the government bonds that have been issued to cover the deficits:

Here is a chart showing the total balance of outstanding government bonds.  It's interesting to see that the bond balance of ¥668 trillion yen will take approximately 16 years of general account tax revenues (at ¥41 trillion) to reduce the balance to zero assuming that all government tax revenue goes to pay off the debt.  

As well, the government calculates that the debt per family of four is ¥20.94 million ($252,290) and that the disposable income of an average family is ¥5.13 million ($81,429).  These are the kind of numbers that most people can relate to whereas the concept of debt-to-GDP can be very abstract.  In comparison, the United States debt is $14,060,011,229,556.38 which works out to $183,190 for a family of four.

Here's a chart showing the trends in the interest owed on the debt and the average interest rate on the debt outstanding.  It is most fortunate, for Japan, that they have had a decade of very, very low interest rates otherwise the debt situation would have reached the critical point long ago.  As it stands now, for fiscal 2011, Japan will owe $119.28 billion (¥9.9 trillion) in interest:

For comparison, here are the interest on the debt statistics for the United States for this fiscal year (by month) and back to 1988:

Here is a breakdown of Japan's federal government expenditures by category over the past 50 years.  Note how Social Security expenditures ramp up, most markedly between 2000 and the present and how they are now the largest single government expense.  This is a direct result of Japan's aging population and is an issue that many Western governments will face as the baby boomers pass into retirement:

Lastly, here is a comparison of general government net debt as a percentage of GDP over the past 15 years for Japan, Italy, the United States, France, the United Kingdom, Canada and Germany.  Japan is, by far, the worst offender when it comes to their debt-to-GDP ratio, however, notice that most other countries' ratio ramps up as a result of stimulus required during the Great Recession:

Let's take a brief look at Japan's inflation rate over the past 30 years:

Now let's look at their 10 year bond interest rate:

As you can see, deflation is, for the most part, firmly entrenched in Japan's economy.  As well, the Bank of Japan's decade-long program of quantitative easing has kept interest rates at extremely low levels since 1998.  Despite that, Japan's economic growth has been modest at best with rising unemployment and growing social unrest.

It is always interesting to see the Japanese economy in action.  In so many ways, it is a precursor to what will likely happen to the economies of many Western nations, particularly those with masses of baby boomers about to reach the years when they expect to access entitlement programs like government-funded health care and pension plans.  Japan seems to have arrived at that junction in its economic history first and I would suggest that our governments had better learn from Japan's experiences before it is too late.


  1. Who does Japan owe all this money to?

  2. Probably many of the same groups and countries that own US debt. Here is a recent list of top US creditors.

    Hey Junkie, with regards to Japan's dire situation, at what point does their system simply "snap?"

  3. Why is any of this a problem if Japan can simply create their own fiat money out of thin air (or, actually, via a computer keyboard)?

    I'd have thought the real issue would be the availablility of (human) resources due to its ageing population.

  4. Paul,

    I have no idea when Japan's system will buckle under the weight of its own debt; one thing is different when compared to American debt, the citizens of Japan own most of their own debt so at least interest payments on the debt stay within Japan rather than being exported to China et al. That factor alone may keep them afloat longer.

  5. its all a joke created out of thin air is right. we live in a crazy world

  6. paul, have you read greg pytel's blog at all? he has a great take on whats happening.

    thanks for your work.

  7. I am really glad you are using a "net" debt-to-GDP ratio. Unfortunately, I am saddened at how difficult it is to find sub-federal debt ratios by country.

    Take Canada for example: We have somewhere around 35% net debt-to-gdp for our federal government, and it is around double when one includes provinces as well while still excluding local governments. (70%)

    The US has about 70% net debt-to-gdp and around 11% as for the average state debt-to-gdp. (81%)

    Let's not forget local government debt around 7% debt-to-gdp for US municipalities, I do not know this figure for CDN municipalities.

    My point here is that "total government" net debt-to-gdp is a fairer comparison by country; I am not sure what Japan has for provincial & local government debt. But when one looks at all factors, it demonstrates how much we are all in debt.

    One more concluding comment, the province of Ontario has around $200B in government debt. California is around $175B in government debt; but California's economy is TRIPLE the size of Ontario's!!! Scary situation for Ontario!


  8. I didn't realize that, Junkie. I'll keep that in mind. Much the opposite over here as Japan and China own a significant chunk of ours.

  9. I am saddened at how difficult it is to find sub-federal debt ratios by country.

  10. I cannot thank you enough for this article. I have a new site launching in about 2 weeks called Most people have been focusing on trying to short the yen and there are a few ETFs that let investors do just that. I also like the risk reward ratio of being short the Japanese Government Bond market directly? How much downside is there to being short the 10 year JGB with a 1.3% yield?

    Member, Chicago Mercantile Exchange