Japan’s Financial Wizards Will Need To Reach New Heights

NOTE. In this second edition I have inverted the ‘Yen Purchasing Power’ chart to make it more intuitive for the reader. I also added oil.

In April of this year the Japanese Ministry of Finance published a very useful fact sheet. The data and charts below are drawn from it.

There is nothing new about Japan’s bankruptcy. For decades they have defied the laws of finance and economics by doing seemingly impossible things year after year. Japanese governments like to spend more money than they collect every year.   See below.  

This year the government plan to borrow a further 35.5 Trillion Yen.  They will spend about 27 Trillion Yen servicing their debts.  In other words 75% of what they will borrow will be used to service existing government debt!

The central Bank of Japan has lent the government about half of its existing national debt.  In addition to this it has fixed interest rates at about zero for the past 20 years.  If Japan cancelled its debts with the central bank it would make little difference. Japan’s debt would still be absolutely massive even at half the size.  They would still be spending 37.5% of their 2024 borrowings on debt service at today’s ultra-low interest rates.

Can the Japanese just carry on at 0.1% interest rates for another 20 years?  Probably not. Interest rates are much higher in the United States and Europe and this is causing problems with the external purchasing power of the Yen.

Since 2021 the Yen has lost a significant amount of external purchasing power. One Yen buys a lot less Oil, Gold, Dollars and Euro. The Oil analysis below shows that a weaker Yen is not just a Foreign Exchange problem.

Saving The Yen By Hiking Interest Rates

If Japan tries to ‘normalize’ its interest rates higher to save the Yen, how will they service the national debt?  Remember today Japan is spending 75% of its annual borrowing on debt servicing with excessively low interest rates - Japanese government bonds (“JGBs”) are yielding circa 1%.  What happens if JGBs drift out to a 2% yield? Or a 5%/10% yield?

Saving The Yen By Intervening in the Foreign Exchange Market

The Bank of Japan have bought the Yen in the Forex market recently lending some temporary support.  However a country needs foreign currency with which to buy and support its own currency.  Japan is no longer the export nation it once was and has not been a natural earner of foreign exchange since 2011.  They have plenty of foreign exchange reserves here and now.  But that could change very quickly if Yen selling continues to accelerate.

Conclusion

Japan is the world premier money printer, they are the wizards of modern financial chicanery.  They will need to conjure up some new tools to maintain control in the Land of the Rising Sun.