He Did It

PLEASE WAIT LOADING ,,,,,,,,, That is the takeaway for this weekend.

Decades ago this blessed land's bureaucrats and the research arm of the Liberal Democratic Party established that government finances faced a demographic wall, where the European-style social welfare benefits and United States-levels of taxation would collide with a wave of retirees, necessitating either:

1) mass privatization of government functions

2) reversals in the promises made to the citizens

3) higher taxation

4) potentially hyper-inflationary levels of government indebtedness, or

5) a combination of the above.

The solution the bureaucrats and the LDP proposed was a consumption tax, with an initial target rate of 10%.

It has taken thirty years to walk the walk from realization to realization. At least three prime ministers have had their heads handed to them over the tax, first for the imposition of a nominal 3% tax, then for each step of the march up to 10%.

However, on Friday, with every political instinct and a slug of economic analysis pulling in the opposite direction, Prime Minister Noda Yoshihiko managed to drag an opposition-controlled House of Councillors over the goal line.

The political costs have been enormous. Noda will most likely be rewarded, as he should be, with reelection as party president in September. However, he will preside over a much diminished Democratic Party of Japan, over 60 members of which have decamped in one way or another over the consumption tax. The Cabinet's and the DPJ's opinion polling numbers are in the cellar, with an election looming.

One can hate the raising of the consumption tax...and a lot of folks do, for reasons both intellectually sound and transparently selfish.

However, one cannot, no, one must not deny the bravery and tenacity of the prime minister, who sacrificed political blood and capital his party could not spare. When all the sirens are singing sweet songs about how cheaply the government can borrow money, Noda and his wounded party have sent a signal to the holders of Japan's bonds that the government of this blessed land will make good upon its debts through a willingness to both inflict pain and accept annihilation.

Well, So Much For That Eternal Verity

PLEASE WAIT LOADING ,,,,,,,,, I once issued a definitive proclamation regarding Peter Tasker, a founding partner of Arcus Investments.

It turns out I was wrong.

In his latest opinion piece for the Financial Times, Mr. Tasker has nothing interesting to say (Link).

It seems that sometimes even the best just phone it in.

For a better look at the short-term and mid-term consequences of the consumption tax legislation, read this Bloomberg report (E). Ignore the title (titles on wire service reports are too often misleading) and concentrate on what the analysts are saying about 2013, the election year. The looming threat of a tax rise in April 2014 will likely increase consumption over 2013, stimulating overall economic growth, as companies and individuals pick up big ticket items before the 3% jump in prices. The likelihood that consumers will shell out for goods and services at current prices, staring as they are at whalloping, regressive tax rise in 2014, will likely stabilize prices, nullifying, even if only temporarily, the long-term deflationary trend. Whether the halt in deflation triggers a spike in equities investments, given the sudden crash in real returns on bonds, is a question best put to Naomi Fink, a.k.a the Smartest Person In Tokyo, of Jefferies.

I am not as sanguine as Adam Richards (E), I certainly cannot be convinced that in a world where every country's bond yields are low -- some even lower than Japan's -- and a rock hard yen that is killing exporters, that a tax rise taking a first stab at stabilizing the nation's fiscal health is a really bad idea.

He Always Has Something Interesting To Say

PLEASE WAIT LOADING ,,,,,,,,, The Nihon Keizai Shimbun at one point chose Peter Tasker as the best equities analyst in Japan for five years running. That is not the best foreign analyst of equities. The best analyst of Japanese equities markets, period.

In an essay for the Financial Times, he proposes a very, very long-term solution to Japan's debt and stagnation crises.

Always a worthwhile read.

The Philosopher King

PLEASE WAIT LOADING ,,,,,,,,, Let us say you are reading an op-ed from Toronto's The Globe and Mail on Japan's immense national debt by a Mr. Daryl G. Jones, director of research at Hedgeye Risk Management in New Haven, Connecticut. You read that:

The Asian nation has been adding debt at an accelerating pace over the past decade. In 2001, Japan’s debt-to-GDP ratio stood at 144 per cent. A decade later, it was 212 per cent – meaning that Japan is now far more indebted than Greece was at the worst point of the recent crisis, when Athens’ debt topped out at 165 per cent.

And you sort of shrug, as you know half of the gross debt is actually owed by the government to itself, and that 90% of the remainder is in the hands of passive domestic investors -- who have an incentive, as they are Japanese, to not push Japan into foreclosure.

So you trundle along:

Japan’s debt burden is still expanding rapidly. We project the country will run a budget deficit of more than 9 per cent of GDP this year. This is a huge gap and will require even more borrowing. The Japanese government says that revenue from bond issues will account for 49 per cent of all government revenue in 2012 – a situation comparable to a family having to borrow half of the money it expects to spend over the next year.

Turning the situation around is difficult. Social security spending and debt repayments are projected to make up 53 per cent of Japan’s 2012 federal budget. Both areas are hard to cut, especially with an aging population.

Government is also tough to trim because Japan’s government spending is only 40 per cent of GDP, lower than in most industrialized nations. Thus, it is unlikely that Japan can, or will, implement austerity to reduce its deficit.

This makes you a bit more worried, as it reflects some of your own concerns. Laying aside the country-as-household metaphor, which never works, any more than the country-as-corporation metaphor, the inability of the Democratic Party of Japan, despite its best efforts, to find "wasteful government spending" in amounts that would make sensible Hatoyama Yukio's and Ozawa Ichiro's complaints about the sequencing of the imposition of a rise in the consumption tax ("First find all the waste; cut it; then make the necessary tax adjustment") is a point the Noda government is failing to hammer home.

The op-ed then takes a turn, as they always do, through Japan's demographic conundrum. You skip over the part about investors losing confidence as they did in Greece, Portugal and Spain, which managed to have debt crises prior to demographic crises.

Then you read another interesting passage:

There are a number of reasons that Japanese sovereign debt may be re-priced sooner rather than later. The first is that Japan will have to refinance 24 per cent of its outstanding debt this year, an enormous amount that will test the limits of the market’s hunger for Japanese bonds. Second, Japan is shifting from a current account surplus to a current account deficit, which naturally reduces the appetite for Japanese bonds.

If the current account were going into the red zone, that would be really worrisome. It must be noted that yesterday the Finance Ministry announced an unexpected trade surplus for February (E) -- so perhaps, for at least today, we can ignore our fears of the inevitable switch to a current account deficit.

So everything is going pretty well. There are some dire predictions and uncomfortable facts, but nothing you cannot handle.

Then, in the second-to-last paragraph, you hit this:

Japanese philosopher Daisaku Ikeda once said, "A person, who no matter how desperate the situation, gives others hope, is a true leader."

...and then your day is shot, as your mind is filled with increasingly elaborate and borderline paranoid theories ("Hedgeye...You know if you say it really fast, you know what it sort of rhymes with?").

"Philosopher"? That is a new one for me.

For the full op-ed, click here

The Construction State, Crumbling

PLEASE WAIT LOADING ,,,,,,,,, From Jiji Press:

2 Japan Ministries Warned of Poor Infrastructure Maintenance

Tokyo, Feb. 3 --Japan's infrastructure and health ministries have failed to carry out sufficient maintenance of public infrastructure, the Internal Affairs and Communications Ministry said Friday.

The Internal Affairs Ministry urged the two ministries to improve the management of infrastructure under their supervision, including ports, airports, water and sewage systems, and rivers.

Many of such facilities in Japan were built during the nation's postwar economic boom, and adequate maintenance is now required to help prolong the lives of the aging facilities.

The Internal Affairs Ministry conducted a survey on the conditions of part of such infrastructure facilities between fiscal 2006 and fiscal 2010.

During the five years, no regular maintenance work was conducted at 13 of 18 ports managed by local governments and five of nine state-managed airports, the survey showed.

To the above the Nihon Keizai Shimbun adds that at 7 of the airports, 80 different areas in need of maintenance remained untouched and at 19 water treatment facilities, 6 were not carrying out regular inspections. (J - but beware of rapid link rot)

This was always on the horizon: how would it ever be possible to maintain original facilities built in the high growth era when the countryside was slathered with new but basically unneeded facilities in the slow growth era. Sure the latter tweaked the GDP figures and perpetuated the cycling of cash between the construction companies and the Liberal Democratic Party. However, the bill would eventually come due, when the country's debts and deficits would limit the amount of money that could be spent maintaining the nation-spanning concrete, asphalt, steel and glass jungle.

Rocket Science

PLEASE WAIT LOADING ,,,,,,,,, James Saft, a columnist for Bloomberg Reuters, purportedly one of the world's most influential finance and business wire services, has a interesting column out today. Interesting as in "How interesting it is that this piece got past the editors." (Link)

Saft offers a dire scenario that should give any possible foreign investor in Japan's government bond market pause:

At current very low interest rates - 10-year government bonds yield a paltry 1.0 percent - Japan has ample room for maneuver. Take that rate to 2.0 percent and Japan's annual interest bill doubles.

Call that bold; call it counterintuitive. Call it 1+1=2.

(Many thanks to reader JM for putting the scenario into perspective for me.)