Japan's Impending Debt Explosion

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Japan's Impending Debt Explosion. by K.E. Kiel Nielsen.

Japan is a dead financial system, still standing. Its Government's total liabilities exceed Japan's GDP four times. Then there are the financial system's debts, corporate debts and the private debts of Japan's households and consumers. Even the Government's debts exceed Japan's total savings, which are huge. Japan's banks and financial system simply cannot handle any external economic slowdown. But the US economy is now rolling such a slowdown towards Japan. Japan is so inundated with debts that a total financial crash is a distinct, global danger.

JAPAN'S IMPENDING DEBT IMPLOSION. Goldman Sachs has just done an evaluation of Japan Inc's public, i.e. Government, balance sheet. It is financial nightmare reading. In this evaluation, the cumulative claims against Japan's Government comes to - More - than 4-times, Japan's GDP!

The "Official" Debt of Japan's Government was about 130% of GDP, and that is increasing about 10% per annum because of the ongoing Deficit Spending, but this Goldman Sach's report quite validly includes off balance sheet debts and unfunded pension claims and it is the addition of these items that brings the total debt exposure of Japan's Government to a huge 4 X GDP.

Calculated into money, Japan's Government's total debts the comes to $US 12.4 TRILLION.

This total Government debt IS CLOSE TO THE TOTAL PRIVATE SAVINGS OF JAPAN.

Further, this calculation does NOT include Japan's Corporate Debts and the debts of Japan's Financial Sector, nor does it include the debts of Japan's households and their consumer debts.

Obviously, when the above four groups of other, private, debts, are - Added - to the 4 X Debts to GDP of Japan's Government:

JAPAN'S TOTAL DEBTS TO GDP ARE UNSUPPORTABLE.

Globally, that means that Japan is simply an enormous Debt-Implosion just waiting to happen.

A Chain Of Likely Causation.

A slow-down in US imports could be the necessary external trigger because such a slow-down in Japanese exports to the USA could force Japan's Nikkei Index below the hyper-critical 13,000 level. A level which, if reached or breached, will force all of Japan's Major Banks into a situation where they can neither claim that their share holdings represents part of their capital (because, below 13,000 there aren't any), nor can they sell any of their huge share holdings to cover the gaping holes in their own balance sheets - from the Bad-Loans, still there, from the Bubble- Economy back in the middle, late Eighties. Japan, is simply a ticking, financial Debt-Bomb!

The implosion of Japan's internal debt-structure, will have explosive effects upon the World's financial structure first, because (absurdly enough) Japan's is also the World's No.1 Creditor.

Japan, geo-financially, has larger holdings of external investments than any other nation on earth. It holds a huge portfolio of, US Treasury Debt Paper, of US Commercial Debts and - Shares, and an even more immense global portfolio of direct capital investments in plants and equipment.

In an accelerating Japanese Debt Implosion, the first things that can be sold globally in an attempt to re-gain liquidity are, obviously, the financial paper investments. First in line for such a sale are - Japan's mega-holdings of US Treasury Debt Paper, because it instantly translates into fresh, new MONEY. But that would have the effect of driving US interest rates way UP-Wards, unless the US Fed stormed into the breach and accepted the Japanese selling-wave by printing US Dollars in the quantities required to hold it off the secondary, commercial markets.

BUT, once the US Federal Reserve has done That, it also stands with a huge addition to its own assets and, as a consequence, the rest of the World will then see a huge, perhaps enormous, new additional quantity of US Dollars - inundating the World! But, if the Fed does not "Monetise" such a wave of Japanese selling of the US Treasury Debt-Paper it holds, US market rates of interest will explode Up-Wards. And, then what happens to the US economy and stock markets?

A Global Over-View:

With the US economy now slowing down at a rate of speed that makes its tires smoke and with Japan's financial system on the edge of an internal Debt-Implosion, globally, the situation is vastly different than the one in mid-1987, just before the Global, October 1987-Share-Quake.

Back then, in those now ancient times of the mid-late Eighties, the USA had just entered into its new global status as - A Globally Indebted Nation. Japan, back then, was already well on its way to set the stage of its Bubble-Economy but there was still room in Japan to blow it up, even more.

Then came the Global Share-Quake of October 1987. After a short hesitation, the newly installed Fed-Chief Greenspan (he had only been Head-Fed, for two months) led the world into history's all time great, global, re-liquifications. Interest rates were - CUT, but, vastly more importantly, the entire world's main cluster of Central Banks hammered fresh money into the global financial system to a degree never previously seen. It "Worked!" The world was "saved" from a repeat of the Dirty-Thirties Depression but, the event itself, set the stage for - TODAY.

Amongst the Central Bank Money-Pumpers, Japan pumped more new money into its banking and financial system than anybody else, on a national GDP basis. The "Glorious" late-Eighties Bubble-Economy followed! The period where it looked like Japan was going to over-take not only the United States but, the World. Then came - The BUST! Japan's economy slowed and, after a lag in time, Japan's stock market followed in one of history's greatest bear markets. But what was even worse was that Japan's - Collateral Foundation CRASHED! Any Nation's collateral foundation is the assets, and their value, which such a nation's banks and financial institutions have placed loans against. If loans, and their gearing to collateral values, have been forced as high (or, higher) that 90% of the value of the underpinning collateral, then all it takes is for the value of that collateral to - Fall Below - the size of the loan issued, before the lenders are in big trouble. In Japan's case, the main collateral was - Land Values. And when land values crashed (they are now down to 80%, or less, of what they were at the peak of the Bubble), it cut out from under Japan's banks - the Collateral, and left them with absolutely huge, BAD-DEBTS.

These Japanese Bad Loans are still here!

Leaving Japan's Mega-Sized banks with balance sheets, that are utter financial nonsense because Japan's banks are bankrupt, their capital still a lot less than the Bad Loans still outstanding.

The reason for re-hashing this past history - IS THIS. The last time, back in October ‘87, Japan could participate in bailing the world out, doing its part in the then huge global re-liquification.

BUT, in the next now fast approaching global downswing:

JAPAN - CANNOT PARTICIPATE - IN FACT;

JAPAN MIGHT CAUSE A GLOBAL,

FINANCIAL BREAK-DOWN.

www.the-market-economist....e1007.html



-- Carl Jenkins (somewherepress@aol.com), March 11, 2001

Answers

What the author of this article neglects to tell us is what will be the catalyst of change. Japan has done a great job of carrying these bad debts since there bubble burst over 10 years ago. What is to prevent them from carrying the bad debts for another 10 years or twenty?

The catalyst is that we're having a slowdown? The only way that there will be any changes in Japan is for them to admit their financial policies have been a total blunder over the last ten years and there good ol' boy network is much too strong for that. Loss of face and all that, you know!

-- Guy Daley (guydaley@altavista.com), March 11, 2001.


Wasn't the end or the beginning of March ground zero for the government to change the accounting rules such that bad loans had to be dealt with on the balance sheets of Japanese banks?

-- Will (righthere@home.now), March 11, 2001.

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