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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Henry Volquardsen who wrote (2281)	12/13/1999 9:06:00 PM
From: Henry Volquardsen	Read Replies (2) of 3536

sorry for taking so long, things got very hectic. I've been wondering a lot about Japan lately. I have some opinions, bearish, but am more interested in what people are thinking and whether they think the reasons for my concerns are real. I'll give my overview on what I'm thinking and then go through the posts since I posted this question and make comments. Hopefully we'll have some fun -g-. My concerns regarding Japan are on economic performance. When or how this impacts markets is a complex question. First the budget deficit. Depending on which numbers you use the budget deficit is currently running between 14 and 15 per cent of GDP. This is an enormous number. And what have they gotten for this massive stimulus, a meager 1.8% growth. And even this level of growth is debatable given the way the Japanese calculate GDP. And how long can they continue this level of deficit spending? The current debt is already at 150% of GDP. This is among the highest of any OECD nation. At the worst of our deficit spending we were right around 60%. And due to the large primary deficit they are adding to this number at an alarming rate. By 2003 they will be approaching 200%. Currently they are able to finance this because of the huge pool of domestic savings. But at the rate they are increasing the debt this won't be enough and there are signs that the domestic holders won't stay in bonds forever. The real ticking time bomb however is pension liabilities. Living in the US we are familiar with how US corporations account for pension liabilities. They physically put money aside in separate regulated accounts. They also recognize it is an expense and reduce earnings. There are sometimes questions about whether these accounts have been over or under funded. But the money is there and relatively secure. I realize pension accounting is pretty dry and boring stuff but the Japanese system is very lax and badly underfunded. Japanese companies are not required to charge any reserves for future pension liabilities. All pension expense is recognized as it is spent. This has lots of interesting implications. In the 60s and 70s there were very few retirees, less than 1 for every 20 workers. It was a minimal drag. In fact at some other point it might be worth noting that this practice helped inflate Japanese competitiveness by allowing them to avoid fully pricing their product, maybe Detroit was right...they were dumping. Now the Japanese economy has 7 workers supporting each retiree and they are expected to drop to 5 soon. And eventually lower. Almost all this expense will come out of current expense and will be a tremendous drag on the economy. Recently Toyota, I believe, announced a 20 per cent cut in pension payouts to current retirees (imagine a US company trying this). And Toyota is one of the rare Japanese companies that had made at least some allowances for retiree expenses. So how bad is the pension problem? Well the best numbers I saw for the bad loan problem were $500 billion. The unfunded pension liabilities are estimated to be $800 billion. Now pension liabilities are not going to hit all at once like the bad loan problem but it will be a more persistent problem for longer. So how does Japan deal with these problems and how will it impact the markets?

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