Japan may go Bankrupt? Now that's scary!
washingtonpost.com
Corrosion of Confidence
By Robert J. Samuelson
Wednesday, June 12, 2002;
A decade ago, the idea that Japan might default on its government debt was a crackpot notion. Since World War II, no major industrial country had repudiated any of its debt, and Japan -- the world's second largest economy and a technological leader -- seemed the least likely candidate to do so. No more. All the bond-rating agencies have downgraded Japan's debt; recently, Moody's lowered its ratings several notches. The odds of default are rising.
By itself, Japan's altered plight is fascinating. But it is even more instructive as a metaphor for a larger economic transformation. We have gone from a world (it seems) of small and understandable risks to one of huge and imponderable hazards. Terrorism? Who knows? It may be an immense danger -- or merely a periodic tragedy. The accuracy of corporate accounting? Another black hole. The increase of tainted companies (Enron, et al.) sows widespread suspicions, even if the scandals touch only a few firms.
Among corporate executives and institutional investors -- more than average consumers -- there's a vague loss of confidence. It reflects the unease of venturing into uncharted waters. Economic forecasts typically incorporate changes in interest rates, prices, labor costs and the like. These are familiar benchmarks. But increasingly, economic psychology depends on hopes and fears that lie outside recent experience. We don't know what we don't know -- or the consequences of what we don't know.
There's a rediscovery of risk. Japan's government debt is a case in point. In 2003 total debt (the money borrowed to cover past deficits) will reach nearly 150 percent of national income, or gross domestic product, estimates the Organization for Economic Cooperation and Development. In 1991 it was 61 percent of GDP. By contrast, U.S. government debt is 58 percent of GDP; Italy's debt is 105 percent of GDP. Worse, Japan's debt is growing rapidly, because its current deficit (the gap between spending and taxes) is immense, almost 7 percent of GDP.
The classic ways of cutting a budget deficit are raising taxes and reducing spending. But because Japan's economy is so weak, either approach might cause a deep recession and worsen the deficit. If Japan's debt continually grows, it will soon hit "levels not seen in the developed world since before World War II," says Moody's. At some point, "debt levels become unsustainable."
Just what this means is unclear. Banks, pensions and other investors might balk at buying bonds (that is, lending money). In that case, Japan could not repay maturing debts. Or Japan might unilaterally extend the maturities of existing debt. Or something else. When might the debt become "unsustainable"? Says Moody's: "Such a point is not knowable in advance."
Vincent Truglia, who oversees Moody's government bond ratings, says the odds of a default are still small. Perhaps 200 to 1. But the odds rise with the debt. Naturally, the Japanese government says a default is "unimaginable." Most debt is in yen. About 95 percent is held by Japanese, who are huge savers. The government assumes that ordinary Japanese will continue to make vast deposits into banks and other financial institutions, which will buy the needed amounts of bonds.
Not everyone agrees. Adam Posen of the Institute for International Economics foresees a financial crisis sooner rather than later. Japanese savers, he says, have been shaken by loss-plagued banks and pyramiding government debt. The danger is a shift from deposits into "cash, gold [and] offshore accounts." The result would be a credit squeeze. Since last summer, says Posen, monthly gold imports into Japan have risen fivefold.
So we don't know whether a crisis might occur, when or what it would look like. Nor can we know the repercussions, in part because there's no recent precedent. "After the late 19th century, the defaults are almost all in emerging markets -- they're Argentina, Brazil and Turkey," says economic historian Barry Eichengreen of the University of California.
Here is the larger lesson: Uncertainty breeds caution. People everywhere act on dreams and dreads. The stock market flourishes or falters according to the prevailing mood. To make new investments, companies need more than cash flow. They need enthusiasm. In the late 1990s, the euphoria was indestructible. Now there is a curious tension. American consumers have remained optimistic. Their spending has kept the economy advancing. But among economic elites, there's a foreboding that something -- terrorism, corporate scandals, a dollar crisis, a stock market crash, a Japan crisis -- is leading us to we know not where.
The foreboding could become self-fulfilling if it paralyzes people and companies. The present fears may be as overblown as the recent euphoria. But genuine risk is an unsettling concept. Peter Bernstein, the well-known author and economic consultant, recently said: "Uncertainty is something we cannot quantify, we do not know what is going to happen, we don't know what the probabilities are." Precisely. |
