The Nobel Prize winner in Economics Simon Kuznets once said that there were four types of countries: “The developed, the underdeveloped, Argentina and Japan.” And these last two categories have fascinated analysts of all kinds for decades.
Argentina is already being talked about a lot these days: it has been collecting payment suspensions for some time — and inexplicable inflation data for a consolidated democracy that is neither at war nor has suffered any type of natural catastrophe. And Japan, for the opposite reasons: it is a country with absolutely stratospheric levels of public debt that does not suffer any type of punishment for it. A mirror in which all countries seek to look at themselves thinking about what is coming in the coming months, after the coronavirus triggers the public deficit and debt of Spain, half of Europe and the US.
In particular, the recent figures are extraordinary. The country owes 257% of its GDP, some 9.8 trillion dollars, which is equivalent to about 77,000 dollars per inhabitant. In addition, the debt has not stopped rising: in the entire last decade, the lowest public deficit was registered this past month of March, with a 5.8% of GDP mismatch between expenditure and income. Figures that would lead to requesting a bailout -or several- from more than one country and that would make the European Commission faint if it happened on this side of the world. And yet nothing happens.
negative interest
The most extraordinary thing, perhaps, is that this debt is not an unsustainable burden. According to the most recent data from the Bank of Japan, debt interest accounts for 9.4% of government revenue, barely 1.66% of GDP. Almost one point less than what Spain pays for owing less than half the percentage accumulated by the Asian country. Something that helps the fact that the interest on the debt is currently negative: -0.04% on the 10-year bond. And the Bank of Japan has already warned that to keep prices at that level for the duration of the health crisis.
And that’s the second key: if the Bank of Japan isn’t monetizing debt, it’s a lot like it. The institution has a balance of 5.21 trillion euros, more than 100% of the country’s annual GDP, and has no sign of stopping its purchases. Normally, such a situation would trigger inflationary pressures in any country. But the hangover of the roaring ’80s and the aging spiral it’s stuck in has made Japan immune to rising prices.
flat encephalogram
As the economist Javier Santacruz explains to elEconomista, the magic formula that the country has discovered is very simple: that not even the infinite issuance of debt and money can boost prices. “It is an economy with very low growth, stuck in an economic cycle with a flat encephalogram and full of deflationary episodes” that not even the ticket printing machine is capable of counteracting. Its origins date back to the crisis of the late 1980s, when a construction-driven financial bubble burst, leaving the country’s economy in a coma from which it has failed to recover.
Added to this is another key circumstance: the aging of the population has taken the country’s productivity ahead. “All the advances in technology are eaten on the other side by the fall in the labor factor, because there is less labor and more and more, so total productivity is stagnant,” explains Santacruz.
This aging also attacks another of the pillars of the economy: consumption and investment by families. Older people consume less, which slows down the money cycle and reduces inflation. And its eagerness to invest in safe funds has enabled the Bank of Japan.
And that is probably the biggest problem and, at the same time, the biggest advantage of the country. Japan’s debt is mainly held by domestic investors and its own central bank. The economist Robin Harding argued that this circumstance makes them immune to a suspension of payments: “If it did not pay, the Government would have to recapitalize its own banks, returning to the starting point.” For Santacruz, “this is the effect of having such a closed economy. There are hardly any foreign investors in their capital markets, and since they have a positive current account balance of payments” -that is, more exports than imports- “nor can they inflation from outside”. An immunity to price increases that is unique in the entire world and that defies common theories about inflation.
In summary: Argentina is very vulnerable to inflation because it is a young country and tied to the dollar, so any international turbulence takes it ahead. Japan is isolated from the world and has no problem printing infinite yen, because not even for that reason is it able to trace its consumption. Neither of the two examples are particularly attractive in the long term. The risk, in any case, is that the coronavirus crisis is the trigger that can lead us to ‘Japanization’. Italy seems to have already traveled a large part of the way in that direction.
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