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Demographics a disaster, but not relative for equity investors and there have been numerous population scares throughout history
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GDP Growth and demographics do correlate, but equity returns and GDP do not
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Slack in the labor market suggests great potential for productivity enhancements
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Debt at 227% of GDP is far worse than PIGS and debt it 7 times tax revenues versus 5 times prior to Russia’s default.
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Differs with PIGS, in that defaults typically happen with debt is externally financed, and made worse when locked into an exchange rate
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Much of the debt is short term, heightening “rollover risk”
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JP Morgan, if interest rates rise 2% within a decade, interest charges would consume all of tax revenues
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Household Savings Rate will turn negative in middle of decade, and Japan will have to go to the foreign market where they will find higher interest rate demands. But :
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The focus on the downward trend in household savings is highly misleading. Unlike Greece and, for that matter, both the US and UK, Japan’s gross savings rate (at 23% of GDP) remains high. In fact, Japan’s Fiscal deficit is the result of too much saving. Since the bubble burst in 1990, Japanese companies have been paying down their debts and raising cash. The financial surplus of the private sector has produced a shortfall in aggregate demand, which has been plugged by government deficits. Once corporate deleveraging ends and the Japanese start spending more and saving less, then (everything else being equal) the government decit should automatically contract.
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If the economy picks up, the sovereign debt issue could be resolved
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Embarked on QE equivalent to 5% of GDP, more than any QE since deflation began.
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Corporate balance sheets healthy.
HistorySquared:
GMO said that it’s rare for countries to default on domestic debt, but this jives with Rogoff and Reinhart’s 800 year study. Additionally, there is no mention of the reliance on China, which is the reason Hugh Hendry has CDS on Japanese industrials.
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