Vitaliy Katsenelson presented a very compelling argument that it is not Greece or Spain or Ireland or the USA that is the next major country to drop — its Japan.

These are two of his 25 slides, and they paint a bleak picture of Japan:


click for larger charts


Category: Credit, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

49 Responses to “Japan – Past the Point of No Return”

  1. the bohemian says:

    only another 100% to go

    we can match and beat Japan at their own game

    GO Bernanke!

  2. Mannwich says:

    Hey – good news! Benny & Timmy can look at this chart and know that they can pump our debt MUCH further before real trouble hits. Bring it on, guys.

  3. Mannwich says:

    And ours is still the reserve currency, so maybe we can even “beat” Japan? Money and debt are just “concepts” anyway. ;-)

  4. Carse says:

    Is this a desire for a Yen carry trade to return? I wouldn’t count on it until Government motors goes belly up or goes private.

    And even then there is Europe and just about every other nation desiring a weak currency right now and into the foreseeable future.

    Japan will just have to take a number and get in line.

  5. d4winds says:

    Japanese interest rates tell a reverse story. Spain, etc. should be so lucky as to have an outlook as “bleak” as Japan. Generally a good blog, but this sort of graph is about a decade old, as is the faux alarmism.

  6. d4winds:

    I am not sure I understand your basis for disliking Vitaliy’s analysis.

    How can this be a decade old if the data is right up to Q2 of 2010?

  7. the bohemian says:


    what’s 10 years- almost nothing in gelogic time

  8. obsvr-1 says:

    Interesting article on Japan Debt and who the major holders are:

  9. the bohemian says:

    let’s pretend I wrote “geologic”

  10. “Benny & Timmy can look at this chart and know that they can pump our debt MUCH further before real trouble hits”

    Krugman uses Japan as justification for pumping up our debt. He says if the bond vigilantes arent going after Japan why are people worried about them going after the US.

    I’d counter that you don’t want to give up your sovereignty to the bond market, because the bond vigilantes don’t matter… until they do.

  11. Mike in Nola says:

    The main thing for us to worry about is when/if Japan has to start dumping treasuries to raise cash whenever it hits the fan.

  12. NoKidding says:

    I think I see d4winds point.

    Japan looks bad based on that chart, but the more other information you add the less weight the chart carries. As a broad counterthesis, I would propose:

    Japan is a merchantile economy with goal of maximizing positive balance of trade with other nations. It may be accumulating debt to weaken its own currencyas part of that strategy. The market acknowledges that Japan’s debt is counterbalanced by industrial capacity by granting it favorable financial terms.

    Conversely, the more other information you add the worse certain other nations look. Their increasing debts and weakening currencies do not fit into any apparent strategy. The market acknowledges their situation with punative financial terms.

  13. Super-Anon says:

    As a typical American economist might say:

    “Fortunately all that debt is owed to Japanese citizens.”

    It’s not like all those Japanese savers will revolt or anything when they discover that their savings is just a giant illusion created by a multi-trillion dollar BoJ sponsored ponzi-finance operation.

  14. Super-Anon says:

    (Whoops… I cut myself off before I finished.)

    Since when has a government ever been overthrown by angry creditors and taxpayers?

  15. financial says:

    The Japan Post Office, one of the world’s largest deposit bank announced last week that as of 2011 they will no longer be buying JGB, they will be a net seller, as a consequence of the Japanese no longer increasing their savings, the Japanese are now consuming their savings the natural result of retirement.

    Demographics is the one missing element of the analysis.

  16. eludog says:

    To me, it is obvious that Japan is past the point of no return but they continue to issue debt. But can the Japanese continue to issue debt forever as their interest rate falls further and futher to near 0 due to the fact they can print money?

  17. adbutler007 says:

    I am in the ‘turn of all the computers, turn off the lights, close the door and walk away’ camp. However, one must consider all the facts. To whit, it is necessary to measure Japanese government debt NET of foreign reserves. From the India Times (

    “Some analysts say Japan’s net debt provides a more accurate picture of the country’s indebtedness. This measures gross debt minus government assets such as public pension fund reserves and foreign reserves. On that basis, debt will reach around 105% of GDP in 2010, the highest among major economies, the OECD says. Still, some analysts say Japan would not be much worse off by that measure than Belgium and Italy were in the 1990s, and both nations avoided a sovereign debt crisis. “

  18. DL says:

    When the suggestion is made that the US government might monetize the debt, the anti-inflationists argue that we should look to Japan, which has no inflation.

    To which I would say, all that the Japanese example proves is that the inevitable can be delayed for many years.

    My money’s still on monetization of the debt, at least by the US government. (Although it may take several years before we get there).

  19. wally says:

    This a half-picture. Japanese also hold great savings – which is debt when viewed from the other side. If Japanese retirees cash in savings, debt slowly goes away.
    That’s exactly how it is supposed to work.

  20. Mannwich says:

    @DL: I think I’m in that camp as well. Could take several years (several more than people think, I’m guessing) though.

  21. flipspiceland says:

    I owe myself $ 5,000,000; I have $3,000,000 in savings.

    What is the likelihood of anything disastrous happening that would make this equation anything but useless?

    Japan owes itself the bulk of the debt. So what? Are they going to call in the debt and if they are how are they going to go about doing it?

    ..and what Wally says.

  22. aiadvisors says:

    I wouldn’t be so quick to write off the Japanese. They are compulsive savers and most of their debt is held by… them. They also hold a massive amount of our own (US) debt. The fact that they OWE a lot of debt must be judged by the fact that they also OWN a lot of debt. It’s good old fashioned balance sheet analysis. Also please note the strong yen. Other analysts with actual skin in the game apparently don’t see the problem. The Yen presently is a currency safe haven.

  23. DL says:


    Whatever happens won’t be based on logic. It’ll be based on the political path of least resistance.

  24. ashpelham2 says:

    I don’t claim to fully understand Japan’s predicament, other than my understanding of their lack of growth now for nearly 20 years. I see this as a demographic problem, and it certainly can lead to economic demise.

    What we must observe as Americans is, what does our demographic look like? Are we in the same place as Japan was in 1990? I don’t think so, and especially considering our population and available land. I do think that NAFTA plays a role in ours vs. the Japanese futures. NAFTA has allowed the whole continent to be on more of a level playing field, while I don’t believe that Japan has any such agreement with neighboring countries (and, let’s not forget, they are an island nation).

  25. Lugnut says:

    We know what happened last time the Japanese were painted into a corner.

  26. Julia Chestnut says:

    Still betting on Mexico. Not necessarily a debt problem, of course, a sovereign nation problem. Did you notice that the narcotraficantes have escalated to using bombs? Good times created a decent-sized middle class, who are currently being squeezed again and seeing their standard of living demolished along with their sense of security. It is really not good.

  27. Patrick Neid says:

    The Japanese savings are almost gone. If demographic studies have any validity their collapse over the next 25 years will be from old age.

  28. Darmah says:


    “Since when has a government ever been overthrown by angry creditors and taxpayers?”

    I think there might be two where this played more than a passing role: the one in 1776 and the one in 1789 (US and French).

  29. Japan has been trying to tackle its massive deficit and every government that has tried recently has been turfed. The public is unwilling to deal with the elephant in the room. When someone is in denial like that then the problem is only beginning to manifest itself. All those seniors that hold all that debt will want it to retire on. Who will generate the revenues not only to pay off that debt, plus the interest but also to continue to fund the government? There is no one left behind the curtain that will do this. The next generation does not have enough economic power. So if they impoverish the seniors by defaulting on that debt what are they going to do? Kill them off? No, then they have the added problem of having to support destitute seniors as well. It is a real dilemma.

    Another troubling point is that Japan has been one of the financiers for America and subsequently the world. It is one of the pillars in the world economic building. One of the main pillars. If this one turns in on itself to take care of its own problems it will weaken the whole world cash flow structure.

    The question is who will step in when Japan becomes economically ill? There is China but are they willing? Would you be willing to throw good money knowing it will almost be guaranteed to lose money? How stupid do people think they are? Why do you think they are building up their internal economy? They will turn inward if pushed also. It is just that the reasons will be different. After that where does the funding come from? These are multi trillion dollar funding problems that aren’t going to be met by the Starbucks employees of the world. That is especially true if they learn that the chances of even making their money back at par are slim and none.

    Lenders can be surprisingly fickle when push comes to shove. No one will lend unless there is something in it for them and Japan and the US are running out of bargaining chips that aren’t already securitized. The only ones left to lend are CBs at the magic printing presses but at some point the public will catch on to that game too. They will either go in two directions. They will demand a stop to it seeing how the inflation is only making the problem worse or they will demand more if it thus pushing the world economy into hyperinflation

  30. Patrick Neid says:

    Here’s a link to his article that may have provided some background to the charts:

    Pretty basic stuff that has been discussed for several years in bear caves.

  31. Drewbie says:

    Zimbabwe is considered a developing nation? I thought devolving would be a better term?

    >Still betting on Mexico.

    Hmmm. 90% Catholic, or something like that. That’s a lot of blind faith to overcome before reality hits home. 90% of the country think a virgin mary hanging from the rear view mirror is an adequate substitution for seat belts and carseats for their children.

  32. 90% Catholic 10% gangsters?

  33. Thor says:

    Julia – Yes, horrible, and our fault as well. We supply the demand for drugs, as well as the guns they use to kill each other. Can you imagine the outrage if we were doing this to Canada? Or if France were doing it to Spain?

  34. Japan owes its debt to itself, by and large, and in any event, has loads of foreign currency it has accumulated in order to keep its currency from the stratosphere. It continually runs trade surpluses.

    The US, on the other hand, has about half of its debt held by foreigners, and continually must borrow more to finance its massive trade deficits.

    Japan will default internally, but probably not anytime soon. Growth ain’t never coming back on any sustainable basis unless Japanese women start having babies.

    The US is far more likely to default externally, probably by devaluation of the currency (i.e., inflation). That’s always an option when you print the currency you borrow in. We have no accumulation of foreign reserves to tide us over. But we do still have nukes.

  35. insaneclownposse says:

    BR – I know you find these topics tiresome, but I think they are worth discussing. Thanks for posting this. There is a lot of valuable information in this thread. I don’t know if Japan is going to default before the U.S., but I feel that the only way to truly “fix” the U.S. and Japan economies is to have a serious restructuring of both private and public debt.

    Whether that restructuring happens in an orderly or a disorderly fashion is hard to say. I’m tempted to think that it will be disorderly as major changes don’t usually occur without a crisis.

  36. RW says:

    What d4winds, NoKidding and wally said. Katsenelson’s discussion raises some interesting points and is not unreasonable on its face but presenting big liability numbers in the absence of counterbalancing asset and productivity numbers as well as broader economic context is more argument than analysis.

    Anecdotally I’ve made a lot of money by staying on the other side of the trade of virtually everyone betting on monetization, inflation and a rise in interest rates for well over a decade now and expect that to continue for the foreseeable future. The US and Japan are producing a monopoly commodity that world wants for trade, liquidity and/or safety and as long as there is a dearth of safe places to store and/or transfer money — and the world sees a need for safety — the price of ‘renting’ USD or Yen will remain high.

    Even when (not if) Japanese and/or US govt bond prices begin to drop (interest rates increase) I’ll be checking other macroeconomic variables carefully because this could mean the world is finding better places for cash rather than moving into risk/bubble assets again.

    PS: If Japan can develop a more open immigration policy their women won’t need to have more babies in order for the country to grow again but, regardless, a lot of other countries will go down the economic tubes before Japan does. JMO

  37. DeDude says:

    They tried the hard choice of taxing and cutting, but that was politically impossible. Now they have to monetize the debt so they can get inflation to eat it all up. That is the one solution that the voters cannot stop by rebelling. That means increase in interest rates for them and the rest of the world. The only question is when – and can they control it to avoid hyper-inflation.

  38. DeDude says:

    In order to get more inflation you have to be able both to print more money and to get that money into the hands of active consumers. Japan is just getting to the point where their demographics dictate that a lot of people saving for retirement will stop and instead spend that retirement money. Perfect for printing paper money to pay back the Japanese government bonds, knowing that the money will be used for consumption (and create inflation). They just have to calibrate that approach with the sale of US treasuries, if inflation begins to get out of control. In the end it may be more painful for US than Japan. We could get the higher interest rates (from their sale of treasuries) but without inflation to counter it.

  39. Carse says:

    Interesting how no one even mentions CHINA.

    Just take a number and get in line.

  40. Drewbie says:

    >90% Catholic 10% gangsters?


    The gangsters are all Catholics.

    The drug couriers even have their own patron saint. Take a look at “Jesus Malverde” on the google.

    The drug lords build HUGE mausoleums for their children killed in the drug war – Mausoleums with air conditioned rooms for the families to sit in comfort with photos or art of their kids brandishing ak47′s adorning the walls.

    Check out the episode “Mexico to the Bahamas” of the serial documentary “Tropic of Cancer”. I think it was shown on the Beeb.

  41. philipat says:

    So why is the Yen so strong and being regarded as a safe haven?

  42. Mike S says:

    For private savings to exist, there must be a public deficit. If you look at the accounting,

    Private Savings = Public Debt

    This deficit mongering stuff isn’t just crazy, it is based on factually incorrect assumptions. Money isn’t something that falls from the sky to rich people, it is created. And it is created by government deficit spending, not through the central bank buying government debt.

    Read more Rob Parenteau or Warren Mosler, and less from this guy. One of the reasons we are in such a mess is that our Central Banks and most so called financial analysts don’t understand money or how it is created.

    Deficit spending is necessary for there to be significant private savings.

  43. eren says:

    in usd terms, it is a little bit more than a double, i.e. 5.04t usd vs 2.22t usd.
    it is not tripled in usd terms. the exchange rate was 89.76 in 1992. it is 126.51 now.
    so it does not look so bad. I think average debt per person may be more meaningful than this chart.

  44. The rationalizations in this thread for why it is different this time sound about the same as the ones offered during the I-net stock overvaluation craze.

    I have to think that at some point the law of big numbers will come into effect

  45. constantnormal says:

    @Mike S …. but but but … where is my share of all the money that has been created?

  46. panchog says:

    I am a native Japanese. Yes, we are a quirky bunch. We, the Japanese, are compulsive savers… and thrifty spenders. We had horrible real estate bubble, and everyone learned the lesson… you have to save for “the tough times ahead.” My mom, who survived WWII, is retired. She has $1 million in the bank, with $5000/mo pensions… but she still prefer to live on $2000/mo. How’s that ?

    Wally and others mentioned it already. The JPN Govt owes its debt to its own people, via Japanese banks’ deposit (ie. Saving’s account by the Japanese people). It’s your right hand lending money to your left hand. The US is borrowing from Japan, China and others. The contrast/implication is obvious here.

    The JPN Government’s biggest problem is 20 years of deflation + strong Yen. The Japanese Central Bank should be “printing money” as Bernanke has been doing… but they know better and they are cautious NOT to devalue your own currency.

    My biggest worry is the demographics. Can we replace the old and dying with new borns and immigrants? They are trying, but it won’t be easy.



  47. takloo says:

    i disagree with the analysis… Japan’s debt to GDP has been the highest for almost 2 decades now… why the sudden alarm?

    I highly recommend Michael Pettis recent blog post debunking the debt-to-GDP ratios

  48. [...] better or worse, the magic show is scheduled to end fairly soon. In Japan, the Post Office will stop buying JGBs in 2011 because the population is growing older and on balance will be consuming more than saving. Gaiatsu [...]

  49. emailcraigs says:

    One by one countries will spend themselves out of the current economic system until one day….voila!!! One world currency because “our system of economic stupidity just isn’t working for the post-globalization world. And the top 1% will be so tickled as they take their rightful place at the top to forever propagate their hegemony. It’s like a fairy-tale isn’t it?