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ECONOMICS

Japan could lead the way in forgiving debt

  • 14 May 2018

 

As the world economy groans under soaring levels of debt, the place to look is Japan, whose current government debt-to-GDP ratio is an eye watering 253 per cent. It is Japan, which led the developed world into its current mess, that is likely to lead the world out of it by cancelling debt. The consequences of such a move, if it happens, would be far reaching.

It has mostly faded from memory, but in the 1980s Japan had a debt bubble that makes what has been happening now in the West seem prudent. The Imperial Palace, which was admittedly never going to be on the market, was said to be worth close to all the real estate in California. The Ginza office district was worth about twice the real estate in California.

Japan, in other words, led the world into its current era of ridiculous debt accumulation. But almost on the tick of 1990 the Japanese asset bubbles collapsed, and for the subsequent 28 years the country has had zero, or even negative, interest rates — a desperate attempt to inject liquidity into the economy. It has failed because, with corporations and individuals in negative asset territory, no-one wanted to borrow any more. The Japanese economy ground to a halt.

During most of the 1990s and up until about 2006, the policies of western governments, particularly the United States, could be described as a failed attempt to avoid the fate of Japan. Interest rates were progressively lowered, which led to greater recklessness, and then to the ultimate recklessness, the derivatives debacle, which nearly brought down the entire financial system in 2007.

The world economy now suffers from Japan-style levels of indebtedness, and central banks have been making Japan-style efforts to keep the ball rolling. The current level of global debt is, according to the IMF, $US164 trillion, which equates with 224 per cent of global GDP. About $US21 trillion has been created by the G7 central banks since the global financial crisis, and the central banks, especially the US Federal Reserve, have been providing low interest money to the banks to keep the private banking system operating.

Instead of prosecuting the bankers whose criminal recklessness created the GFC, they were instead showered with cheap money that made it extremely easy to turn a profit because, having got it for almost nothing, they could lend it out at higher rates. This pump priming (called quantitative easing) was more successful than the Japanese efforts