2023-05-16

Source: Global Times

Author: Zhang Yulai

Financial stability "has become one of the main topics of the recently concluded meeting of finance ministers and central bank governors of the Group of Seven (G7). Recently, there have been a series of events such as the collapse of Silicon Valley Bank and the acquisition of Credit Suisse. As the world's largest Economic power, the United States is facing the risk of debt default. As the host country of this G7 conference, Japan's situation is also getting worse.

The total government debt of Japan reached 1270 trillion yen at the end of 2022, an increase of approximately 29 trillion yen (284.9 billion Singapore dollars) compared to the previous year, setting a new record for seven consecutive years. The external economic situation is also rapidly deteriorating. According to data released by the Japanese Ministry of Finance on May 11th, the current account surplus in 2022 decreased by 54.2% compared to the previous year, mainly due to the rise in global resource prices caused by the geopolitical crisis, and the significant depreciation of the yen exchange rate last year, resulting in a trade deficit of 18 trillion yen.

Admittedly, there have been recent instances of international investors, represented by Warren Buffett, being bullish on investment opportunities in Japan. However, this is clearly due to the rapid deterioration of the global investment environment. Due to the consideration of risk diversification and specific reasons such as the ultra-low PBR (stock to equity ratio) of Japanese listed companies, Japan has a temporary "comparative advantage". However, the shadow behind the spotlight is rapidly expanding.

Firstly, Japan's financial situation is in an unprecedented predicament, and the "spending more than one's income" model is no longer sustainable. For the first time in 2023, Japan's general accounting budget exceeded 114 trillion yen, which has been an expansion for 11 consecutive years. Among them, the expenditure on social security has reached nearly 37 trillion yen, a year-on-year increase of 1.7%, and the natural increase caused by population aging continues to reach 615.4 billion yen. The most eye-catching is the defense budget with the largest increase, expanding from 5.4 trillion yen in 2022 to 6.8 trillion yen, an increase of 27%. Moreover, at the end of last year, the Kishida Cabinet also launched a "major military expansion plan" aimed at doubling defense costs to a level of "2% of GDP". Under this trend, it will undoubtedly pose an extraordinary and severe challenge to Japan's finances.

Tax revenue growth has been unable to keep up with the pace of budget expansion, and the issuance of treasury bond has become a key means to maintain Japan's financial operation. It plans to issue another 35.6 trillion yen of treasury bond this year, which is equivalent to an increase of 100 billion yen of government debt every day. Currently, the total government debt of Japan is 2.3 times the size of its GDP, which is "far ahead" among G7 countries and 1.5 times that of Italy, which ranks second. According to the calculation of the Ministry of Finance of Japan, the national burden rate in Japan has now reached 47.5%, which was 35% in 2002. This indicates that there is very little room for Japan to increase taxes in the future. In addition, the debt burden is still growing, and repayment of old debt has even become one of the important items of budget expenditure. For example, the scale of treasury bond due this year has reached 25.25 trillion yen, accounting for 22% of the budget. The path of financial reconstruction has become distant.

Secondly, the negative effects of the "heterogeneous" financial policy that has lasted for 10 years are constantly fermenting, leading to a significant increase in financial risks. However, the adjustment of central bank policies has fallen into a dilemma. At the inauguration press conference, the new president Kazuo Ueda said that he would continue to implement the easing policy and adhere to the target of 2% inflation, but he had to admit that the ultra long-term large-scale easing has caused many side effects and has formed Negative equity.

On the one hand, the near rigid central bank policy led to the failure of Japan's financial Market failure. At present, the Bank of Japan holds 580 trillion yen of treasury bond, more than half of the issuance, which has led to the loss of liquidity characteristics of treasury bond. Moreover, in the securities market, the central bank has also purchased a large number of securities market traded funds (ETFs), with a scale of up to 37 trillion yen, making them rare top shareholders of many enterprises. However, the above-mentioned measures of the Bank of Japan have seriously damaged the principle of market competition, significantly reduced market efficiency, and enabled a large number of Zombie company to survive. On the other hand, the Bank of Japan's series of measures have tied financial risk and fiscal risk together. Finance is heavily dependent on the issuance of treasury bond, while the Bank of Japan has taken over a large number of treasury bond, gradually forming the fact that it relies on low interest rates to ensure the low cost of treasury bond. This makes it more difficult for the Bank of Japan to exit its easing policy, as for every 1% increase in interest rates, the Japanese government's debt repayment pressure will increase by 10 trillion yen. So, in the face of extremely severe imported inflation, the Bank of Japan has been hesitant to raise interest rates and can only cooperate with the Ministry of Finance to intervene in foreign exchange. It is revealed that on October 21 last year, 5.6 trillion yen was used in one day, and the yen exchange rate against the US dollar at that time touched 151.9 yen per dollar.

Moreover, Japan's aging population is still intensifying, bringing a series of negative impacts. In 2022, the new population in Japan dropped below 800000, and the total population decreased to 125 million, with 12 consecutive years of negative growth. Among them, the proportion of elderly people aged 65 and above has approached 30%, while the proportion of the working age population (15-64 years old) to the elderly population has changed from 12:1 to 2:1, which has led to the precariousness of the entire social security system. The aging population not only leads to a continuous decline in demand, but also leads to a shortage of labor supply, creating a dual strike between the demand and supply sides of the economy.

Source: Global Times

Author: Zhang Yulai

Financial stability "has become one of the main topics of the recently concluded meeting of finance ministers and central bank governors of the Group of Seven (G7). Recently, there have been a series of events such as the collapse of Silicon Valley Bank and the acquisition of Credit Suisse. As the world's largest Economic power, the United States is facing the risk of debt default. As the host country of this G7 conference, Japan's situation is also getting worse.

The total government debt of Japan reached 1270 trillion yen at the end of 2022, an increase of approximately 29 trillion yen (284.9 billion Singapore dollars) compared to the previous year, setting a new record for seven consecutive years. The external economic situation is also rapidly deteriorating. According to data released by the Japanese Ministry of Finance on May 11th, the current account surplus in 2022 decreased by 54.2% compared to the previous year, mainly due to the rise in global resource prices caused by the geopolitical crisis, and the significant depreciation of the yen exchange rate last year, resulting in a trade deficit of 18 trillion yen.

Admittedly, there have been recent instances of international investors, represented by Warren Buffett, being bullish on investment opportunities in Japan. However, this is clearly due to the rapid deterioration of the global investment environment. Due to the consideration of risk diversification and specific reasons such as the ultra-low PBR (stock to equity ratio) of Japanese listed companies, Japan has a temporary "comparative advantage". However, the shadow behind the spotlight is rapidly expanding.

Firstly, Japan's financial situation is in an unprecedented predicament, and the "spending more than one's income" model is no longer sustainable. For the first time in 2023, Japan's general accounting budget exceeded 114 trillion yen, which has been an expansion for 11 consecutive years. Among them, the expenditure on social security has reached nearly 37 trillion yen, a year-on-year increase of 1.7%, and the natural increase caused by population aging continues to reach 615.4 billion yen. The most eye-catching is the defense budget with the largest increase, expanding from 5.4 trillion yen in 2022 to 6.8 trillion yen, an increase of 27%. Moreover, at the end of last year, the Kishida Cabinet also launched a "major military expansion plan" aimed at doubling defense costs to a level of "2% of GDP". Under this trend, it will undoubtedly pose an extraordinary and severe challenge to Japan's finances.

Tax revenue growth has been unable to keep up with the pace of budget expansion, and the issuance of treasury bond has become a key means to maintain Japan's financial operation. It plans to issue another 35.6 trillion yen of treasury bond this year, which is equivalent to an increase of 100 billion yen of government debt every day. Currently, the total government debt of Japan is 2.3 times the size of its GDP, which is "far ahead" among G7 countries and 1.5 times that of Italy, which ranks second. According to the calculation of the Ministry of Finance of Japan, the national burden rate in Japan has now reached 47.5%, which was 35% in 2002. This indicates that there is very little room for Japan to increase taxes in the future. In addition, the debt burden is still growing, and repayment of old debt has even become one of the important items of budget expenditure. For example, the scale of treasury bond due this year has reached 25.25 trillion yen, accounting for 22% of the budget. The path of financial reconstruction has become distant.

Secondly, the negative effects of the "heterogeneous" financial policy that has lasted for 10 years are constantly fermenting, leading to a significant increase in financial risks. However, the adjustment of central bank policies has fallen into a dilemma. At the inauguration press conference, the new president Kazuo Ueda said that he would continue to implement the easing policy and adhere to the target of 2% inflation, but he had to admit that the ultra long-term large-scale easing has caused many side effects and has formed Negative equity.

On the one hand, the near rigid central bank policy led to the failure of Japan's financial Market failure. At present, the Bank of Japan holds 580 trillion yen of treasury bond, more than half of the issuance, which has led to the loss of liquidity characteristics of treasury bond. Moreover, in the securities market, the central bank has also purchased a large number of securities market traded funds (ETFs), with a scale of up to 37 trillion yen, making them rare top shareholders of many enterprises. However, the above-mentioned measures of the Bank of Japan have seriously damaged the principle of market competition, significantly reduced market efficiency, and enabled a large number of Zombie company to survive. On the other hand, the Bank of Japan's series of measures have tied financial risk and fiscal risk together. Finance is heavily dependent on the issuance of treasury bond, while the Bank of Japan has taken over a large number of treasury bond, gradually forming the fact that it relies on low interest rates to ensure the low cost of treasury bond. This makes it more difficult for the Bank of Japan to exit its easing policy, as for every 1% increase in interest rates, the Japanese government's debt repayment pressure will increase by 10 trillion yen. So, in the face of extremely severe imported inflation, the Bank of Japan has been hesitant to raise interest rates and can only cooperate with the Ministry of Finance to intervene in foreign exchange. It is revealed that on October 21 last year, 5.6 trillion yen was used in one day, and the yen exchange rate against the US dollar at that time touched 151.9 yen per dollar.

Moreover, Japan's aging population is still intensifying, bringing a series of negative impacts. In 2022, the new population in Japan dropped below 800000, and the total population decreased to 125 million, with 12 consecutive years of negative growth. Among them, the proportion of elderly people aged 65 and above has approached 30%, while the proportion of the working age population (15-64 years old) to the elderly population has changed from 12:1 to 2:1, which has led to the precariousness of the entire social security system. The aging population not only leads to a continuous decline in demand, but also leads to a shortage of labor supply, creating a dual strike between the demand and supply sides of the economy.