The Japanese debt dilemma is one that I have been thinking about for quite some time. In particular, how has one of the most industrious countries on the planet managed to go from a viable debt-to-GDP level of 50% in 1980 to 240% in 2013? That’s akin to a country generating $100,000 in revenue while attempting to deal with a $240,000 credit card.
In truth, $240,000 does not adequately capture the gargantuan nature of the monstrosity. We’re actually talking about a quadrillion yen ($10.5 trillion U.S. dollars). What’s more, roughly 1/2 of all Japanese revenue is sucked up in the servicing of existing obligations.
Is it even feasible for Japan to pay its creditors back without defaulting? I suppose that Japan can continue paying the “credit card minimums” to avoid default. On the other hand, there is no chance that it can retire its debt load altogether. Even more frightening is the fact that the debt-to-GDP has risen every year since 2008, and it is on target to jump from 212% in December of 2012 to 250% by the end of the year. This hardly seems like a looming catastrophe can be avoided.
Nevertheless, Japan is giving it the ‘ol money printing try. After all, the U.S. Federal Reserve did not invent quantitative easing (QE) whereby a central bank prints currency to buy government bonds. And while we’re busy talking about when the U.S. will taper its QE bond buying, Japan simply cannot afford to do so. The only way to stem the rising tide of ever-increasing debt is to see the economy grow at a faster pace. That requires the yen to fall in value to help exporters; it also requires the Bank of Japan (BOJ) purchasing government bonds from Japanese financial institutions with the goal of those companies lending to businesses and consumers.
Again, Japan will never escape from its debt woes. It can tread water, though. And its companies can improve their balance sheets in the same way that American corporations have done.
Unfortunately, even if you hedge against the Japanese yen with WisdomTree Japan Hedged Equity (DXJ), you may be getting in at an expensive price. Some reports peg Japanese equities at a price-to-earnings ratio of 19. The U.S. is less expensive with a higher dividend; so are most developed economies. Stated gently, the easier money has already been made.