The curious solvency of Japan

By any objective measure, Japan is more broke than Italy.  Indeed, nearly all the advanced countries are as broke as each other, but some of them are in trouble, and some of them are not.  Japan can borrow money at low interest.  Italy cannot.

Looking at past financial crises, there is no objective level of solvency at which a country goes down the tubes.  They get along fine until they do not.  Even when it is obvious that a country is trouble, people continue to lend it money on the assumption that an even bigger idiot will lend it more money with which to repay the first idiot.  And they are always right, until they are wrong.

National bankruptcies are like bubbles, are in fact bubbles.  And there is no way to say when a bubble will pop, because if there was a way to say when a bubble would pop, it would pop before then.

So people believe that there more and bigger idiots for Japan, so it is safer to lend to Japan, than to lend to Italy.

Smart people believe that there will be more idiots to come though for Japan, than there will be for Italy.

It is easier to understand Italy’s insolvency than Japan’s.  Italy cannot print its own money.  If it runs out, it has to stiff its borrowers, including its banks.  If it stiffs its banks, they have to stiff their depositors.

The European Union, like Japan, can print its own money, but it is easier to understand the European Union’s insolvency than Japan’s.  One day there might suddenly be no more European Union.  If Germany decides to go back to Deutschmarks, euros probably will not be worth anything any more.  The European Union might become unreal tomorrow morning – it is looking rather insubstantial this afternoon.  Japan on the other hand has been around for thousands of years.  Its national anthem is over a thousand years old, and its imperial dynasty has been seated on the Chrysanthemum Throne since 660BC.  Japan looks mighty stable, compared to the governments of Europe, which notoriously have been prone to come and go.

The idea that a country and its government might still exist, but that its money might suffer a sudden and massive loss of value, that a broke government is apt to find its money worthless, the idea that fiat money is merely fiat, is one that many people find very hard to grasp.  A lot of Germans still do not understand the German hyperinflation.

So it is more plausible that if the Japanese government starts to go broke, you will be able to unload your Japanese bonds on an idiot of last resort. that you will be able to find a bigger idiot to take Japanese bonds off your hands, than that if the Italian government starts to go broke, you will be able to unload your Italian bonds on an idiot of last resort, that you will be able to find a bigger idiot to take your Italian bonds off your hands.

 

6 Responses to “The curious solvency of Japan”

  1. Leonard says:

    “Idiot of last resort” — neat phrase. Google shows it’s not original to you, but still very rare. It deserved to be better known! I’ll be spreading it in future.

  2. Bill says:

    That’s insightful. Another thing to consider is that more of Japan’s debt is held by Japanese than is typical of OECD countries in general. This probably makes it somewhat harder for the Japanese government to default.

  3. Matt says:

    If the Italian government cannot service its debts without enduring some fiscal pain, the safe bet is that the Italian government will choose to default. Whereas if the Japanese government cannot service its debts without enduring some fiscal pain, “Japan endures fiscal pain stoically” is a safer bet. Maybe or maybe not safer than “Japan defaults”, but definitely safer than “Italy behaves responsibly”.

    • jim says:

      That people believe this may well explain Japan’s continued good credit. I am disinclined to believe it (the zombie banks are an indication of the moral decay of the ruling elite in Japan as much as in the west) but whether I believe it or not, likely people buying bonds believe it.

  4. spandrell says:

    Good point, but the imperial dynasy dates from the 4th century AD, if that. Also Japan as a unified modern state also dates from 1868. Not so stable.
    I wouldnt buy their bonds myself.

    • jim says:

      the imperial dynasty dates from the 4th century AD, if that

      If the dynasty began long after 660BC, it nonetheless began long before history. There is no reliable historical record of the first alleged 25 emperors, but neither is there any reliable historical record of a time when the dynasty was not ancient and long established.

      Their paper money, however, has a much shorter history.

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