Japan's Debt Crises

From Der Spiegel:

Today's Tokyo has become a permanent mecca of consumption, its boroughs seemingly divided according to target markets. ...

This world of glitter, however, is but an illusion. For years, the world's third-largest economy has been unapologetically living on borrowed cash, more so than any other country in the world. In recent decades, Japanese governments have piled up debts worth some €11 trillion ($14.6 trillion). This corresponds to 230 percent of annual gross domestic product, a debt level that is far higher than Greece's 165 percent.

Such profligate spending has turned Japan into a ticking time bomb .... Japan, the postwar economic miracle, has never managed to recover from the stock market crash and real estate crisis that convulsed the country in the 1990s. The government had to bail out banks; insurance companies went bust. Since then, annual growth rates have often been paltry and tax revenues don't even cover half of government expenditures. Indeed, the country has gotten trapped in an inescapable spiral of deficit spending.

The fact that this tragedy has been playing out in relative obscurity can be attributed to a bizarre phenomenon: In contrast to the debt-ridden economies in the euro zone, Japan continues to pay hardly any interest on what it borrows. While Greece has recently had to cough up interest at double-digit rates, for example, the comparable figure for Japan has been a mere 0.75 percent. Even Germany, the euro zone's healthiest economy, has to pay more.
The reason is simple: Unlike countries in the euro zone, Japan borrows most of its money from its own people. Domestic banks and insurers have purchased 95 percent of the country's sovereign debt using the savings deposits of the general population. What's more, the Japanese are apparently so convinced that their country will be able to pay off its debts one day that they continue to lend their government a seemingly endless amount of money.

Experts warn that this system cannot go on for much longer. Takatoshi Ito ... and a colleague have calculated that even if the Japanese people invested all of their assets in sovereign bonds, it would only be enough to cover 12 years of state expenditures.

But who is supposed to come to Japan's rescue once that point has been reached? "If Japan is forced to go looking for investors abroad, a debt crisis will be unavoidable," says Jörg Krämer, the chief economist of Commerzbank, Germany's second-largest bank.

[The governor of the Bank of Japan] no longer adheres to the disciplined monetary polices his Western counterparts preach. Instead, Shirakawa keeps the money printers going to stimulate the economy. Since 2011, his bank has launched emergency programs with a total volume of around €900 billion. In comparison, the euro bailout funds jointly financed by the euro zone's 17 member states only add up to €700 billion.
For some time now, Japanese banks have been able to borrow money from the central bank at interest rates close to zero. By following this policy, Shirakawa is doing exactly what a number of European politicians -- and particularly ones from cash-strapped Southern European countries -- have been asking the European Central Bank (ECB) to do: He is financing the Japanese government. He denies doing so, and the method he uses are circuitous, but it amounts to the same thing.

So far, though, his strategy has done little to help. "At the moment," Shirakawa admits, "the effect of our monetary policy in stimulating economic growth is very limited." The cheap money is stuck in the banks rather than flowing into the real economy. "The money is there, liquidity is abundant, interest rates are very low -- and, still, firms do not make use of accommodative financial conditions," Shirakawa adds. "The return on investment is too low."
... Predicting the potential effects of the Japanese debt crisis is extremely difficult. But researcher Schulz is convinced that there won't be any "major crash." Out of self-preservation, he says, it is unlikely that large holders of Japanese bonds, such as domestic banks, would shed those bonds very quickly. Such a move would severely damage faith in Japanese debt and, by extension, in the banks that hold that debt. Instead, he predicts "many small crises" in the coming years. He and other economists further believe that there is plenty of room to raise taxes as a countermeasure; taxes in Japan remain relatively low.

Nevertheless, warns Commerzbank economist Krämer, one shouldn't give short shrift to the potential dangers of the Japanese debt crisis. "The psychological effect could be the most dangerous one," he says. What would happen, for example, were investors to suddenly lose faith in other heavily indebted countries such as the US.

"Japan remains one of the world's biggest industrial nations, and the yen is an important currency for international monetary transactions," says Asia expert Gern. "If everything were to spin out of control, then the world would have a real problem."

Notice anything similar between the Fed's policy and that of the Bank of Japan? We are going through the same motions--and likely will have the same results.