What happens if Japan runs a trade deficit

Edward posted this in a comment to the previous post:

"Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus.

Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is.

Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky."

Japanese workers take pay cuts to stay employed

On December 27, Bloomberg reported that "Japanese workers´ willingness to accept wage cuts to safeguard their jobs is lowering prices and deepening deflation". This assertion was attributed to Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. Yamada also asserted that

"Japan´s jobless rate would be around 10 percent, compared with the current 5.1 percent, if companies had fired workers rather than cut pay since Japan fell into a recession in 2008. "

The monthly average wage in Japan has fallen to 315,294 yen, the lowest level since the government started tracking the data in 1990. Assuming an exchange rate of 90 yen to the dollar, that is roughly $3,500 per month, or $42,000 per year.

Presumably Japan's employers are reducing labor cost to offset the effects of a stronger yen versus the dollar and price competition from Chinese goods on profitability.

One effect that the falling wage levels will have is to reduce the ability of Japanese households to put savings into government debt. This will add some volatility to the prices for Japan's government debt.

Falling wage levels also will make it more difficult for Japan to reduce its dependence on exports as the primary source of GDP growth.

A provocative analysis of Japan's economic prospects

I highly recommend WHEN JAPAN COLLAPSES, released today over at The Burning Platform. While the tone of the piece is a bit hyperbolic, the author has gathered a solid set of data shown in chart form to back up his thesis. That is as follows:

"If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. The near failure of a 3rd world country (Greece) turned the world upside down. The failure of Japan would likely touch off a worldwide crash."

The key is that any significant shift away from the current global patterns of trade and investment flows will likely lead to major defaults, as governments and central banks have used their textbook policy options and the results have been maintenance of a delicate balance at best.

Japan's 2010 House of Councillors election: another "twisted Diet" coming up?

Guest Post by Manuel Alvarez Rivera
Election Resources On The Internet

Without doubt, the Democratic Party of Japan (DPJ) has had a decidedly rough ride in power in the ten months since its historic House of Representatives election victory, which brought to an end more than half-a-century of nearly uninterrupted Liberal Democratic Party (LDP) rule. Last month the Japanese public was treated to the all-too-familiar spectacle of a prime minister stepping down following a decidedly short tenure: after less than nine months as Japan's head of government, Yukio Hatoyama left office over his inability to fulfill campaign promises, and was subsequently replaced by Naoto Kan; Kan, who also succeeded Hatoyama as DPJ leader, is Japan's fifth prime minister in less than four years.

Meanwhile, more grief was in store for DPJ. Prime Minister Kan's initially strong popularity ratings steadily slid over the course of the election campaign, and another very familiar political spectacle took take place on election day, when voters finally went to the polls on Sunday, July 11 to renew half the membership of the upper house of Japan's bicameral National Diet, the House of Councillors: the DPJ and its remaining ally, the small People's New Party (PNP) lost their joint upper house majority.

The loss of the upper house (whose electoral system is described in Japan's 2007 House of Councillors election and Parliamentary Elections in Japan) constitutes a major setback to Prime Minister Kan's government: under Japan's 1947 "MacArthur" constitution, bills rejected by the House of Councillors can't become law unless the House of Representatives - the Diet's lower chamber - overrides the Councillors' veto by a majority of at least two-thirds. Consequently, an opposition-controlled upper house is now able to derail the government's legislative agenda, as was the case between 2007 and 2009, when DPJ and its allies controlled the House of Councillors, while LDP and its coalition partners held a large majority in the House of Representatives; not surprisingly, this state of affairs - known in Japan as a "twisted Diet" - led to repeated clashes between the two legislative bodies.

However, the lower chamber retains the final word on a number of important matters, most notably among them the designation of a prime minister. In addition, it is still possible that Prime Minister Kan and DPJ could now find new coalition allies to secure an upper house majority, although the small Your Party, which now holds ten upper house seats following sizable gains in the recent vote, have formally ruled out the idea. Evidentally, Kan and the Democrats have done themselves no favour with their insistence on increasing the five percent consumption tax, which has proven unpopular with potential coalition partners, not to mention voters.

As a result of the election the government has been reduced to 110 seats in the House of Councillors, while the opposition parties will hold 132 seats.

Although DPJ received the largest number of both prefectural district and party list votes, LDP won the largest number of seats by capturing 21 of 29 single-member districts; DPJ, which only carried eight single-member seats, won more seats than LDP in both the multi-member districts and the party list vote, but this was not sufficient to overcome LDP's large single-seat lead. That said, the election outcome wasn't exactly a ringing endorsement for the Liberal Democrats, as Japan's erstwhile dominant party had its lowest party list share of the vote ever. On the other hand, LDP breakaway Your Party (YP), which favors small government, soared to third place in the election, displacing traditional LDP ally New Komeito (NK; an offshoot of the lay Buddhist organization Soka Gakkai).

It may be debatable whether the result polled by DPJ in the recently held House of Councillors election was particularly bad or not, but it is clear that in terms of seats won it was well below the party's already limited expectations. Historical precedent strongly suggests the upper house election setback will in all likelihood lead to the fall of Prime Minister Kan's government; however, only time will tell if this will turn out to be the case.

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You can find fuller details of the recent election results on Manuel's Japan page, here.