America may soon be changing bankers, shifting its business from China back to Japan.
Japan had long been the U.S.’s main creditor. That is until September 2008, when China became the biggest foreign owner of Treasuries. This worried many in Washington who would rather be indebted to a friendly democracy than an ambitious communist power. One of Mitt Romney’s big talking points, in fact, is that the U.S. is too beholden to China.
The presidential candidate’s I-won’t-be-borrowing-money-from-China pledge may soon be moot. Japan now holds $1.12 trillion of U.S. Treasuries to China’s $1.15 trillion. Japanese purchases are steadily rising, while China’s holdings have declined more than 10 percent since mid-2011.
Yet all this obsessing about who holds America’s debt is a distraction. The real issue is whether it makes sense for any major economy such as the U.S. to export more than 50 percent of its IOUs. Shouldn’t countries redouble efforts to build bigger domestic customer bases for their debt? Shouldn’t they be more, well, Japanese?
“People reflexively bash Japan -- they hold it up as an example of what not to do in every case,” says Ed Rogers, chief executive officer at Tokyo-based Rogers Investment Advisors. “To them I would say not so fast. Debt is but one example.”
This notion is anathema to the free-market fundamentalists out there. Nor would it be easy to achieve. As Christine Lagarde, managing director of the International Monetary Fund, sees it, reversing financial globalization “would be akin to persuading a billion people not to use Facebook.” Yet it is worth exploring whether the U.S. might profit from a more Japan-style debt arrangement.
In his book “The New Depression,” published earlier this year, economist Richard Duncan builds a sobering case for another Franklin D. Roosevelt-like New Deal to restore growth, strengthen competitiveness and achieve energy independence. Financing it means tapping the vast amounts of private-sector cash sitting on corporate balance sheets. If U.S. companies believed they were investing in their future profit potential, they might not mind buying more Treasuries.
Few words strike greater fear in the hearts of economists than “Japanization.” The prospect of chronic malaise, deflation and dwindling global relevance has central bankers such as Ben S. Bernanke in the U.S. and Mario Draghi in Europe pumping out a deluge of liquidity to avert a lost-decade scenario.
Among its most prominent features is the revolving door of prime ministers and finance chiefs, making it impossible to address Japan’s well-known systemic problems.
This political incoherence is coupled with a reliance on a weak yen to undergird an export-driven economy. Japan’s iconic companies are so dependent on the currency crutch that when it disappears the damage can be stunning. Sharp Corp., Sony Corp. and Panasonic Corp. had combined losses of more than $20 billion last year, in part because the yen’s strength hurt overseas sales. For decades, these names played a pivotal role in Japan’s prosperity, much as Detroit’s automakers did for America’s. Now, their plight is accelerating the hollowing out of Japanese industry.
Little attention is paid, though, to how many western economies would be lucky to become Japan and what it got right. True, Japan’s two-decade-long bout with negligible growth and deflation wiped out trillions of dollars of wealth and left many banks as insolvent zombies. The Nikkei 225 Stock Average is a quarter of what it was in 1989, when it achieved an all-time high of 38,957.
In all that time, the nation never even came close to unraveling. Crime didn’t skyrocket; homelessness never exploded; and huge numbers of job weren’t lost as they so often are in U.S. recessions. There were adjustments, of course, for workers who found themselves with part-time employment, women who saw fewer career opportunities and students facing a dismal job market.
And let’s not forget the incredible calm that accompanied last year’s devastating earthquake. Japan never suffered the riots and looting that flared up in the U.S. in the aftermath of Hurricane Katrina in 2005. Supply-chain disruptions that affected top corporations such as Apple Inc. were addressed in short order. Power blackouts were few and far between as all of the nation’s nuclear reactors went offline. How many nations could do that?
The glue holding Japan together is the huge ratio of government debt owned domestically. Keeping more than 90 percent of its debt at home allows Japan to have the world’s largest public debt and 10-year yields of just 0.78 percent. It’s why credit-rating companies haven’t pushed Japan toward the precipice of junk status. It’s why short-sellers betting on Japan being the next Greece have never made money.
This self-contained system gives Japan the ultimate escape valve if it were ever on the verge of default: debt forgiveness from its own people and companies. Such a step would be unthinkable for Japan’s government. But look at it this way: What other nation has this kind of Judgment Day put option?
Romney is right that borrowing so much from China is bad for America. So is doing the same from Japan. Maybe the U.S. will think about borrowing more at home. Debt should never be a nation’s biggest export.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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