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Open Mouth, Insert Foot

posted by Adam Levitin

Japan's debt got downgraded by S&P because it doesn't believe that the Japanese government is serious about taking measures to cut its deficit.  And here's what the Japanese Prime Minister Naota Kan had to say, “I just heard that news.  I am a little ignorant on those kind of matters.  Let me look into it more.” 

Brownie, you're doing a heckuva job.

Even before the downgrade, Japan was just barely skating by--low interest rates make the huge Japanese debt manageable.  If interest rates go up a couple of points, Japan's going to have one serious financial crisis.  


I rather think I disagree, which would be of no moment whatever were I not channeling Paul Krugman: http://krugman.blogs.nytimes.com/2011/01/28/japanese-bond-amnesia/

Japan has an interesting advantage in the world of sovereign borrowing: its investor base is overwhelmingly domestic, and not terribly sensitive to what S&P has to say. This article, which includes the foot-in-mouth moment highlighted by Adam, also includes a handy pie chart that explains why it all matters not much: http://www.ft.com/cms/s/0/095efb70-29f3-11e0-997c-00144feab49a.html#axzz1EbxBf7Ie

Compare Japan's advantage to the captive audience the United States enjoys by virtue of printing the global still-reserve currency. True, if Japanese households stopped saving and if Japanese banks stopped buying JGBs, and if the U.S. dollar died, everything would be different. But then everything would be different.

What happens when that captive audience become net sellers as the population ages into retirement and have real liquidity needs?


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