Look beyond Japan’s headline debt numbers, urges Stratton Street Capital’s Andy Seaman
Andy Seaman, executive partner at Stratton Street Capital says investors need to look behind the dire headline debt figures affecting Japan, as the country actually still is a strong creditor nation.
Most people have a reasonable idea of the amount of assets they hold abroad, whether it be a holiday home in a sunny place, or a holding of emerging markets equities. But it is much harder to guess at the position for a whole country, where there may be huge foreign borrowings that cancel out these assets.
Why does it matter what we own or owe abroad? One part of this is that assets abroad generate income that flows in, while liabilities abroad have an ongoing cost. These long term flows will tend to move the exchange rate over the long term, as well as providing revenues or bills that must be paid. Foreign assets can also provide a buffer against demographics, as an ageing country can sell off foreign holdings to pay for retirement. This is more difficult with domestic holdings as in an ageing country there will be more sellers than buyers.
Japan is a classic case. People often think of Japan as a country with huge debt, because of the headline government debt figures. However if you look at the external assets of the country, you can see that while there are domestic imbalances, Japan as a whole has huge foreign assets. Even the government is a net creditor abroad, as while foreigners own ¥39tn of government bonds, the government could easily pay these back with its ¥100tn ($1.2tn) in reserve assets. The private sector has an even larger surplus, of over ¥100tn in portfolio assets abroad, and ¥219tn of total assets. Overall the country has a net foreign asset position of ¥254tn, or over $25,000 per person in Japan.
Although Japan is now running a huge trade deficit, largely driven by the cost of energy imports after the shutdown of the nuclear energy programme in the wake of the Fukushima disaster, the income coming in from investments abroad is even larger than that and the country still has a current account surplus. The trade deficit in the first half of 2012 was a record ¥2.5tn ($31.8bn), five times the deficit for the same period last year. Hugely increased imports of liquid natural gas (LNG) from countries such as Qatar are the main cause of this. However the current account, which measures trade plus income from overseas investments, posted a ¥3tn ($38.6bn) surplus in the first half of 2012, a fall from earlier years, but still a substantial surplus. This continues to drive up the yen.
Recently many large Japanese companies, historically large exporters, have been struggling. Sony and Sharp have been in the news most recently. However these losses have been more about the lack of profitability in the very competitive flat screen TV market which is going through a typical technology market boom-bust cycle, not directly due to the recent rise in the yen. The yen has been rising for decades now, and companies have in the past adapted by moving to higher margin goods, offshoring, innovation, productivity and so on. These are hard things to do, compared to an easy devaluation, and many companies will fail to survive, but Japanese businesses at least have a history of succeeding with this continuous currency appreciation pressure, and the country has accumulated all its wealth from this continuing success.