Veritas – Keeping it in the family and why Japan’s debt looks better

Recent news that Japan was considering buying more eurozone debt to help solve the crisis may have come as a surprise, but data from the Bank for International Settlements, the World Bank and the IMF suggest the country has an envious position in terms of private and public debt owed to other countries.

Despite a large government debt to GDP ratio of 233%, the level of foreign debt to GDP is among the lowest of any in the G8.

Foreign debt is estimated at €2trn, but relative to the country’s GDP of just over €4trn, it means Japan owes half its debt to its own citizens.

Compare that to ratios of externally owed debt among eurozone members France (235%), Germany (176%), Italy (163%), Spain (284%), Portugal (251%), Greece (252%), or worst of all Ireland (1,093%).

The US has a 101% ratio, and the UK 436%.

Japan is in a better place in other ways too. IMF and OECD data outlining [asset_library_tag 3721,Japanese debt and savings ] suggest that the debt/household income ratio has been improving over the past decade, compared to a sharp deterioration seen in the UK and US over the 2000-2008 period. And although the eurozone is still best placed in terms of the debt burden on this basis, if the trend continues, then Japan will soon take over the role of least indebted aganist the group identified above.

The different attitude to debt is also visible in the savings rate, which actually dipped sharply in Japan between 2000-2008, the figures further show. The implication therefore is that Japanese savers were intent on paying off debt rather than saving more. The savings rate in the country has climbed again since 2008.

Another piece of evidence as to Japan’s new found status as a relatively lowly indebted country – at least according to some measures – coupled with ability to improve efficiency in its industry base is the exchange rate of the yen against the dollar. Currently at around 76, a year ago it was 83, three years ago it was 97 and five years ago it was 117.

Against the euro the story is similar. Currently around 104, a year ago it was 113, three years ago it was 123, and five years ago 150. Japan is yet to have its ‘SNB moment’ – the Swiss National Bank drew a line against further appreciation of the CHF against the euro this autumn – but it is clear that currency markets have already signalled their view that this may be one of the better placed developed countries in terms of the financial crisis engulfing Europe.



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