For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Hamlet Act 1, scene 3, 75–77
As I am sure you all know, Standard & Poor's (Slogan: Meet our standard or we make you poor) has downgraded Japanese debt from AA (double-A) to double-A minus. Now, when I was in school, even a single-A minus would have been reason for delirious celebration, but apparently in the high flying world of international finance, this is not considered a "good grade".
Prime Minister Kan demonstrated his concern by saying that he "doesn't know much about" credit rating systems. Hats off to the PM; would that every national leader could be so bluntly honest: "I'm an idiot; live with it."
As everyone knows, the United States is a huge borrower of money, a great deal of it from foreign countries like China and Japan.
But I was curious. Who is holding Japanese debt? Who would buy Japanese Government Bonds (JGB) when they are
It turns out, the Japanese are borrowing from themselves! A full 95% of Japanese national debt is held by Japan.
How do they manage this?
They pay themselves a very low interest rate on their holdings. For example, the consumer interest rate for a Post Office, 3-year deposit is – wait for it – a WHOPPING 0.362% (after taxes) per year! This means that for every $100,000 of your nest egg you invest, you will get the substantial sum of $362 per year in interest income. Forget about more eggs in your nest; it's more like a little salt on the one you have. Americans, on the other hand, pay on average 3.29% or roughly 10 times as much.
What will the government do when the people decide that they want their money back?
Let's look at an example case.
Here are Mr. and Mrs. Futsuu a couple who have just taken retirement and are looking to spend their golden years, enjoying the fruit of their savings. They have been very frugal indeed, and in addition to Mr. Futsuu's pension of about $20,000 per year, they have the interest on the $500,000 they have saved. They have put all of their money into "high-yield" Post Office savings accounts and now their $500,000 is paying out (omg... this means I have to do some math... one sec...)$1810 per year in interest.
Mrs. Futsuu: (looking at their savings statement) Hey, look at this! We only got $1810 last year on our savings! We can't live on that! That barely covers your beer bill for each month!
Mr: And my pension only pays us a little more than $1600 per month...
Mrs: (looking sadly at Mr) We can't afford to live here any more.
Mr: (brightening) Let's move to the US where we can get 3.29% or better yet, New Zealand where we can get over 5% on our savings!
Mrs: (cheering up) Yes! I have been reading that many Japanese are moving abroad to retire.
So the Futsuus take out all their money and move to New Zealand.
This scenario, clearly, is unsustainable. If all the retirees remove their assets from savings in Japan, the government won't have the money to pay them back!
What should the government do?
It's simple! The government should take active steps to move them NOW, before they feel the pressure to withdraw their savings. Programs to encourage resettlement should be set up, offering housing in mostly Japanese compounds (for cultural comfort) in less expensive countries such as New Zealand (Slogan: Sheep ᴙ us) or Thailand. Only in this way will they be able to afford the retirement and aging of such a large portion of their population. This is also a win-win situation for everyone. The government moves people to cheaper places, thus saving on retirement and late-life health care costs for its aging population. The retirees themselves enjoy an upgrade in their lifestyles while spending far less of their life's savings. Young people will benefit from the increase in new job openings and reduced costs of supporting their elders. And finally, the lands they vacate in moving abroad can be turned over to relocated agricultural workers (see last week's post). Only by taking this dramatic and farsighted action can Japan create a more dynamic country – free from debt and disappearing seniors.
OK, so what you are saying is that we should be building a retirement village here in good ol' NZ and then hire all Japanese staff to cook and entertain. Is THIS going to be our gravy train?
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