Keep an eye on Japan

The new (and former) prime minister of Japan, Shinzo Abe, is planning some big public spending, in an attempt to stimulate the economy. While this isn't a new idea, this time it looks like the spending will be more coordinated, with a goal to encourage private investment.

But what interests me is Abe's attitude toward the level of the national debt - by that I mean he doesn't seem to be too concerned about it. However, this is at odds with the doomsayers out there who are predicting a Japanese collapse because of its supposedly unsustainable mountain of public debt.

So I think it'll be interesting to see what happens in Japan over the next year or so. Here's what I think will NOT happen (and what the doomsayers have been saying will happen for years):

1. Japanese government will be unable to service its debt. The only way this can happen is if the government chooses not to. Just like here in New Zealand, and in the USA, the government can always repay debt in its own currency.

2. Interest rates will spike as buyers flee from the government bond market, putting downward pressure on bond prices (thereby increasing yields). Impossible unless the central bank (the Bank of Japan) decides it wants to increase interest rates! This is unlikely as long as the economy is sluggish and under utilised, as the BoJ will be determined to keep rates low (as they've been doing for two decades).

3. The government won't find anyone willing to buy new debt, as the market will be turned away due to concerns about the level of outstanding debt. This prediction comes out of a misunderstanding about how modern monetary systems work in countries that can effectively issue their own currency. The key point here is that government spending finances it's own borrowing! For more detail, read this great article http://www.businessinsider.com/japan-is-never-going-to-default-2012-5

Now, what CAN happen (and is happening right now to the yen) is a devaluation of the currency. And this is exactly what Abe wants - it helps to strengthen the export sector by making Japanese goods cheaper.

Do you see how this relates to New Zealand? The NZ government could be conducting large scale public spending with a focus on job creation and exporting (not roads that no one wants) resulting in full employment and a lower NZ$. Maybe Japan will show us the way...