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Source: www.asiaecon.org |

THE DEBT TO BE PAID IN JAPAN


The global recession is providing an opportunity to test the strength of central banks world-wide. Not only does this provide a test for how the banks will handle current economic conditions, but it also serves as an indicator for how well the banks have prepared domestic market for these harsh times. Over the past twenty years, Japan has emerged as an example of how much the central bank can influence the rest of the economy. Japan's currency is considered to be very strong against foreign currencies, but the growing public debt that the nation has adopted could negate any economic advancement.


The global recession is providing an opportunity to test the strength of central banks world-wide. Not only does this provide a test for how the banks will handle current economic conditions, but it also serves as an indicator for how well the banks have prepared domestic market for these harsh times. Over the past twenty years, Japan has emerged as an example of how much the central bank can influence the rest of the economy. Japan’s currency is considered to be very strong against foreign currencies, but the growing public debt that the nation has adopted could negate any economic advancement.

Japanese companies that are financially solvent are currently taking advantage of its strong currency to invest globally. Many of Japan’s large banks have been pumping billions of dollars into foreign companies. In January, two of Japan’s largest banks, Mizuho and Sumitomo Mitsue Financial Group, invested $1.2 billion in Merrill Lynch and $998 million in Barclays Plc, respectively.

Despite the high level of investing that is currently taking place with Japan’s financial institutions, other industries are being hit hard by the economic instability of the global market. Earlier today, Nissan announced that it would cut 20,000 jobs, or 8.5% of its workforce, in order to cut costs. Additionally, the company is reducing the salaries of board members by 10% and completely eliminating their bonuses. The relative strength of the currency has also made domestic products less attractive in the global market. This has led to number of bankruptcies filed-per-month reaching an eight-year high, according to BBC.

Although large financial institutions are heavily investing in international funds, there is skepticism concerning the stability of Japan’s financial center stemming from its large public debt. Japan’s government currently has one of the highest public debt’s in the world, owing more that 170% of its GDP. The debt has been climbing since the 1970’s,  but because of the fiscal and monetary policies that were put in place during that time span, the debt has skyrocketed over the last 20 years.

Earlier today, the BOJ announced that it will be spending 1 trillion yen ($11 billion) to buy shares held by Japanese banks in order to help relieve the financial institutions of the of the global economic crisis. This will allow Japan to combat the public debt, because it’s nominal inflation rate of 2% will allow the the BOJ to pay off loans with low borrowing costs. Increasing the money supply has the effect of increasing inflation rates, but as New York University economist Nouriel Roubini has suggested, “Inflation [for Japan] is the path of least resistance for politicians”.  

The BOJ is making sure that any fiscal polices that are set forth are done so responsibly, assuring that  they  will only buy shares of companies with a minimum credit rating of bbb-minus, but many investors doubt that this monetary policy will be enough.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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