For more than a decade, economists have been predicting a crisis in Japan, as the country finally collapses under the huge debt load it has accumulated over two decades of stagnation.
As yet, however, these predictions have been wrong. Japan's economy is still struggling, but the country's interest rates remain near zero, and the government can borrow as much money as it wants. The yen, moreover, has stayed extraordinarily strong, recently trading at about 80 to the dollar.
But Japan is still a slow-motion train wreck, says Gary Shilling of A. Gary Shilling & Co. And the speed of the train-wreck is now accelerating.
The Japanese yen recently began to weaken sharply.
Shilling believes that this is related to Japan's trade balance, which recently slipped into deficit.
A trade deficit will require Japan to fund its government borrowing with loans from other countries, as opposed to loans from its own citizens, who have been funding the government deficit for the last two decades. Japan's population, meanwhile, is aging, and its consumer savings rate has dropped as citizens dip into savings to fund their retirements. The combination of these two factors--a trade deficit and a declining internal savings rate--will exacerbate the need to fund the deficit externally.
And what will that mean?
In Gary Shilling's opinion, it means that Japan's borrowing costs will rise and its currency will weaken. If Japan's borrowing costs rise too much, they could make Japan's debt-load unsustainable. And at that point, Shilling says, the Japan train-wreck will cease to be slow-motion.
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