Facing an Enormous Public Debt, Japanese Starting to Change Attitude Toward Gold

In Japan, nothing is going well : the trade deficit is growing, recovery is not happening, and public debt continues to soar. Why? Is Japan doing things differently, economically, than the other great industrialized countries? Not at all, and this is what is troubling, because it’s doing the same, but on a much worse level!

When Shinzo Abe took power in December, 2012, he made it clear that he would speed up the accommodating policies in place : more deficit, and even more money printing. More deficit, supposedly, to sustain demand, but nothing is showing on the recovery side. More money printing to finance the deficit, but also to bring the yen down (that lost 20% to the dollar in 2013) and, thus, jumpstart its exports. But things are never that simple... Exports have barely budged but, on the other hand, the cost of imports has risen substantially and, at the end, their trade deficit has grown larger!

One thing is doing better, though : the Nikkei is on a bull run since the start of 2013... Nothing to rant about, since it’s a bubble, of course, and it’s the only result achieved from the central bank’s money printing...

Japan is only ahead of us : it lived through a great crisis (real estate and stock market bubbles exploding) at the start of the ‘90s. Since then, it has had laxist policies that Shinzo Abe has just taken to a higher level. The result of all this is a public debt equivalent to 240% of GDP, an astonishing number (double that of Italy, and Greece’s is « only » 160%). How can this country support such a debt? Well, simply by buying it massively. The Japanese are high savers and they invest their savings in Treasury bonds, which they trust, and they own 93% of the debt. There is no need to convince foreign investors with such a national savings rate.

However, this model is starting to show some cracks. Since there are more and more Japanese off the work force, it mechanically reduces the rate of savings. More fundamentally, people may be starting to doubt these policies of public debt and money printing.

And, worthy of note, is another evolution that, although marginal, volume-wise, might be revealing : the Japanese people are back buying gold (the people, of course, not the central bank). If we are to believe the World Gold Council’s « Gold Demand Trends Full Year 2013 », after seven years of negative net investment demand (generating cumulative outflows of 266.1 tonnes), Japanese investors generated net positive investment demand for three consecutive quarters (page 12).

Up until now, Japan was the exception among Asian countries that are hungry for gold (China, Vietnam, Thailand, Indonesia), and even seemed odd, because Japanese people would get rid of their gold, to the point that Japan was showing a negative balance. These days seem like they are over and that awareness has risen in the course of 2013. Does this bode for a big change? Too early to tell but, obviously, faced with a public debt seemingly defying the laws of gravity, a little good monetary sense is appearing in the « Country of the Rising Sun ».