While Japan is unlikely to have its own Liz Truss moment, high debt levels and an empowered populist in charge are still reasons for concern
JapanOpinionAsia OpinionNicholas SpiroMacroscope|Japan will soon learn how far Takaichi can ride her luckWhile Japan is unlikely to have its own Liz Truss moment, high debt levels and an empowered populist in charge are still reasons for concernReading Time:3 minutesWhy you can trust SCMP
Macroscope|Japan will soon learn how far Takaichi can ride her luck
For many decades, Australia was known as the “lucky country”. Its long period of uninterrupted growth stretching back to the 1990s was a rarity among advanced economies. Yet even before the Covid-19 pandemic erupted, Australia’s luck was running out amid stagnant productivity, ahousing affordability crisisand the slowdownin China’s economy.
Another developed country that has had luck on its side is Japan. Having endured more than three “lost decades” in a prolonged struggle against deflation, Asia’s second-largest economy has had its fair share of misfortune. Persistently weak growth, a rapidly ageing population, a nearly 35 per centplunge in the yenversus the US dollar since February 2022, and the unwinding of globalisation add to Japan’s struggles.
However, for a country with an average annual rate of growth of 0.8 per cent between 1991 and 2019 – the second-worst performance in the Group of 7 advanced economies after Italy – it is striking that Japan never suffered a debt crisis following the bursting ofits asset price bubblein the early 1990s.
In fact, Japan is the home of the “widow-maker” trade. For decades, many investors shorted, or sold,Japanese government bondson the grounds that the combination of massive public debt and anaemic growth was unsustainable. Even so, the trade saddled fund managers with crippling losses, partly because of the ultra-loose monetary policy of the Bank of Japan (BOJ).
While bets against Japanese bonds have paid off since the BOJbegan normalising policyin 2024, Japan’s bond yields are still lower than Germany’s despite its public debt as a share of economic output being four times higher. “This is the easiest way to see that Japanese yields are being kept artificially low, which prevents them from accurately pricing risk premia to reflect Japan’s high debt,” Robin Brooks, of the Brookings Institution, said in a Substack post.
Yet it is in politics where Japan’s luck is most apparent. The ruling Liberal Democratic Party (LDP), whichlooked like a spent forcelast year, has risen like a phoenix from the ashes. Prime Minister Sanae Takaichi has taken Japanese politics by storm. Her gamble to call a snap parliamentary election on February 8 paid off handsomely, giving her partya two-thirds majorityin the lower house.
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Source: News - South China Morning Post
