Why the world should be afraid
Starting from the fourth quarter of 2023, especially in the first quarter of this year, the performance of the Japanese economy has become the focus of the world.
The Japanese stock market is booming, which is impressive. At the same time, the yen has depreciated sharply, domestic prices have risen historically, corporate profits have hit a new high, and the Bank of Japan has announced its exit from negative interest rates and YCC. Do these news indicate that Japanese society is moving out of deflation?
There is even a more controversial discussion: "Will the Japanese economy take off again after the lost three decades?" - However, an important link is missing: Can the increase in wage income and the increase in prices form a virtuous cycle? We are still waiting to see.
On the other hand, Japan's first quarter economic data seemed to have dealt a heavy blow to the outside world: real GDP fell by 0.5% month-on-month, and the annualized rate was 2.0%, showing negative growth again after turning positive in the fourth quarter of last year. Not only did domestic demand fall by 0.2% month-on-month (personal consumption fell by 0.7% month-on-month), but foreign demand also fell by 0.3% month-on-month (due to the decline in automobile shipments, exports fell by 5.0% month-on-month). Was it seasonal or did the exchange rate magic fail? However, real GDP grew by 1.2% in fiscal 2023, and there was a large deviation between the quarterly value and the annual value.
What has attracted more attention from the outside world is that the yen exchange rate has been "falling continuously"; at the end of April, the Japanese government intervened and slightly lifted the yen exchange rate, but in just one and a half months, the yen exchange rate returned to the pre-intervention level and even broke through the 160 mark (Note: 1 US dollar is equal to 160 yen).
The Japanese economy has been in a state of deflation almost since 1997. There may be some years when it is slightly higher - but the main reason is the increase in consumption tax. Decline is the basic tone, which is the state of deflation.
Therefore, from the late 1990s to the present, Japan's economic policy has always placed solving the deflation problem at the core. Abenomics is a very typical case. Why did Abe implement a yen devaluation policy? It is to escape deflation. The current devaluation of the yen can be said to be a "godsend." It is difficult to increase prices and inflation by relying solely on Japan's domestic economic cycle. Only through external stimulation, such as the Russian-Ukrainian war, which caused imported inflation and pushed Japan's CPI up, but the final effect was that it only rose to 3.1% last year (2023); in 2022, the highest month was only 4%, which is not high compared with Europe and the United States.
In the global economic system, the current situation in Japan could trigger a series of chain reactions that could lead to the collapse of the global economy. However, not much is talked about about what is happening in Japan. In fact, we should pay close attention to this country and its economic situation.
As a country with a historically high level of debt, especially as a percentage of GDP, Japan is a classic risk signal. Let’s take a deeper look at why Japan could be the starting point for a global economic collapse and why the world should be scared.
Historically, Japan has been one of the most indebted countries. According to the International Monetary Fund (IMF), as of 2023, Japan's public debt to GDP ratio exceeded 250%. If developing countries are excluded, Japan is undoubtedly the most indebted developed country. Such a high debt level means that the Japanese government must pay a large amount of interest every year, which puts great pressure on its fiscal situation.
Although some people believe that countries can borrow unlimited amounts of money without any consequences, this is not true. Historically, all countries that borrowed more than they could afford eventually faced serious economic problems and currency devaluation. In the case of Japan, its debt burden has reached an unprecedented level and has clearly exceeded its economic capacity.
Weakness of the Japanese Yen
Due to the heavy debt burden, the international market began to view the yen as a very weak currency. In the past 13 years, the yen has depreciated by 50% against the US dollar. This depreciation may attract more foreign tourists to Japan in the short term, but in the long run, it is not good for the Japanese economy. The depreciation of the currency means that Japan's purchasing power decreases, and imported goods become more expensive, further exacerbating domestic inflation.
Domino effect
In the global economy, the collapse of any major economy will trigger a chain reaction. As the world's third largest economy, Japan's economic collapse will have a profound impact on the global market. First, Japan's collapse will cause the economies of its trading partners to be hit. Second, as an important participant in the global financial market, Japan's financial turmoil will affect the global financial system, causing market panic and loss of investor confidence.
Possible flashpoints
There are many possible triggers for Japan's economic collapse. The first is the unsustainability of its debt level. As interest rates rise, the Japanese government will face increasing pressure to pay debt interest, which may cause its fiscal situation to deteriorate rapidly. The second is the continued depreciation of the yen. This will lead to higher prices for Japan's imported goods, further exacerbating domestic inflation and weakening consumer purchasing power.
International reactions and measures
In the face of Japan's possible economic collapse, the international community needs to take active countermeasures. First, countries need to strengthen monitoring and early warning of Japan's economic situation and take timely countermeasures to prevent the crisis from spreading. Second, international financial institutions such as the IMF and the World Bank can provide necessary financial support to help Japan stabilize its economy. Finally, countries need to strengthen economic cooperation and jointly respond to global economic challenges.
The fragility of the Japanese economy poses a threat not only to itself, but also has a significant impact on global economic stability. The world should pay close attention to Japan's economic situation and take active measures to deal with possible crises. Historical experience tells us that ignoring economic problems will only lead to more serious consequences. We need to learn lessons from Japan's example and take active actions to prevent the collapse of the global economy.
Good luck and see you next time!
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