Recently I had a conversation with a friend who is specialized in economic research and asked questions regarding Japan’s current financial status:
- Is Japan at serious risk having overwhelmingly higher national debt to GDP compared to other developed nations?
- Which is preferable to Japan, having a weak yen or strong yen?
- Is the argument around the Modern Monetary Theory (MMT) these days unreasonable?
- Is inequality indeed worsening in developed countries?
By looking at the numbers he presented, I was once again shocked.
The following are major countries’ external net assets data:
According to the table summarizes major countries’ external net assets, published by the Ministry of Finance (data as of 2018), Japan is the world’s top with 341.5 trillion yen. Germany is the second (260.3 trillion yen*) and China is the third (236 trillion yen). The high external net assets is a major pillar for Japan’s finance. It also bolsters the argument that Japan’s credibility is stable, because even if the yen depreciates, the private sector (i.e. bank institutions) would be able to sell these external assets, monetize them, and buy out government bonds (i.e. bonds can be absorbed domestically). Basically, our situation is better than having no assets.
Anyway, that’s not where I was shocked.
The table also shows countries with high external debts, meaning recipients of large foreign investments; the United States is by far the largest debt holder, and the amount is an incredible -1,077 trillion yen. Considering that the second largest, France, has a balance of -34 trillion yen and that Japan has the largest external net assets of +341 trillion yen, you can get a sense of how big the amount of debt that the US has.
I’m amazed by the power of USD as the key currency.
It’s just simply mind-blowing. The US has been growing its economy by implementing its “strong dollar” policy; by printing dollar bills and inviting foreign investors. Establishing and maintaining the position as the owner of the global currency, the US has been the winner of the economic game so far. It was Mayer Amschel Rothschild who said, “Give me control of a nation's money and I care not who makes the laws.” This famous line blazed across my mind.
Japan has long been trying to implement a similar economic strategy to attract more foreign investments for its land development. However, the yen’s performance is not even comparable with the dollar’s. Speaking of which, the CEO and chairman of Las Vegas Sands, Sheldon Adelson, has recently announced his decision to cancel the company’s business plan to open an integrated resort (IR) in Japan.
In economics, people often use the words “too big to fail” and this also applies to the US bond. Japan and China are the major holders of US bonds. In 1997, when Japanese Prime Minister Ryutaro Hashimoto held a lecture at Columbia University, during the QA session he half-joked that he sometimes had the urge to sell the US bond. Later, he said that he was threatened thereafter that if he did sell, the US would take it as a declaration of war. In the recent US-China Trade War, China is also implying that they will sell the US bonds as the last resort. The US should be sensitive about this. For Japan, we are holding something we can’t even conceive of selling. What problematic assets we are holding.
Obviously, what sustains the strong dollar is its constant economic growth, which at the very core, is driven by population growth. The population in the US has been on a constant rise, and its identity as a country of immigrants is foundational to the country’s strength. On this point, there is a huge contrast with Japan, where the population has been on a constant decline. China is in a similar situation as Japan because of its past “one-child policy.”
I am finishing up without any particular conclusion this time, but I guess one conclusion is that I once again realized how important it is to carefully look at real data. The external net liability of 1,077 trillion yen is so overwhelming.
*Ministry of Finance: for foreign currencies, the exchange rate published by the IMF is used.