There’s been a lot of chatter in recent days about Japan and their debt issue. John Carney and Joe Weisenthal both wrote good pieces on their sites and then today Bloomberg reported the Fitch downgrade of Japanese debt citing:
“A lack of new fiscal policy measures aimed at stabilising public finances amid continued rises in government debt ratios could lead to a further downgrade. A shock to Japan’s sovereign funding conditions such as a steep and sustained rise in yields would be strongly negative for the ratings, although Fitch does not consider this likely.”
I would say that I do not consider this “likely” either. Now, I don’t know if I’d go as far as Joe goes in saying that Japan won’t ever default. They could very well choose to default much like Russia did in the 90′s. And I certainly wouldn’t make big bets on the political intelligence of Japanese officials (in either direction). After all, there are a lot of politicians in this world who simply don’t know how the monetary system works and they might even conclude that a default would be good. Who knows? The Euro crisis that never ends hasn’t yet convinced some people that austerity is crushing these economies, but sometimes evidence in front of your face just isn’t enough.
But the more important point is that Japan is like the USA in being an autonomous currency issuer. In essence, the US Treasury would never run into trouble procuring funds to pay bondholders because of its unique relationship with the Federal Reserve. Bondholders know this so US bonds are seen as a save haven. As an act of Congress and the lender of last resort the Fed can always be counted on to supply fund to the US government so bond holders can be paid and remain whole. In this regard, the US government is a currency issuer because of its explicit political unity between its central bank and treasury (the exact thing missing in Europe). The same relationship exists in Japan. So, unless you think central bankers are bad at “printing money” for their governments then it’s rather silly to assume that Japan or the USA can’t obtain the funds to remain “solvent”. Of course, Japan could suffer hyperinflation at some point, but as I’ve previously explained, this is quite a different phenomenon than “running out of money”.