The document analyzes why Japan is not like Greece in facing its debt crisis and argues that Japan can sustain its debt for the following key reasons: 1) Japan has a large trade surplus and net international asset position that can finance its debt, 2) interest payments on Japan's debt remain low despite rising debt levels, and 3) Japan has policy tools like quantitative easing to boost demand and reduce deflationary pressures. However, the document notes Japan's growth remains weak with productivity gains slowing.

1. Noda’s Mistaken Priorities
Japan is not the next Greece
Richard Katz
The Oriental Economist Report
© 2012 rbkatz@ix.netcom.com www.orientaleconomist.com
Temple University In Japan
June 29, 2012 1

2. Why Japan Is Not Greece
12%
10%
Current account, % of GDP, 2005-10 average
8%
Holland Germany
6%
Japan
4%
Austria
2%
Belgium
0%
UK France
-2% Italy
-4% USA
Ireland
-6%
-8%
Spain
-10%
-12% Portugal Greece
-14%
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
Net govt debt, % of GDP, 2010
2

3. Income, Not Trade,
Drives CA Surplus
28 140%
26
24 120%
22
Balance of payments (tril. yen)
20 100%
18
16 80%
14
12 60%
10
8 40%
6
4 20%
2
0 0%
-2
-4 -20%
85 87 89 91 93 95 97 99 01 03 05 07 09 11
Trade balance (left) Int'l Incom e (left) Incom e % of Curr. Account (right)
Even if trade deficit, no CA deficit for perhaps a decade, then net assets
3
to draw upon

4. Why Japan Isn’t Greece (cont.)
75%
50%
Japan
Net Int'l Assets, % of GDP. 2009 or 2010
Belgium
Holland Germ any
25%
0%
UK US
France Italy
-25%
-50%
-75%
Spain
-100% Greece
Ireland Portugal
-125%
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
Net Govt Debt, % of GDP, 2010
4

5. Low Growth Expands Deficit;
Better Growth Lowers It
8%
Decrease during 2002-07 recovery, then explosion in 2009-09 recession
7%
Primary budget balance, % of GDP
6%
1997-2001 recession and stagnation
5%
4%
3%
2%
1%
0%
-1%
-2%
84 86 88 90 92 94 96 98 00 02 04 06 08 10
Primary deficit is deficit aside from debt service 5

6. Interest Payments Still Low
Despite Debt Explosion
150% 5.5%
140%
Net Governnm ent Debt (left scale) 5.0%
130%
120% 4.5%
110% 4.0%
100%
3.5%
90%
% of GDP
80% 3.0%
70% 2.5%
60%
2.0%
50%
40% 1.5%
30% 1.0%
20%
0.5%
10% Net Interest Paym ents (right scale)
0% 0.0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
6

7. Slack Demand For Credit
Keeps Interest Rates Down
2.2%
2.0%
1.8%
1.6%
10-year JGB yield
1.4%
1.2%
1.0%
0.8% Panic due to irrational
fear of run on banks
0.6%
0.4%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
7

8. Consumer Spending Flat
Because Household Income Flat
115 115
110 110
Income and Consumption (real, 1997=100)
105 105
100 100
95 95
90 90
85 85
80 80
75 75
70 70
65 65
60 60
55 55
50 Real Disposable Incom e 50
45 Real Consum ption 45
40 40
1980 1984 1988 1992 1996 2000 2004 2008
8

9. Tax Shifts Income
From Households to Firms
12,000
Change in annual taxe, 1988-2012 (Bil. Yen)
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
-8,000
-10,000
Total Corporate Incom e Other Consum ption
Corporate tax down mainly due to tax cuts; 2011 profits up 3% from 1988, 9
up 11% at big firms that pay most of corp. taxes

10. Gov’t Borrowing Makes Up for
Reduced Private Borrowing
300% 300%
275% 275%
250% 250%
225% 225%
Governm ent net
200% debt 200%
Debt as % of GDP
175% 175%
150% 150%
Households
125% 125%
100% 100%
75% 75%
50% Non-Financial Corps. 50%
25% 25%
0% 0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
10

11. Budget Deficit, Trade Surplus
Replace Private Demand Shortfall
4% 4%
2% 2%
0% 0%
-2% -2%
-4% -4%
% of GDP
-6% -6%
-8% -8%
-10% -10%
-12% -12%
-14% -14%
-16% -16%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
CY
Budget deficit Trade surplus Private dem and gap
11

12. GDP Still 2.3% Below Peak;
Forecast: 6 Years To Regain Peak
2%
1%
0%
Cumulative GDP change
-1%
-2%
-3%
Jan-March 2012
-4%
-5%
-6%
Tsunam i
-7%
-8% From Jan-Mar 1997
-9% From Jan-Mar 2008
JCER forecast
-10%
0 1 2 3 4 5 6
Years from pre-recession peak
1995 Kobe earthquake barely registered in GDP tables;
electricity makes the difference 12

13. Joblessness Seen In Reduced
Hours, Not Unemployment Rate
2%
Jobs Hours
1%
0%
Change from 2000 (3-mo MA)
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%
-11%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
13

14. All Growth From Productivity…
130 130
125 GDP 125
120 120
115 115
110 110
105 Productivity 105
100 100
1990=100
95 95
90 90
85 85
80 80
75 75
70 Work Hours 70
65 65
60 60
55 55
50 50
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Productivity = GDP per workhour 14

15. …But Productivity Anemic 1.4%;
GDP Just 0.9%, Per Capita Just 0.7%
6% 6%
5% Average productivity grow th 1991-2011: 1.4%
4% 4%
Year-on-year growth (2-qtr MA)
3%
2% 2%
1%
0% 0%
-1%
-2% -2%
-3%
-4% -4%
-5%
-6% -6%
GDP
-7%
Productivity (GDP per hour)
-8% -8%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
No current structural reform policies to accelerate productivity, such
as farm reform, competition policy, labor market, or TPP 15

16. Anemic Per Worker GDP Will
Mean Lousy Per Capita GDP
1.2%
0.9%
1.0%
0.8%
0.6%
0.3%
0.4%
Annual % decline
0.2%
0.0%
-0.2%
-0.4% -0.2%
-0.4%
-0.6%
-0.8%
-1.0% -0.9%
-1.2%
20-64
-1.4% -1.3% Total population
Per capita GDP
-1.6%
2011-15 2016-20
Per capita GDP growth assumes productivity growth remains at 1.4% and
no change in workhours per working age person; actual growth should be
16
higher in the process of economy getting back to full capacity

17. Low Growth Worsens Deflation;
Better Growth Fights It
5% 3.0%
4% 2.5%
Correlation = 79%
3% 2.0%
2% 1.5%
Deflation (domestic demand)
1.0%
1%
0.5%
0%
Output gap
0.0%
-1%
-0.5%
-2%
-1.0%
-3%
-1.5%
-4%
-2.0%
-5% -2.5%
-6% -3.0%
Output gap (left)
-7% -3.5%
Deflation, dom estic dem and (right)
-8% -4.0%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Output gap is gap between actual GDP and what GDP would be at full
employment and full capacity-utilization; better growth would eliminate gap 17

18. 2011 Cut In Electricity Per GDP
1.86
2001-2010 average
1.84
1.82
1.80
1.78
KwH per Y1,000 GDP
1.76
1.74
1.72
1.70
1.68
1.66
1.64
1.62
1.60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
18

19. Nukes Down; Oil, LNG Way up
90
Feb. 2011 Feb. 2012 Change
80
70
60
50
Electricity, bil. KwH
40
30 22
20
10
3 0
0
-10
-20 -20
Total Thermal Nuclear Hydro
19

20. Electricity Demand Down Because
GDP Still Down From 2007 Peak
0%
1 2
-1%
Due to
Change from 2007 to 2011
-2% GDP fall
-3% Total
Kw H
-4%
Decline
Due to
-5%
less
-6% Kw H per
GDP
-7%
-8%
-9%
20

21. And Because Mfg. Still Down 12%
104 104
100 100
Industrial Production Index, 2007-IV = 100
96 96
92 92
88 88
84 84
80 80
76 76
72 72
68 68
64 64
00 01 02 03 04 05 06 07 08 09 10 11 12
21

22. Unhealthy Dependence on
Trade Surplus to Drive Growth
60%
Share of GDP 55%
Share of GDP Grow th
Share of GDP Growth 02-I to 07-IV
50%
40%
40%
34%
29%
30%
20%
16%
10%
5%
0%
-10%
Trade Surplus Investm ent Household Consum .
22

23. Trade Surplus Still
Pivot For Growth
7%
6%
5%
Contribution to change in GDP (%)
4% Rest of GDP
3%
35% of recovery
2%
1% Net Exports
0%
-1%
-2% Net Exports 45% of drop
-3%
-4%
-5%
-6%
-7% Rest of GDP
-8%
-9%
-10%
08-I to 09-I 09-I to 12-I
23

24. Real Yen Below 25-Year Average
145 145
140 140
Nominal rate
135 135
130 130
125 125
120 120
115 115
110 110
(1986-2012=100)
105 105
100 100
95 95
90 90
85 85
80 80
75 75
70 Real (price=adjusted) yen rate 70
65 65
60 60
55 55
50 50
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
24

25. Easy Money Alone
Can’t Cure Deflation
350 350
Nom inal GDP
M2+CDs ex-base
300 300
Monetary base
250 250
Overnight rate dropped from
Index (1990=100)
2.3% in Jan. 1995 to 0.5% in Sept.
200 200
150 150
100 100
50 50
0 0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
25

26. Alternatives on Tax
• Use fiscal and monetary stimulus to restore full
demand
• Combine this with new law to raise taxes once
economy hits certain benchmarks, e.g. narrowing
of output gap (which will also fight deflation); that
will reassure bond markets
• Why tax consumption when structural defect is
chronically anemic consumption due to low
consumer income?
• Better taxes that would raise revenue and GDP
growth: Taxpayer ID, Rezone fake farmland,
Change real estate taxes, Change land usage
laws 26

27. Structural Reform Agenda
• Energy policy
• More domestic and int’l competition, including
imports and inward FDI
• Easier for new companies to challenge
incumbents (cf. current problems in electronics)
• Improve productivity in backward sectors of dual
economy by raising to global benchmarks
• Real labor market flexibility, not wage austerity via
irregulars
• Raise household share of national income
• Real social safety net making Japan safe for
creative destruction
27