Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.669

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The weak US dollar tells us that America is weak whereas the strong Japanese Yen tells us that Japan is strong. In this money-driven age of capitalism, creditors are strong and borrowers are weak.


A nation's debt level is a measure of its weakness whereas the amount of money a nation has lent is a measure of its strength. The fact that Japan is a world-leading creditor and the US is one of the world's biggest borrowers proves that Japan is strong and that the US is weak. The US's debt-to-GDP ratio is 101% whereas Japan's debt-to-GDP ratio is 213%. The economies of Greece and Italy are now becoming a concern with debt-to-GDP ratios of 157% and 129%, respectively.


Although Japan's debt-to-GDP ratio of 213% is one of the healthiest in the world, practically all (95%) of its debt is settled domestically. This means that Japan has almost no international debt, a number that is actually very close to zero. Therefore, no matter when international monetary turmoil occurs, people will first buy JPY as a safe currency. I still remember that when the credit crunch occurred at the end of 2007, people rushed to buy JPY which caused the USD/JPY rate to hit the 76 level. Today, we once again have a strong yen that has reached the 76 level that reflects the US debt downgrade as well as the financial woes of Europe.


America's budget deficit, household debt, and current account deficit are all interconnected and attempting to change this would be like changing a child's blood type. This means that since the US is a post-industrial economy, expenditures always exceed production balance, resulting in a constant international balance of payments deficit. The US economy could collapse since the nation always spends more than it earns. Similarly, American households also hold an excessive amount of debt.


The reason why the US has not yet collapsed financially is because the US Dollar serves as the international key currency (this has been stated over and over again). The US Dollar is currently used as a key currency in approximately 60% of foreign trade transactions, however this percentage is falling each month. If the USD is used as a key currency for trade between third countries, the US will benefit from it since reciprocal trade volumes will increase the demand for the USD. For example, if China purchases $1,000,000 worth of machinery from Japan, demand for the USD would increase just by China purchasing that amount which it will then pay to Japan. The only reason why the USD has not yet collapsed is because of its status as the world's key currency.


America's largest creditor is China and its second largest is Japan. This means that both China and Japan serve as the nation’s banks. These two countries have recently started to sell US Treasury bills at a faster rate. China's net purchase of US Treasury bills in June was 4.1 billion USD, half the amount purchased in the previous month. Also, Japan net purchase amount dropped 73% from the previous month which means that net selling is occurring. If the world increases its independence from the USD, the currency will start receiving a cold shoulder even in international trade circles. The weakening of the USD mixed with the world's increasing independence from the currency is a progressive downward spiral.


Japan's economic structure is exactly opposite that of America since it is a country of overproduction, meaning that it always produces more than it spends. As a result, Japan's international balance of payments is characterised by a chronic payment surplus. In financial terms, Japanese households are exactly opposite those of America since they have a surplus of assets. The amount of savings and investment securities held by Japanese citizens (1.5 quadrillion JPY) is more than two times the amount of Japan's total bond issue (approx. 700 trillion JPY). Although raising the debt ceiling for US Treasuries has caused much chaos, debt ceiling concerns would never occur in Japan since Japanese citizens, who hold 95% of Japan's bonds, have another 800 trillion JPY （1.5 quadrillion JPY minus 700 trillion JPY）to work with in order to purchase more bonds issues by the Japanese government.


In Issue No. 665 which addressed the history of the date August 15, we looked at how Japan unconditionally surrendered to the Alied powers and was placed under control of the General Headquarters of the Allied Forces (GHQ) on August 15, 1945, how Japan has become America's present day creditor, and how Japan has the right to seize the United States if the country is unable to make interest payment to Japan on August 15, 2011.


Japan is economically superior to the US. The next thing Japan must do is form a better government.I await the birth of a new Japanese leading party. Japan does not need a democratic left-wing government, which has already failed Japan in the past, or a rigid LDP-led government.