Will the sun shine again

Japan was inflicted with the triple disaster of a magnitude 9.0 earthquake, 10 m high wave tsunami and the resulting nuclear radiation crisis on 11 March 2011. The destruction was widespread and extensive. The cost of the damages is estimated to be about US$309 billion and an estimate of US$200 billion is required for the rebuilding of homes, factories, roads and bridges. So, where is the government going to get all this money?

The Japanese government is already the most indebted among the advanced nations. Its public debt is equal to 200% of its GDP – about US$10 trillion. This has been accumulated over the last two decades when, the government, in an attempt to stimulate the economy, spent an enormous sum to build infrastructures like bridges to nowhere and concrete jungles along the shorelines. How much more debt can it take on?

The saving grace is that this 126 million people nation is rich. Japanese households sock away a massive savings of US$18 trillion. 95% of the public debt is funded by local institutions and its citizens. All of this at near-zero interest rate. The country also has a foreign reserve of US$1 trillion.

The government may issue more Japanese Government Bonds (JGBs) to fund reconstruction. But the domestic life insurance companies and the Government Pension Investment Fund may not be able to absorb much more of the new JGBs as they have to support more pension-related costs due to the aging population. That means foreigners will be expected to pick up some of the new JGBs. But, they will only do so at a much higher interest rate. This (higher interest rate) the Japanese government definitely cannot afford to pay.

However grim the situation may look today, you can be sure that the Japanese will rise again. It is their indomitable spirit and stoical character that will make them prevail. Just give them a decade and see.

Global Financial Integrity (GFI) has reported that Malaysia had an illicit financial outflow of US$291 billion (RM889 billion) in the period from 2000 to 2008. This is an enormous amount of money – equal to 150% of its 2009 GDP. Malaysia ranked fifth among countries with huge outflows. Critically, the first 4 countries are much larger economies like China, Russia, Mexico and Saudi Arabia. So, can Malaysia, a small economy, afford such a huge outflow?

Why is there such a big outflow from the country? Foremost, it must be ill gotten gains which need a safe haven such as a Swiss bank account. The ‘dirty’ money could be from corruption, kickbacks from contracts and other illegal means. The people that are involved are mainly politicians, government officials and other people in power. There is evidence that corruption is becoming more rampant in Malaysia. Transparency International’s ranking of how corruption-free Malaysia is has declined from position 36 in 2000 to 56 in 2010.

The Bumiputra policy has irked many business people in the country. Some of them feel that it is better to spread their eggs i.e. have some of their wealth stored outside the country. They do this in the guise of geographical diversification of their businesses. This also leads to an outflow of funds.

Malaysia’s income distribution is highly skewed. This means there is an inordinate number of high net worth individual in the country. These people are highly mobile and are likely to transfer some of their wealth outside the country.