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.