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Decimal Digest
20 Feb 2012

Contrasting Greece from Japan

Otto Eduard Leopold, Prince of Bismarck, the famous founder of the German Empire is also known for his famous quote “Politics is the Art of Possibilities”. If we pay particular attention to the word “Art” in this quote, and take guidance from Pablo Picasso, the Spanish Artist, who is known to have said “Art is a lie that brings us nearer to the truth”, we can easily compare and contrast the bond markets in Greece and in Japan as they are behaving today.i

After all the acrobatics of PSI, possible OSI, ECB‟s LTRO, two tranches of “bailouts” of the Greece State by various EU institutions and by IMF, Greece is expected to have public debt to GDP of about 120% in 2020. (We offer our apology for the excessive use of acronyms in the previous sentence, but please do not blame us for their popularity.) Now, contrast that with Japan. We have not seen any forecast, which says 2020 Public Debt of japan, will be less than 240% of GDP. In other words, Japan will be carrying at least double the load of debt as compared to Greece in 2020.

The other main macro factor – the current account balance – was decisively in favor of Japan till 2010. However, now, in spring of 2012, not many analysts believe that Japan will have structural current account surplus going forward.

However, Japan has one major institutional difference as compared to Greece. This institutional difference is that Japan has its own central bank which is prone to running its printing press overtime at a drop of hat, while Greece does not have any control on the timing of „printing press overtime runs‟ at ECB. This is a major positive factor for Japan, which leads Japan to borrow 10-year money at less than 1%, while Greek 10-year bonds are changing hands at 30%+/-.

With the recent changes announced by BOJ in its operating model, with explicit positive inflation target, and the expected pressure from Japanese current account balance, it is not possible to imagine Japan following the Weimer Republic to become another rich nation to experience hyperinflation. At this moment, when last few years we have been equating Japan with frequent bouts of deflation, imagining Japan with hyperinflation may sound far fetched and alarmist. However, one just has to turn the clocks to 2007, and watch the evolution of Greek-German Bond Spreads to see that the long-term trend till 2007 of relentless narrowing of this spread turned direction violently and permanently.

Coming back to Picasso, it is a distinct possibility that the current market structure of favoring Japanese Bonds over Greek Bonds can very well be a transitory lie, leading to a more permanent truth of weakness of Japanese economy.

If financial markets were to wake up to this possibility, and decide to punish Japan in the same way they punished Greece for having institutional and structural weaknesses, the effects on the whole macrocosm of global markets will be beyond imagination.

i The stream of “Economics” was earlier known as “Political Economy”. We believe that that the earlier description is a better description of this stream of competing thinking systems. Economics is, and will always will be, a prisoner of political possibilities, although in short term, we seem to perceive economics shaping politics


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