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Thursday, June 20, 2002

"While most press responses to Japan's recent modest improvement have been to accept the sitaution at face value, there have been some more skeptical voices:

The Nikkei 225 benchmark index was subjected to a series of measures in the run-up to the end of the financial year in March that were designed to ensure it closed above 11,000 points, say senior international bankers interviewed by the Financial Times.Although government agencies insist their aim was only to enforce the law, bankers believe there was a widespread fear in government circles that there could be a "March crisis" as a result of depressed stock prices.

Observers have long suspected that the market was being manipulated. Overseas speculators with short positions were thought by officials to be responsible for the downward pressure on the market. Masajuro Shiokawa, finance minister, said in March that the market had become a "gambling den" for foreign speculators. The bankers believe the government initiated a process known as gyosei shido - or administrative guidance - in order to ensure the market closed above 11,000 points, which was considered the safe level at which the banks and companies could avert damaging losses."
Full Story: Financial TimesLINK

So on top of outlawing shorting, you also systematically fix the numbers. Who said Wall Street had it's credibility problems?

A good summary of the political backdrop to the ongoing drama in Japan is provided by Morgan Stanley's Robert Alan Feldman, which among others interesting ideas includes the following point:

"The first step in the fiscal reform debate is to determine just how much fiscal reform is needed. The most accessible yardstick is the primary balance -- the fiscal balance excluding interest costs. This yardstick is useful because it gives a guide to the fiscal surplus needed to stabilize the level of government debt to GDP. (For a discussion, see "One Step on a Long Journey," Global Economic Forum, June 29, 2001). The formula is quite simple. In order to stabilize the ratio of debt to GDP, the primary balance must exceed the difference of the interest rate on debt and nominal growth, multiplied by the debt ratio at the start of the calculation. In symbols, PB > (r - g)[D/Y]. The ratio of debt to GDP is about 130%. The average excess of the long-term bond yield over nominal GDP growth over the last four years has been about 2.5% points. These two figures imply that Japan must run a primary surplus of about 3.3% of GDP, in order to stabilize the debt/GDP ratio. Note that the required primary balance would rise over time, unless deficits were eliminated, because of the higher value of D/Y implied by continued deficits. Any rise of nominal interest rate exceeding an acceleration of GDP growth would make the debt dynamics that much worse.
How far away is Japan from a primary surplus of 3.3% of GDP? A very long way indeed, in our view. The latest calculations from the OECD suggest that the primary balance for general government in Japan (the consolidated balance of central government, local government, and social security funds) was a deficit of about 5.3% of GDP. This means that a swing of 8.6% points of GDP in the fiscal position would be necessary. In money terms, with nominal GDP of about ¥500 trillion, a swing of about ¥43 trillion of the fiscal position is needed."
Source: Morgan Stanley, Global Economic ForumLINK

So the reality is that to avoid government debt as a proportion of GDP spiraling out of control, Japan has to either make really hefty tax increases, or really hefty spending cuts, or a combination of the two. And if the US economy doesn't take of as expected?

Incidentally, is this 130% figure for real, it's been around for at least two years now, and I can't believe it hasn't gotten worse recently!!

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