Japan: Land of the Rising Debt

I promised in my last email to forward an article I wrote on Japan for Institutional Investor, and here it is. I also wanted to share pictures with you from the Value Investing Seminar in Italy (follow links to see pictures).  I went to Italy with my brother Alex.  We spent a few days in Rome, then took a train to Naples (from where we took a day trip to Capri, Pompeii and Sorrento), and finally ended up in Trani – a small town on the Adriatic Sea where the conference was held.  Trani is a little gem.  The people were warm, there were very few tourists, and the food was incredible.  Few people spoke English; but unlike Parisians, who may well speak English, but refuse to do so, I got along fine with Italians, maybe because they speak with their hands (I do too).  The seminar was an amazing experience.  Ciccio Azzollini, who organized it with Whitney Tilson, is a terrific host and a wonderful human being, and he is solely responsible for me gaining five pounds. I cannot wait to go back next year!   - Vitaliy

Japan: Land of the Rising Debt

By Vitaliy Katsenelson at Contrarian Edge

Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores. 

The prelude to the current crisis began in the early 1990s, after Japan’s housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan’s ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe. 

A country with ballooning debt needs to have an expanding economy to outgrow the burden. Economic growth is driven by two factors: productivity and population growth. Although the Japanese economy may continue…