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There's a reason why a near 100-year old Wall Street firm recently asked: is Japan next? Boenning & Scattergood points out that the debt-to-GDP ratio exceeds 200 percent -- leaving the island nation second only to Zimbabwe's 234-percent ratio. The firm's Richard Farr points out the ratio itself doesn't mean that much -- after all, in 1998 Russia defaulted on its debt when it was only 75-percent of GDP. It really comes down to the market's faith that the country's good for the cash and can handle rising borrowing costs.
Farr says Japan's fiscal problem dwarfs the problems in Greece and Italy. First, it's the dollar value. Japan has more outstanding debt than the United States and it's spending 10 percent more than it makes, meaning it's going to need to keep going to the debt market for fresh cash infusions. $2.7 trillion in debt is held by the rest of the world -- putting it on-par with Italy. But most of it's held by the Japanese investors directly - and that's what Boenning & Scattergood believes masks a bigger problem.
It's all about the aging demographic.
As the population declines, it's also aging. The Japanese live longer than anyone else in the world, where the life expectancy for men is 79 and 86 for women. While there are fewer people to fuel the tax base in the country, there are more people using it. The population over the age of 65 is up more than 29 percent in the last ten years alone.
There are 8.4-percent fewer children in Japan today compared to a decade ago, while the working population has fallen by almost 5.4 percent.
That means we'll be seeing retirees living longer with fewer workers to pay for them. Farr is telling clients today that "as income generators become income dependent, Japan's ability to internally finance its debt will become increasingly strained."
Farr says at some point the country is going to have to finance its deficits from the rest of the world -- and potentially at much higher interest rates. The country is currently borrowing at less than 2 percent over 30-years, but because the country's economic growth hasn't kept up with its growing debt loads, Boenning & Scattergood fears Japan will join Italy and Greece as the debt fire spreads.
It wouldn't be as big a concern if the economy was firing on all cylinders, but it's at risk of blowing a gasket instead. The "all industry activity index" fell in November more than 1.1 percent over the month before -- and it's down year over year, too. The factory sector itself tumbled in November and down almost 4.2 percent year-over-year.
Farr says not all is lost in Japan. While it's on "the precipice" of a very serious financial crisis, there are two reasonable ways to mitigate the problem.
First, export more to the world. That's a tough call after the tsunami that wiped out production facilities. The other key fuel for the economy? Encourage immigration. Farr admits that's a tough sell as entire parts of the country are off limits due to nuclear contamination.
Farr says the timing of such a crisis is anyone's guess -- and the country's currently strong financing ability internally and its export-led economy have given the country a greater cushion than the euro zone.