March 20, 2011
The Post had yet another piece warning of the horrors of Japan’s declining population. Of course Japan is a densely populated country with very high priced land. However, it is possible that if its population declines too much that they will no longer be able to find workers to push people into over-crowded Tokyo subway cars.
The piece also confuses the importance of foreign holdings of public debt and foreign indebtedness. It argues that Japan need not fear a run on its public debt because the vast majority of the debt is held domestically. The more important issue is that Japan is a huge net creditor country as a result of running large trade surpluses for decades.
Its net indebtedness position is the key factor in this story. If it had a large foreign debt it would have to fear a flight from the yen even if none of its public debt was held by foreigners. Such a run would send the yen plummeting and cause import prices to soar. This is exactly the same risk it would face if foreigners owned its public debt, since the central bank would always have the option to buy the debt sold by foreign investors.
This point is important because many deficit hawks make the same sort of misleading comment about U.S. debt. Insofar as there is a problem of foreigners holding U.S. debt it is due to the trade deficit the country is running. This gives foreigners the dollars they need to buy U.S. assets of any sort, including the stocks and bonds of private companies, as well as U.S. government debt.
The trade deficit in turn is the result of an over-valued dollar, not the budget deficit. Therefore, if these deficit hawks were really concerned about foreign holdings of U.S. assets then they would be focusing their efforts on getting the value of the dollar down, not reducing the budget deficit.
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