What happens if japan defaults

Of course, the best option would be for Japan to grow out of its debt. And here, there's a glimmer of hope. Japan's productivity essentially stopped rising in , even in its vaunted manufacturing industries. Since then, only small gains have been recorded.

This productivity stagnation can be seen in the erosion of Japan's export competitiveness, in declining wages, and in the failure of Japan's GDP per capita to catch up to anywhere near that of the United States. Indeed, calculated in terms of purchasing power, Japan's GDP per capita is less than that of Taiwan or Ireland and only a smidge greater than that of Israel.

Ironically, that offers grounds for optimism, since it means productivity has room to rise. Many of the structural reforms that Prime Minister Shinzo Abe is now either enacting or pushing for would unleash the power of neoliberalism — flexible labor markets, free trade and shareholder capitalism — on the stodgy, moribund Japanese corporate culture.

That will surely disrupt Japanese society, but should ultimately give Japan a burst of growth in income and tax revenue that, other things being equal, would both shrink the numerator and boost the denominator of the debt-to-GDP ratio.

Other things are not equal, unfortunately. More income per person is of limited help when it comes to closing the deficit if you have fewer and fewer people. And here we come back to Japan's relentless population decline. Although the country's total fertility rate — the number of children an average woman is likely to bear — has ticked up in recent years, it still stands at only 1. That means Japan's native-born population will continue to fall for decades, even if fertility magically recovered.

What about immigration? Not likely, because Japan, unlike the United States or Canada, defines itself ethnically. And even if the barriers to immigration could be lifted, a surge large enough to reverse the population decline and bail out the government's debt problem would likely cause a backlash that would make the United States' anti-immigration movement look tame.

So if Japan is not going to be able to tax, reduce spending, or grow its way out of the debt trap, that leaves one option. It's time to talk about debt monetization — about using monetary policy to pay off debt. The simplest and most well-tested form of debt monetization is the one Japan is already using: fiscal dominance.

The Bank of Japan's vow to do whatever it takes to raise inflation from nil into the 2 percent range effectively means buying up financial assets wherever it can find them and pushing down interest rates on all sorts of debt to historic lows. This strategy works well when paired with another technique: financial repression — the policy of leaning on banks and funds to buy government bonds no matter how low the interest rate goes.

Of course, this policy has the drawback of reducing bank funds available for loans to productive enterprises. But in Japan, there are signs that the government's ability to bully banks and companies into buying its bonds is ebbing.

Nor can Japanese households pick up the slack. The once-vaunted savings rate of the Japanese household has now fallen below that of the United States, thanks in large part to the ballooning numbers of retirees. Who does that leave to buy the Japanese government's bonds? The Bank of Japan. The more dramatic version of debt monetization — the nuclear option, if you will — is to have the bank buy bonds directly from the government as it issues them.

Japan's government actually did this from to , as a strategy for combating the Great Depression. It worked then and it might work now. In fact, if you are willing to go to the nuclear option of true debt monetization, you could also pay down the existing stock of debt.

For starters, the Bank of Japan could cancel the debt that the government already owes it. Second, much of the Japanese government's debt is held by pension funds that are run by the federal government. This debt could be swapped for cash created by the central bank, allowing the government to write down huge quantities of debt. The numbers involved are staggering. Analyses by Columbia economist David Weinstein, and a Jobu University economist Hidetomi Tanaka suggest that anywhere from two-thirds to five-sixths of Japan's government debt is held by various government-owned pension funds and corporations, or by the Bank ofJapan.

Monetizing that debt would vaporize Japan's debt problem. There is, however, a great danger here: it might also vaporize Japan's currency. It's flawed right from the get-go, given that it's measuring a stock total debt to a flow a country's national income for the year.

But beyond that, debt-to-GDP just doesn't tell you anything about interest rate risk or credit risk. We pointed out in this chart that for major economies , there's actually a slight negative correlation between debt-to-GDP and yield on the national year bond. In the US, it's well known that rates have gotten lower and lower while the national debt has blown through the roof. In Japan, the story that bears like Bass tell themselves is that Japan has a huge well of domestic savings, and that those savings go into Japanese Government Bonds, but that now that Japan is running a trade deficit, those savings are getting depleted, and the country will need to look for outside borrowers, and those borrowers won't be eager to lend to Japan at the pathetic 0.

For example, in the US, the amount of debt held by foreigners has exploded over the last few decades, but it hasn't created any upward pressure on rates. And it's well known that the majority of Italy's public debt is held domestically , but that hasn't prevented the country from teetering on the brink of crisis. After all, it does seem logically like it should be problematic that Japan would have to borrow more and more from abroad.

Foreign ownership of debt is not a function of the country going cap in hand all around the world, looking for investors to buy their bonds. It's a function of trade. When a country runs a trade deficit, it basically means it's spending more on goods from the rest of the world, than the rest of the world is spending on goods from said country.

So it stands to reason that if Japan is buying a lot from the rest of the world, then there are a lot of yen floating around the world: More yen wind up in places like China, the Mideast, the US, Europe, etc. What happens to those yen? Well, some will get spent on other things, but in the end, they'll all wind up in bank accounts somewhere, and somehow they'll find their way into a Japanese Government Bond, so that the holder of said yen might get some yield.

Now theoretically if someone had a bunch of yen, they might prefer to buy German bonds or US bonds, and that's fine, but then there's another private holder of yen who has to make a decision about where they're going to place their currency.

Eventually, that currency will find its way home, and the cycle is complete. This is the key idea that Bass is missing, and why his trade is never going to pay off. For a country that borrows in its own currency, government spending finances borrowing! If Japan spends billion yen on something, that's billion yen out there in the world that will eventually wind up in a financial institution, where ultimately billion yen worth of JGB will be purchased.

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Measure content performance. Develop and improve products. List of Partners vendors. Though not common, countries can, and periodically do, default on their sovereign debt. This happens when the government is either unable or unwilling to make good on its fiscal promises to repay its bondholders.

Argentina, Russia, and Lebanon are just a few of the governments that have defaulted over the past decades. Of course, not all defaults are the same. In some cases, the government misses an interest or principal payment.

Other times, it merely delays a disbursement. The government can also exchange the original notes for new ones with less favorable terms.

Historically, failure to make good on loans is a bigger problem for countries that borrow in a foreign currency instead of using their own. Many developing countries issue bonds in an alternate currency in order to attract investors — often denominated U.

The reason is that when a country that borrows foreign currency faces a budgetary shortfall, it does not have the option to print more money. Research suggests that the presence of checks and balances leads to fiscal policies that maximize social welfare — and honoring debt carried by domestic as well as foreign investors is a component of maximizing social welfare.

Conversely, governments that are composed of certain political groups with a disproportionate power level can lead to reckless spending and, eventually, default. With the ability to print their own money, countries like the United States, Great Britain, and Japan appear immune to a sovereign default, but this is not necessarily the case.