Japan’s Debt Hits 245% of GDP…Why We’re Headed There Too

Japan DebtMoody’s Investor Service has downgraded the debt of Japan—the third-biggest economy in the world.

The credit rating agency has provided three reasons for this downgrade: uncertainty over Japan’s ability to cut its deficit; uncertainty over the effectiveness of government growth policies; and the risk of yields on Japanese government bonds rising. (Source: Moody’s Investor Service, December 1, 2014.)

Digging a bit deeper…

According to the International Monetary Fund (IMF), Japan’s national debt is projected to reach 245% of the country’s gross domestic product in 2014. And there isn’t any light at the end of the tunnel for the country. Economic conditions are worsening to the point that government growth initiatives are failing.

Japan has tried to get its budget in order by increasing tax on consumption, but this measure has failed. The rise in tax has dealt a major blow to the Japanese economy. Japan is now in a recession for the second time since 2011.

And if interest rates rise, as Japan prints more money to stimulate the economy, thus depreciating the value of its currency, the cost of borrowing for the Japanese government is going to increase, pushing Japan’s national debt even higher.

U.S. to Become the Next Japan?

Is the U.S. following the same path as Japan?

After all, we can apply what Moody’s has said about Japan (its reasons for downgrading the country’s debt) to what’s happening here in the U.S.

As a result of continued budget deficits, the U.S. national debt has just crossed the $18.0-trillion mark, with most of that growth in debt coming over the past few years. The Japanese economy is being questioned for its ability to pay off its national debt. Sadly, when it comes to nominal value, the U.S. has more debt than any other country in the world.

And the Federal Reserve is planning to raise interest rates next year. If this happens, the cost of borrowing for the U.S. government will go higher, putting further negative pressure on our budget deficits.

More Debt Means Prosperity?

There is a belief by certain theories of economics that government spending in times of an economic slowdown leads to prosperity and growth. But Japan is a prime example that this doesn’t work.

From my seat, the Fed’s easy money policies have only helped those who own assets, such as stocks and real estate. The majority of Americans continue to feel severe financial pressures; they are pulling back on their spending, while the savings rate is down and real inflation is rising.

Consider this: according to the National Retail Federation (NRF), on Black Friday weekend this year, Americans spent 11.3% less than they did last year—$50.9 billion compared to $57.4 billion a year earlier. The number of shoppers also declined by 5.2% to 133.7 million unique shoppers, compared to 141.1 million in 2013. (Source: National Retail Federation, November 30, 2014.)

Don’t be fooled by what you hear about the U.S. economy improving. Many financial statistics point to the opposite—a slowing economy. A recession ahead for us in 2015 and a possible downgrade on our debt in the latter part of 2015 are my concerns.