Lesson from Greece : sovereign risk and its productivity


Greece has a lot of difficulties about financial conditions now. Banks are shut down. There is no cash beyond the limited amount when people withdraw money from ATM there.  Capital control is already imposed. People in Greece cannot obtain enough cash to pay the bill. No one knows exactly what happens in Greece in the future.  This kind of risk is sometimes called “sovereign risk“.  Simple lesson from Greece is ” Do not have too much debt compared to earnings”. It is so simple that we can apply this lesson not only to counties, but also to individuals and companies.


Let us consider it in more details.  The key things are “Debt” and “Earning”.  It is easy to measure the size of debt as long as financial statements are accurate. On the other hand,  earning is a little different.  Earnings should be interpreted as the ability to earn money in the long run because some of corresponding debts are also long term debts.  This makes things a little complicated.  It is rarely said that “My company or my country is in danger because of huge debts” as the statement of responsible personnel.  The size of debts can be assessed only by comparing with its earnings.  If  companies or countries have the ability to earn money,  there is no problem to have debts because debts can be repaid by future cash flows generated by companies or countries.


The problem is that it is very difficult to predict the ability to earn money in the long run.  Economists may use “productivity” in order to measure the ability to earn money quantitatively. If productivity is high,  we have more outputs from less inputs at the result of economic activities, vice versa.  If the company has high productivity,  it has more revenue and less cost.  It means that the company generates enough money to repay debts. It sounds good.


Then the question arises “How can productivity be increased?”.  It is very difficult to answer.  Someone says educations are important and others say investments are needed.  Legal system and financial system are sometimes mentioned.  But situations are different between countries, so there is no concrete answer yet.  Greek debt crisis happened in 2009.  I imagined that since then a lot of discussions have been made to improve productivity of Greece.  Unfortunately, situations are not changed enough to convince the creditors to keep supporting this country.  Now people all over the world realized that “It is very difficult to increase its productivity enough to repay debts”.


Figure : Growth in labor productivity (GDP per hour worked, total economy, percentage change at annual rate, GRC:Greece)

Source :OECD Productivity database, January 2015


Therefore, I always worry about Japan in the future. This country is going to aging society rapidly. Debt to GDP ratio of Japan is worse than the ratio of Greece.  Some people say Japan is OK as it is different from Greece in terms of  the size of GDP,  technologies  and so on.  But I can not agree with this opinion because sovereign risk can be emerge in the same way as Greece. Just like Greece, it is very difficult to increase its productivity in a short period. Although the Japanese government says “Japanese fiscal condition is sustainable”,  I am not so sure that financial markets will continue to agree with that in the future.




Note: Toshi’s opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or solicitation to buy, sell or hold any security or to adopt any investment strategy.  The information in this article is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third party sources may have been used in the preparation of this material and I, Autor of the article has not independently verified, validated such data. I accept no liability whatsoever for any loss arising from the use of this information and relies upon the comments, opinions and analyses in the material is at the sole discretion of the user. 

How does economics work on a shrinking population in Japan?


Bank of Japan may cut its growth forecast for this fiscal year to see the result of GDP growth in Q2 after an increase of consumption tax in Japan, according to Bloomberg on 15 Aug 2014.   Is it too early to increase taxes? Or is it inevitable to decrease the fiscal deficit?  Let me consider a little bit here because this is very important not only for Japanese people, but also other aging societies which follow Japan.


Fundamental problem in Japan, I think, is shrinking populations. The population of Japan is decreasing at a rapid pace.  More than 200,000 populations are lost in Japan every year. It must be very sad that if we can see a 200,000-living city is disappearing from our sight every year.  Although it is almost impossible to see what happens in the population every day,  I am sure it is not good for economic growth, investment strategy. The richer countries are, the more population they can sustain in them.  Therefore, economics implicitly assume populations in countries are not decreasing at least unless there are disasters or epidemic. Unfortunately, it is not the case in Japan.  The population has been shrinking even though it is the third biggest economy in the world.


Aggregate demand

Shrinking population has a negative impact against aggregate demand as fewer people buy goods and services. Therefore tax increase may discourage consumer confidence more than in a normal economy in which populations are increasing. In addition to that older people consume fewer goods and services than younger people do.  There will be no need for new shopping malls, convenience stores, gasoline stands, schools and kindergartens anymore in such situations. Even thought we would need new hospitals to take care older people and funeral ceremony services when they pass away,  I do not think these services can compensate lost demands due to shrinking populations.



How about exports to grow GDP?  When JPY is weakening, exports used to be picked up.  The current situation,  however, a little different.  Since the big earthquake hit Japan in March 2011,  trend of trade balance has been negative, even though JPY has been weakening.  One of the reasons is the importing energy to replace nuclear power plants.  Another is that Japanese consumer goods are less competitive than they were in 2000s.  So Japan cannot rely on exports to offset shrinking domestic demand.  What should we do? 


Human capital

One way to revive the Japanese economy is that bringing up high profit and productive industries.  The key is human capital in Japan to achieve that. When we focus on how older people should be cared after their retirement, however, people tend to forget how we should bring up younger people , who are the next generation of workforces. This is a kind of problem about optimization of our society.  How we should allocate our resources between older people and younger people.  Which should come first, schools or hospitals?  In terms of education in Japan,  I am not so confident to say that the Japanese education system enables its children to compete global competition to obtain skilled jobs. English, math and programming will be critical to raise employability in the future, however, it seems there is no change in the Japanese educational system to teach them effectively.  In the long run, I am afraid Japan can not raise productivity because its workforce lack fundamental skills.



People who have never been to Japan, may not understand why Japan does not have immigrations from overseas to compensate shrinking populations.  In my view, Japan is not ready to have immigrations from overseas as it is culturally homogeneous.  People share the same language and the same experience.  It enables them to do “non-verbal communication” which is difficult to understand from the standpoint of foreign people. This is an obstacle to live with foreigners.  It takes longer time for Japan to accept immigrations as few people has experience of “living with foreigners”.



I must say there is no easy way out of this difficult situation.  Although tax increase from 8% to 10% is needed to decrease the fiscal deficit of Japan, it is very difficult to keep the best timing for the Japanese government to introduce it.  Japan has only limited time to make its fiscal balance to be sustainable.