Japan, cash and deposits represent half of total financial asset

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How in debt is the typical Japanese household?12 Jan 2010 .Posted by matt
I think Japan's current record budget and massive government debt are very serious problems. Japan's ratio of government debt to GDP is the highest in the developed world. So, in no way do I want to say that this is some how okay or that people shouldn't be concerned with this.

However, recently there have been some articles suggesting that Japan faces financing problems more serious than, say, the US. For example, I've noted three separate dire predictions about Japan on this blog: here (Goldman Sachs chief economist), here (Ambrose Evans-Pritchard), and here (Jim Delaney at Seeking Alpha) .

However, I think that the US is now facing greater problems than Japan. This is because I think US debt in the private sector is probably much worse than in Japan, where things are relatively stable. Moreover, if one considers the amount of private debt (via mortgages and so on) that the US federal government is now responsible for via the Federal takeover of Fannie Mae and Freddie Mac and via the Federal Reserve's mortgage backed securities purchase program, the real ratio of US government debt to GDP is obviously much higher than stated. In fact, it's pretty mind boggling to consider how much private debt the US government is now actually responsible for. It's as if to a certain extent a vast swath of the private debt market had been socialized.

Now the impetus for this post is that this morning I came across the following research paper at Federal Reserve Bank of San Francisco, Global Household Leverage, House Prices, and Consumption (via the blog Calculated Risk.) Note the following graph:









Where is Japan? This interesting graph spurred me to do a quick search on Google, I searched household, leverage and Japan. One of the more interesting articles I came across was this, A note on Japanese household debt: international comparison and implications for financial stability [PDF] by Shinobu Nakagawa and Yosuke Yasui published by the Bank for International Settlements.

Here are some interesting quotes from the article:

•"The average Japanese household has a financial balance sheet that is far more conservative than that of the representative household in other industrialised countries: in the case of Japan, cash and deposits represent half of total financial assets. In contrast, the ratio for US households is only 16%, while Europeans hold about one fourth to one third of financial assets in these safe and liquid products."

•"Turning to the liability side, Japanese households have a smaller exposure to debt, such as home mortgages and consumer credit, than their Western counterparts. For example, home mortgages in Japan – the single largest component of household debt in Japan, as it is in most other countries – account for 12% of the financial balance sheet (debt plus financial surplus), about half as much as in France and Germany (28%), the United Kingdom (28%) and the United States (23%)."

•"The ratio of household debt to nominal GDP has rapidly increased in recent years to reach almost 100% in both the UK and US economies. In contrast, Japan, along with France and Germany, did not experience such a significant increase in leverage."

•Residentail Mortgage-backed securitisation as a percent of GDP in 2006 was less than 5% in Japan, but over 50% in America. The article notes that mortgage-backed securitisation may be an "important source of financial stability. However, at the same time, we may now have to admit that – particularly for the markets in which off-balance sheet securitisation has deeply penetrated the credit markets – once credit, liquidity or other shocks occur, they could trigger the onset of risk contagion across a wide range of economic agents, including households."

•Incomes are more evenly distributed in Japan, so ... "Relative to household income cohorts in Japan, the low-income household sector in the United States has only a small amount of assets to buffer them from financial shocks. In the United States, some shocks may thus tend to hit poor families harder than others, whereas in Japan, shocks would likely be spread through the whole household sector."
Okay, I don't want to state that any of this proves anything. But they certainly represent more pieces of the puzzle. There are some positives when it comes to Japan.