News: Japan – The Next Chapter of Subprime Mortgage Crisis?

I recently ran into a few good articles on the Japanese economy and its potential future.   After sparking further interest, I dug for more data on Japan’s current economic condition.  I must say, it ain’t pretty.

Since December 2008, Japan’s unemployment rose from 4.1% to now over 5% in May.  According to Ivan Kitov from Seeking Alpha its unemployment rate is expected to rise above 6% by August 2009.

Furthermore, a recent article by Bloomberg pointed out that Japan’s consumer prices fell at a record page in May, further adding to the deflation risk.

Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

The job outlook is getting worse.  Retailers are cutting prices to attract more business.  And the Bank of Japan Governor Masaaki Shirakawa does not think it will get better anytime soon.

What’s dangerous about deflation is the risk of getting into an ugly spiral that can be extremely hard to get out of.  Demand for goods fall, so the prices fall, then the profits fall, which leads to debt defaults, then to bankruptcies.  This ultimately forces more wage reduction and layoffts.  Then what happens when people start to make less money?  Less demand….and it all starts over, continuing its nasty spiral.

Phil from Philstockworld cleverly summarized what I’ve described above with easy to understand charts and then pointed out what would later become a bigger problem for Japan:  Subprime Mortgage Crisis Chapter 2 – Japan.

This article from The Times picked up by many blogs and financial sites talks about the impact of employee bonuses on the overall Japanese economy.

The alarming prediction comes amid clear signs of upheaval in the micro economies of Japanese households. With Toyota, Panasonic and other groups expected to finish the current financial year in the red, the system of company bonuses has been shaken. The Japan Business Federation calculates that June bonuses will suffer an almost 20 per cent cut across the board, and a dip from which there appears little immediate prospect of recovery. Because those twice-yearly bonuses amount, on average, to about a quarter of the annual salary package of mortgage-payers, the effect is likely to be severe.

Mr Ishikawa said: “The next six months are going to see a sharp increase in housing refugees. People are first going to try to defer payments, but then they will default and be forced to abandon their homes and head somewhere cheaper.”

If you know anything about the Japanese culture, you’ll know that bonuses play a huge part of the employees’ yearly income.  While many of us here in the US have bonuses that could be quite a big chuck of money, Japanese people truly depend on these bonuses, usually paid out quarterly or bi-annually, as a part of their income.  It’s not unusual in Japan to have bonuses that match the actual annual salary.  So to take out 20% of their bonuses away, it could hugely shake the Japanese economy.

This all leads to….yes.  Defaults.  I mean you got to be crazy to think that this whole subprime mess we created will stop here.  Yes, we led the world by making too many bad choices too fast, and this can only lead to…more bad things.

As Mad Hedge Fund Trader articulated:

This is all happening when the numbers of those retiring is going through the roof, causing welfare payments to skyrocket. Taking a page out of Obama’s playbook, the government is borrowing to meet these costs, so the national debt is expected to reach the certifiable nosebleed territory of 197% by next year! Prime Minister Taro Aso has so far fought off increased consumption taxes, but it is just a matter of time before those efforts are tossed out the window. Continued deflation is a no brainer. Real estate prices are still stuck at 30% of their 1990 levels. This is what an “L” shaped recovery looks like up close and ugly. In the meantime, the yen strengthens, making exports ever more expensive and uncompetitive.  Better to stand aside from the Land of the Rising Sun and watch with tears.  Is the US next?

I mean seriously…what is Dennis Kneale smoking claiming that The Great Recession is over?  Don’t you see why everyone’s calling you an idiot, a retard, and everything else in between?