Brumby
Major
Efficient-market hypothesis is not about prediction but simply the assumption that when market knowledge and information is sufficiently transparent and efficient then risk and consequently pricing is fully reflected. As such the current pricing of the Yen in theory fully reflects the known state of the Japanese economy today.
How and why the 2.5 times debt burden presents a problem to the future state of the economy is not explained except the Yen will drop. This is an example of statements that say a bunch of stuff but has no meaningful content. At a minimum he should have provided an economic nexus.
I am not a fan of economics because one can use economic theory to advance any position but concurrently not able to prove conclusively anything. The story you brought up is a case in point. If I apply the economic rationale of debt burden I can make the same argument to conclude that China’s current and future economic state is worst off than that of Japan.
China’s double digit growth in the past 10 years had been on the back enormous level of capital inputs used but that in turn has meant that national corporate debt levels have risen from 147 per cent of GDP at the end of 2008 to over 250 per cent at the end of June, 2014 (Jamil Anderlini, ‘China Debt Tops 250% of National Incomes’, Financial Times, 21 July 2014). In context, the expansion of debt which has been used to finance capital inputs from US$9-10 trillion in 2008 to US$20-25 trillion in 2014 exceeds the size of the total American commercial banking system.
Such an unprecedented increase in debt-financed capital has also created systemic problems for the entire financial system in China. In 2011, an investigation by the Chinese Academy of Social Sciences put the debt to asset ratio of Chinese firms at 105 per cent, the highest amongst the twenty major economies studied (Corporate Debt Reaches “Alarming” Levels’, China Daily, 18 May 2012). That China’s overall debt to GDP ratio was then 169 per cent and is now over 250 per cent some five years later means that corporate debt is now undoubtedly far higher than it was in 2011. The last I heard the debit level is approaching 300 percent. In contrast, Japan’s debt level peaked at 350 % that brought in the 30 year economic stagnation. Currently at 250 %, that would put Japan in a better state than that of China.
Given that so much of the fixed investment is wasteful which is reflected in the rapidly rising capital-output ratios, there is almost universal agreement that the official non-performing loan (NPL) ratio of 1 per cent which has not changed for a decade is not credible. Instead, most independent analyses conservatively place the NPL figure to be at least 5 per cent, meaning the NPLs on the balance sheets of state-owned banks whose liabilities are ultimately government liabilities could be around US$2 trillion (Dexter Roberts, ‘China Bad Debt Could Spark Global Growth Slump’, Business Week, 9 May 2014).
As the majority of the capital inputs were invariably directed to SOE’s the result is the creation of extremely inefficient and non competitive enterprises. As an example, the amount of capital input needed to produce one additional dollar of output (i.e., capital-output ratio) increased from 2:1 in the 1980s to about 4:1 in the 1990s, and was well over 5:1 in 2011 according to OECD figures ( OECD, Economic Outlook for Southeast, China and India 2014 ). The capital-output ratio estimate for 2012 was 5.5:1 meaning that a capital input of $5.50 achieves only $1.00 in additional output (John Mauldin, ‘China’s Minsky Moment?’, Forbes, 22 March 2014).
