Dysfunctional politics and a dysfunctional economy make for a toxic combination, as Japan is finding out. The government has been a house divided since 2010, when the LDP won back the Upper House but failed to take the Lower House. Now Japan faces its own yearly debt-ceiling gridlock, as the government needs to borrow almost $500 billion to make ends meet. The LDP opposition is refusing to go along unless Prime Minister Noda calls a general election. The FT:
“Until now, we had viewed the game of chicken between the government [and opposition parties] with a vague sense of optimism,” Jun Inshii, chief fixed-income research strategist at Mitsubishi UFJ Morgan Stanley, wrote this week. “However, we must also take into account the possibility of a collision and hard landing.”Ms Shirota said scheduled JGB auctions would have to be scrapped for the first time in decades, meaning the Japanese government – the world’s most indebted with gross borrowings of Y976tn at the end of June – would run out of money.
We’ve warned before about Japan’s deep structural economic problems. These problems are especially serious given the volatility in the region and nationalism in an escalating conflict with China. Political gamesmanship will only make things worse.