Japan: Catharsis Or Crisis?

Some have pointed out that Korea has got hit hardest as Japan purposefully weakens the Yen.  Therein lies one of the fundamental flaws of the mercantilist approach.

From Zero Hedge:

The recent landslide victory of the Liberal Democratic Party (LDP) on a platform that promised positive change for the long-struggling Japanese economy has thrust a somewhat forgotten Japan back into the headlines. Indeed, as Goldman notes, asset markets have already responded aggressively to the prospective changes with Japanese equity markets climbing to multi-year highs and the Yen declining to multi-year lows against the US dollar and the EUR. But, as Kyle Bass has recently explained, very real questions remain about the ability of the LDP and new Prime Minister (PM) Shinzo Abe to deliver on promises and break the damaging cycle of low growth and deflation that has become well-entrenched in the Japanese economy over the last five-plus years. These doubts are reinforced by concerns about the health of the domestic banking sector and of Japan Inc. in general. "Abe-nomics 'appears' positive, but for how long?" Goldman asks and Hamada's recent concerns over 'going too far' are very real - though in general Goldman's positive 'take' is a useful counter-point to Bass' somewhat more realistic apocalyptic endgame thesis.

Overall, Goldman believes the recent developments suggest a still positive outlook for Japanese assets despite their recent run, but it’s clear that promises will need to continue to translate into action - and some very difficult longstanding issues will need to be addressed - in order to sustain the recent positive momentum over the medium-to-longer term.

There are two factors to consider when assessing vulnerability to a financial crisis: solvency – the ability of the government to pay the debt that it has accumulated – and liquidity – the ability of the government to fund its deficit on an ongoing basis. There are large concerns about Japan’s solvency. Its debt/GDP ratio exceeds 200%, which is by far the worst in the world, and there is almost no hope in eradicating that debt. It also runs a large fiscal deficit owing to falling tax revenues, which is closely linked to anemic economic growth, and rising expenditures on public works and social security as the population continues to age.

But, in terms of liquidity, the situation is actually healthy, with high domestic savings to fund this deficit, as domestic investors continue to pour money into JGBs. That savings will likely be sufficient to fund the deficit for at least five years.

http://www.zerohedge.com/news/2013-01-21/japan-catharsis-or-crisis