Walk me through the math here because I'm having a hard time understanding what you're saying. A 5% gain in industrial production? Public investment? 12.6x what? Investment to revenue multiplier? Additional debt service cost to revenue multiplier?
Using more accurate data, a 5% gain in economic output will be 10.5x greater than additional debt service costs of 5%.
It is a matter of magnitude in regards to aggregate output, tax revenue, and debt service. According to
FRED data, Japan's 2012 GDP was approximately ¥471,163 billion. Also, according to Japan's
Ministry of Finance, Japan's 2012 budget, revenue, deficit, and debt service were: ¥90.3 trillion, ¥46.1 trillion, ¥44.2 trillion, and ¥21.94 trillion respectively. Using this data, we can obtain ratio values which will allow for more accurate assumptions because the variance for ratios are smaller (logarithmically) than variances of the raw data. The 2012 revenue to GDP ratio in Japan was 0.09782, while debt service to GDP was 0.04657.
Under the 5% growth, 5% effective future debt service cost assumptions (both highly unlikely yet trivial none the less), along with 2013 budget projections for guidance, GDP will grow by more than ¥23.6 trillion, revenue grows by ¥2.3 trillion, debt service grows by ¥2.2 trillion, and the deficit increases by ¥2.2 trillion. Of course we must hold a countless number of other variables constant as well.
Year | 2012 | 2013 | Change |
JGDP (¥) | 471.163 trillion | 494.721 trillion | 23.558 trillion |
Budget (¥) | 90.330 | 94.861 | 4.531 |
Revenue (¥) | 46.090 | 48.394 | 2.304 |
Deficit (¥) | 44.240 | 46.466 | 2.226 |
Debt Service (¥) | 21.944 trillion | 24.193 | 2.249 |
Revenue % GDP | 9.782 | 9.782 | 0 |
Debt Service % GDP | 4.657 | 4.890 | 0.233 |
Total Debt (¥) | 942.000 trillion | 988.466 trillion | 46.466 trillion |
Debt to GDP % | 199.931 | 199.803 | -0.128 |
2013 GDP: (¥471.163 trillion*1.05)=¥494.721 trillion
2013 Revenue: (¥494.721 trillion*0.9782)=¥48.394 trillion
2013 Debt Service: ((¥494.721 trillion*0.0467)+((¥494.721 trillion*0.0467)*0.05))=¥24.193 trillion
2013 Budget: (¥926.115+¥2.249 trillion)=¥94.861 trillion
note: The current 2013 budget projection is ¥926.115. Additional debt services costs of 5% were then included to find the total.
It is interesting to note that total Japanese government debt to GDP falls even if we assume identical increases in both economic growth and financing costs. Interest rates will not climb in Japan without the requisite economic growth to foster said growth.
Now you could very reasonably claim that a rise in total effective interest rates to 2% is implausible given Japan's status as a sovereign currency issuer (and all that jazz), meaning that the BOJ would keep the short end of the curve at 0% and force the long end of the curve even lower by snatching up long-term JGBs. And you'd be right - as this is probably what is most likely to happen. The problem with recovering economic growth and inflation at 2% is that the 95% of domestic JGB holders will have to suffer negative real yields - at precisely the time they plan on selling anyway for retirement.
There will be interest rate risk in the event of strong economic growth. But will the loss of purchasing power exceed income gains in a stronger growth environment? IMO, no.
If current forecasts about U.S., German, and Chinese growth are even reasonably met - you can fully expect treasuries, along with other safe haven assets, to revert back to positive real yields. The reversal of trends - from two decades of strong real yields in Japan and close to 5 years of negative real yields in the United States - combined with the other factors that don't need repeating (trade balance, pension funds becoming net sellers, etc.) results in a significant weakening of the yen. It doesn't have to be catastrophic but it will definitely be significant. Even Krugman's model of a "bond vigilante" attack on a sovereign currency issuer results in weakened currencies in spite of rising interest rates. It goes back to the famous trilemma of international finance.
Agreed!