It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.
False.
Many countries have defaulted on debt denominated in local currency. E.g. Brazil in 1990 and Russia in '98.
In Brazil's case, part of the debt was indexed to inflation, so inflating away the debt wasn't easy.
AFAIK most of Japan's debt isn't inflation-linked. Still, a high enough rate of inflation isn't substantially different from partial default.
PS: See the table on page 30. http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/21997...
I think you're both right. When you can print your own currency it is literally impossible to default on your debts, unless you choose to.
Often times defaulting has benefits to the debtor, like the Russians escaping from ridiculous fixed exchange rates in 1998.
Because they decided to issue it, mainly to instill confidence in a currency with a history of big inflation. But this isn't the norm.
It doesn't change the argument that it is impossible to be unable to "pay back" something that you have an infinite supply of.
This definitely doesn't mean that it is impossible; at a minimum, a country might choose to do it. In fact as others have pointed out, default is sometimes preferable to hyperinflation and extreme devaluation. After all, all countries, Japan included, rely on imports to get at least some essential goods (think about food, fuel, medicine and tools); autarky is possible, but very inefficient and painful.
Japan's interest on the public debt is around $250B/year, or around 5% of GDP.
5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone).
$250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable.
Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false.
Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
Back in the real world: When I said earlier that Japan has to pay $250B this year to service their debt, that means there is an actual no-kidding line item in their fiscal year 2015 budget for the Ministry of Finance to pay that money to bondholders. They've budgeted the money already and it will be paid out starting in April just like it was in 2014, 2013, 2012, and so on.
The government of Japan is plainly bankrupt. People that own Japanese government debt are already being paid back in devalued Yen. The only options left for Japan are to either openly default, or dramatically increase the debasement of the Yen - the last option is exactly what they will choose. So rather than an open default, they will default by destroying their currency.
Abenomics will be followed by a call for Abenomics 2, and a more dramatic destruction of the Yen. Japan has been living on borrowed time for 15+ years, maintaining a fake standard of living that was dependent on perpetually greater amounts of debt; the bill has come due. The exact same process is occurring in several of the biggest economies of Europe.
You may consider it a "moral" default if the debt is paid back in inflated currency, but it is in no way a technical default and you can't just redefine long standing meanings of the word "default" to suit the point you're trying to make.
I'm not saying that nobody cares if debt is paid back in debased currency, but if it's paid back according to the letter of the contract, then it's not a default.
That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false. Japan could default on debts if it chose to (many countries have in the past).
This is slightly pedantic. The argument was about whether incurring ever-greater amounts of debt would result in the default of Japan, a country with a sovereign currency. It's a fallacy that is often repeated. As long as the debts are denominated in said currency, the answer is: no. A country with its own currency will always be able print more money to fulfill these obligations, making default practically (not literally, I guess) impossible.
The fact that they can choose to default, or that we may run out of trees, or ink, or whatever, is a bit outside of the scope of the argument.
The literal sense of the word "literally"?
Yes, I think that's exactly what was meant!
Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification?
Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen?
Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds.
So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return).
At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt.
I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.
Banks are not going to be super happy when the government tells them that their bonds are worth nothing through giga-inflationist measures. Or are they ? Default is better than nothing, at least you can pick up the pieces, while inflation is literally destroying your economy for any foreseeable future.
Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
Germany in the '20s (not the '30s - hyperinflation was over by the '30s - just in time for Germany to be sucker-punched by the Great Depression) was a special case. They hyper-inflated in order to default. Namely, the Triple Entente had imposed massive war debts onto Germany at the end of World War 1, and Germany resorted to printing currency in order to pay off its war debts. When formal default justifies military invasion and the annexation of your territory (which was the French argument when the Weimar Republic talked about default), hyper-inflation begins to look awfully attractive.
While it's a trope to use the Weimar Republic as an cautionary tale about inflation, we can't really learn very many lessons from it, because of the relatively exceptional historical circumstances preceding the founding of the Weimar Republic.
(In the end, it was all moot, of course. Hitler unilaterally canceled Germany's debt payments, essentially calling the French on their bluff about invading the Rhineland. The French didn't invade, and Hitler was emboldened to pursue further expansionism.)
I grew up in an Eastern-European post-communist country which was very badly affected by inflation in the '90s (it ran in the high double-digits for almost all the decade, and in one year it actually surpassed 100%). Let me tell you that to see your life-savings absolutely annihilated in a matter of 2-3 years it's much, much, much worse than deflation. Japan got into the current mess after 20 years and it still manages to build Maglev trains and to be an economic power, but in a country affected by very high inflation all that goes out of the window (see the Soviet Union implosion).
And anecdotal recollection, I remember when my parents had asked me to be the one in charge of answering the family's phone (I was 14 or 15), and to tell whomever was calling that they were not home (they had borrowed money from lots of their friends to buy food and to pay for basic apartment maintenance and there is no-way to pay it back). One day a lady judge called, asking my parents to pay back the money they owned her because she did not have money to buy bread. Now, you can imagine that in a country where even judges cannot afford to buy bread for their family things are worse than worse.
Instead of actually addressing quanticle, you went into an irrelevant inflation/deflation rant. It would be nice if we could actually talk with each other rather than at each other in this kind of discussion.
Edit to point out once again: Default and deflation are not the same thing. By bringing up deflation in this particular sub-thread, you are further reducing the signal-to-noise ratio in a comment thread that is already of low average quality.
As I was trying to say, after 20 years of a shitty deflationary economy the Japanese people still pretty much have their pensions more or less intact, while in a highly inflationary economy (like the one I experienced) the pensions become almost null in a matter of maximum 5 years. So your point, "So, when it comes to your life-savings, both can be utterly destructive" is actually demonstrably false, based on recent historic examples. I agree, we can start the discussion from here, i.e. from demonstrable economic facts.
Granted, English is my second to third language, so I try my best at holding a conversation.