Is Japan's Central Bank Still Credible?
- Ocean Rock Ltd
- Aug 7, 2023
- 3 min read
PUBLISHED BY LAURENT MAUREL | AUG 2, 2023 |
Like every year, the news seems to come to a standstill during the vacation season.
The fact is, the media hardly reports anything any more, apart from the weather or certain news items. The disconnect is total. And yet, in the meantime, everything seems to be accelerating, both geo-politically and economically.
The return from vacation is likely to be difficult, with August shaping up to be a hectic month on all fronts.
In the United States, public finances continue to deteriorate.
Fitch has just downgraded the long-term credit rating of the United States from AAA to AA+. The rating agency explains that "the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management". "In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process", adds Fitch.
To finance its deficit and keep spending, the U.S. Treasury issued $1.8 trillion in short-term debt in just two short months, as much as the country had issued in its entire 209-year history.
The US Treasury has also just raised its estimate of the amount to be borrowed in the second quarter to $1.85 trillion. This is unprecedented. This is the logical consequence of last June's lifting of the debt ceiling. The Treasury is in freewheel mode, borrowing without limit.
We have clearly entered an exponential phase of debt growth. Estimates for the end of 2023 now stand at well over $30 trillion, up sharply on last year's forecasts.
In June, against all expectations, US spending climbed by 15% to $646 billion. The U.S. paid a record $652 billion in interest in the first six months of 2023, an amount likely to rise by the end of the year. This level of repayment is unsustainable at a time when the country's tax revenues are falling again.
Total tax revenues fell by 9.2%, from $461 billion to $418 billion in June. This resulted in a decline in public revenues of more than 7.3%, a record since June 2020.
Economic activity, while holding at unexpectedly high levels, is not growing fast enough to sustain the shock of rising debt repayment costs.
On the other hand, unlimited government spending is boosting inflation in the United States. In such a context, how could the Fed lower its key rate? The prospect of a rapid rate cut was one of the last sources of support for economic activity and the housing market. But that hope is fading. How many Americans are buying today in the hope of refinancing their credit with a short-term rate cut?
The measures taken by the Fed to cushion the shock of the debt wall are buying some time. But with the decision to borrow much more than expected between now and the end of the year, the Treasury is complicating the Fed's task. The more the government spends, the bigger the repayment bill, and the more difficult it becomes to buy back new debt. Now that the interest curve on the debt is hitting the steepest slope of the exponential, the central bank's ability to intervene to support the government's lifestyle is dwindling.
One might have thought that the drifting US public finances would be the headline story in the business press this summer. Not so. Another country, another central bank, is still in the news. It's Japan.
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