Japan from the inside out

Modern times

Posted by ampontan on Thursday, September 16, 2010

They have to get money from someplace.
– Edwin Merner, president of the Atlantis Investment Research Corp. in Tokyo

CALIFORNIA GOV. Arnold Schwarzenegger is touring Japan, South Korea, and China as part of a PR campaign to boost tourism and to coax companies in the three countries to bid on the construction of the high-speed rail network that is planned to begin service in the state in 2020. When completed, it will extend from San Francisco to San Diego. California is also encouraging companies in Germany and France to submit bids.

The Japanese bid will probably be higher than the others, which will offset their advantages in technology, product quality, and operating experience. The state of California will have trouble paying for any system because it is $US 19 billion in debt, according to this Bloomberg article on the governor’s tour. It has one of the highest unemployment rates in the country, a net population outflow for the past four years, and a Democrat-controlled legislature that wants to raise taxes instead of cutting expenditures, even if it means reducing $US 100,000+ pensions to former public employees every year for life. California already has the 6th highest state/local tax burden in the United States. The governor and the legislature are continuously sparring over the budget. The state had to issue IOUs to creditors last year, and might have to do it again this year .

The system is estimated to cost $US 40 billion. California will sell bonds to help offset the costs, and also will receive grants from the U.S. government. To enhance their bid, the Japanese government will allow the Japan Bank for International Cooperation—the international arm of the Japan Finance Corp., which is wholly owned by the Japanese government—to loan an unspecified amount to the Californians to help them pay for it.

Now remember that the Japanese government had to borrow 45% of the money—a record—for its own record-high budget this year, approved when Prime Minister Kan Naoto was Finance Minister.

In other words, the Japanese government wants to lend money it doesn’t have to a deadbeat sub-national government that would be kicked out of any bank in the world if were a private citizen or corporation asking for a loan. The former land of milk and honey is in the second-worst financial condition of the 50 states. The United States government, which doesn’t have any money either, is going to chip in with grants. The state of California, struggling to stay out of insolvency, might well default on the bonds or the loan. Another unpleasant scenario is the potential for subjecting their creditors to what’s called financial oppression. Thus, there is a real possibility the Japanese would take a financial bath if it wins the bid. Even if California doesn’t default, by the time it pays off the loan, it might be in seriously inflated dollars.

Yet the Japanese government thinks this is a winning proposition.

And all of this is to build a rail system that will almost surely be a perennial money-loser in a state that is Ground Zero for the American car culture.

Is that not a metaphor for our times?

Bloomberg link stolen from The Marmot’s Hole.

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3 Responses to “Modern times”

  1. Roual Deetlefs said


    There is something else going on here. Why does Arnie have to be in Asia for the sake of tourism and trains ? He could have stayed in Sacramento and let the bidders come to HIM. That denotes strength. What he is doing now is a sign of weakness. Ultimately it must mean something with Arnie needing money …

    If Japan does win the bid, and must make a loan as well, then the loan must be made in $ and not ¥. The reason being that this current strength in the ¥ might just be its last hurrah.

    People looking to buy would be better off waiting for a pull-back towards 84.50, and we would not really change our expectation for further USDJPY strength unless 83.50 is bypassed on a daily close. Next key resistance once the 50-dma is bypassed is 87.90/88. If that is bypassed it would invalidate the bearish impulse started around 95.00 last May and would in my opinion imply that the bear market for USDJPY started in the 70s could be over… Let that sink in for a second and try to guess how high I think USDJPY can go.

    A long term chart of the USDJPY is here.

    If the dollars are paid back, then the Japan will get more ¥ for its dollars. Only time will tell.
    But then both currencies could be inflated by that point…

  2. Andrew in Ezo said

    Arnie was in Asia because his trip was bankrolled by the billionaire Chinese owner of Alibaba-he went to China first and spent the longest time there for the three nation visit.

  3. Today i’ll be taking the train from around Ikebukuro to Ginza. I don’t own a car because the trains are so convenient.

    I left the police state California because it had no transportation infrastructure besides highways which is super inefficient compared to trains.

    Now when the house of cards are crumbling California is thinking of building train infrastructure?

    It needs it badly. This should have been done ages ago.
    DF: Thanks for the note.

    It’s one thing to take a municipal train in the Tokyo metro district, which I agree is convenient, and another to take a train from San Francisco to Los Angeles. Don’t know if you’ve ever been on the East Coast, but the Metroliner (what they used to call it) between New York and DC is only about as fast as a special express in Japan, much more expensive, and loses money. I don’t know about the different systems nationwide, but where I live, JR Kyushu makes money. Not sure the comparison is apt.

    Other considerations: You might not need a car in Tokyo, but Tokyo ≠ Japan. People need them where I live. And it’s never a good idea to buy something you can’t afford.

    – A.

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