Another problem for Japan: good debts

Lester Thurow outlined this phenomenon yesterday at the CSFB conference.

You've heard a lot about Japan's bad debt problem. Now Lester Thurow has discovered that it also has a good debt problem. The MIT professor of Economics and Management and acclaimed author was at the CSFB investor conference in Hong Kong and remarked upon this phenomenon.

Broadly speaking, Thurow thinks that there is a whole lot of performing "good" debts in the economy that are causing it just as many problems as the mountains of bad debts. These largely explain why Japanese people are reluctant to spend. That's because these good debts centre on individual Japanese families possessing massive negative equity.

"40% of the households in Japan have a mortgage which is substantially above the value of their house," says Thurow. "And they are all still being serviced."

While these are good debts from the bank's perspective, they are bad from the perspective of the economy as a whole. Indeed, these very mortgages, he says, are responsible for Japan's deflation and moribund consumer demand. "It's why car sales and such things are down. Who can afford to buy a car, if you have negative net equity on your house of 60-70%?"

Thurow says these families have no choice but to pay their mortgages, because if they die they become the responsibility of their children. He says these loans are two-generation mortgages, which legally obligate the children to pay when the borrower dies. These are illegal in the US under the 15th Amendment, which prevents selling people into bondage. (This amendment was the result of the anti-slavery movement.) "And if you sign a contract for your children, that's selling them into bondage," says Thurow.

So Thurow says the good debt problem can't even be sold by dying. The negative equity will linger with the children.

So what to do? "The easiest thing to do would be for the government to give a tax credit to banks if they wrote every mortgage down by 40%," he says.

Is this likely to happen? Is Japan likely to solve its problems? Thurow is pretty negative: "It will be awfully easy for Japan to have another 10 bad years. The real problem is there isn't enough pain to do anything about it. I was in Japan right before Christmas, and you walk around the Ginza, and you have no sense that this is a country in crisis."

And he adds: "Countries don't change their cultures without a crisis."

Nor does he foresee a crisis: "There's no reason why there should be one. Japan could not grow for a very long time and still be the richest country in Asia."

And what does this mean for Asia? "It makes it harder for the rest of Asia to grow because Japan doesn't provide a market," he concludes.

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