As you may have seen, Japan’s public debt has hit one trillion quadrillion yen. That is roughly $10 trillion. It will reach 247pc of GDP this year (IMF data).
No problem. Where there is a will, there is a solution to almost everything. Let the Bank of Japan buy a nice fat chunk of this debt, heap the certificates in a pile on Nichigin Dori St in Tokyo, and set fire to it. That part of the debt will simply disappear.
You could do it as an electronic accounting adjustment in ten seconds. Or if you want preserve appearances, you could switch the debt into zero-coupon bonds with a maturity of eternity, and leave them in a drawer for Martians to discover when Mankind is long gone.
Shocking, yes. Depraved, not really.
It also doable, and is in fact being done right before our eyes. That is what Abenomics is all about. It is what Takahashi Korekiyo did in the early 1930s, and it is what the Bank of England is likely to do here (while denying it), and the Fed may well do in America.
Japan’s QE will never be fully unwound. Nor should it be. If a country can eliminate a large chunk of unsustainable debt without setting off an inflation spiral, or a currency crash, or the bubonic plague, there has to be a very strong reason not to do it. I have yet hear such a reason. Though I have heard much tut-tutting, Austro-outrage, and a great deal of pedantry. Read More
Another night; another Japanese government bond futures halt. The last 2 days have seen JGB prices plunge at the fastest rate since the post-Lehman debacles in Sept/Oct 2008 smashing back to 13 month highs. 5Y yields are surging even more – trading above 34bps now (up from 9.9bps on March 5th). These are simply astronomical moves in the context of JGB history and strongly suggest Abe & Kuroda are anything but in control of the quadrillion Yen domestic bond market as they jawbone inflation expectations into the psychology of the people. Of course, the Nikkei is surging (now up 9% in the last 5 days alone) amid JPY breaking above 102 (but for now it has rallied back to 101.80). Japnese interest rate implied volatility is surging once again also (after its epic collapse last week – which appears the worst-timed lifting of hedges ever, or more like a lifting of hedges into an unwind of actual long positions).
The last 2 days (since JPY broke 100) have been tempestuous at best!!
with 10Y JGB Futures prices seeing their biggest 2-day selloff since Lehman… Read More
All morning we have been blasted with 2011 deja vu stories how the IMF panhandling effort has finally succeeded, and how Lagarde’s Louis Vuitton bag is now full to the brim with $400 billion in fresh crisp US Dollars bills courtesy of BRIC nations, and other countries such as South Korea, Australia, Singapore, Japan (adding $60 billion to its total debt of Y1 quadrillion – at that point who counts) and, uhh, Poland. From Reuters: “The Group of 20 nations on Friday were poised to commit at least $400 billion to bulk up the International Monetary Fund’s war chest to fight any widening of Europe’s debt crisis.” We say deja vu because it is a carbon copy of headlines from EcoFin meetings from the fall of 2011 in which we were “assured”, “guaranteed” and presented other lies that the EFSF would surpass $1 trillion, even $1.5 trillion on occasion, any minute now. Alas, that never happened, and while we are eagerly waiting to find out just what the contribution of Argentina will be to bail out Spanish banks (just so it can expropriate even more assets from the country that rhymes with Pain), we have one simple question: does the I in theIMF stand for Idiots? Why? Because this is merely yet another example of forced capital misallocation, only this time at a global scale.
Consider that the money used to bail out European banks, and thus do nothing to solve their solvency issues, but merely plug another liquidity gap, is being forcefully taken away from trade surplus countries (i.e., BRICs and assorted hangers on) which are lucky to generate this money for one simple reason: by ordinarily recycling their trade surplus, they fund their trading partners’ purchasing power, or rather the purchasing power of Joe Sixpack who wants to buy the latest and greatest iCrap, in the form of vendor financing used to buy Treasurys, primarily those of the US, and keep inflation rates low. Now, instead of money flowing to where it is most needed, the IMF, as a central planners’ central planner, comes along and tells its members that going forward it will tell them what is in their best interest, and if possible to please fund a lost cause: namely Europe in its current configuration.
This time around, we are starting to see precisely the same thing happen at the sovereign level, and while we do not know yet just what the global trade implications will be from international capital misallocation, we know one thing: by being forced to put money into black hole A (f/k/a Europe), the BRICs will be unable to invest cash into other projects, and/or recycle it by funding deficit countries’ trade deficits. We do know that the consequences will have a dramatic ripple effect on global capital allocation, most certainly not limited to US treasury funding needs. Read More
Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.
Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”
Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.
Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.
‘Worse and Worse’
Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”
S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.
The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”
No Winning Play for Japan
If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.
On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.
Massive Debt Rollover Problem
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
Standard and Poor’s said Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, an indication it may be preparing to lower the nation’s sovereign grade.
“Japan’s finances are getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview today. Asked if this means he’s closer to cutting Japan, he said it “may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today.”
S&P rates Japan at AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government projects will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.
The yen pared gains after Ogawa’s remarks and traded at 77.09 against the dollar as of 2:43 p.m. in Tokyo. Yields on Japan’s benchmark 10-year government bond rose to as high as 0.98 percent today from the previous close of 0.965 percent before the nation’s markets shut yesterday for a holiday. The Nikkei 225 Stock Average dropped 1.8 percent to 8,167.28 as of 2:49 p.m. Tokyo time.
Japan’s lower house of parliament today approved legislation that would add an additional 2.1 percent levy to an individual’s annual payment. Lawmakers revised the government’s proposal to extend the period of the measure to 25 years, from 10 years, to help pay for earthquake rebuilding. The measure takes effect in 2013. Read More
As we speculated two weeks ago, the key word that will be regurgitated by all pundits through the end of the year is “contagion”. Sure enough, the bond vigilantes who are now fully awake and stretching have brought a mauling to Spanish bonds, where 10 Year yields are now at lifetime highs. The chart below shows what will happen to US bond prices sooner or later. Should the 10 Year experience such a move in a comparable time frame, the Federal Reserve’s $56.3 billion in total capital will be exhausted about 4 times over, and Ben Bernanke will be presiding over an insolvent central bank, begging for intelligent life from Proxima Centauri to have departed about 4.27 years ago in direction earth, bringing with it an extra $1 quadrillion in Terra backstop capital.
Kedrosky has posted an informative chart from JPM’s Michael Cembalest indicating that ownership of gold in dilutable terms (aka dollars), as a portion of global financial assets has declined from17% in 1982 to just 4% in 2009. And even thought the price of gold has double in the time period, as has the amount of investible gold, the massive expansion in all other dollar-denominated assets has drowned out the true worth of gold. Were gold to have kept a constant proportion-to-financial asset ratio over the years, the price of gold would have to be well over $5,000/ounce.
Of course, the chart above pales in comparison with the true Exter pyramid, which incorporates all those wonderful JPM/Goldman inventions known as derivatives, amounting to $1.8 quadrillion, which certainly did not exist in 1982. If one were to factor the above table to include this Exter securitized credit money as well, then the true constant worth of gold would be well north of $10,000.