500 Yen to the US$?

[Majestic]

This ought to make anyone holding JP assets feel a bit paranoid.

“Japan is likely to default before Europe does, which could be in the next five years,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview yesterday. Japanese should hold foreign-currency products, such as those denominated in the greenback, Swiss franc, sterling, Australian and Canadian dollars, Fujimaki said. Should the Japanese government default, the yen may weaken to 400-500 per dollar, and the yields on benchmark 10-year bonds could surge above 80 percent, according to Fujimaki. “I’m buying dollars in case of an emergency,” he said.

http://www.bloomberg.com/news/2012-0...t-by-2017.html

[BackDoor_Man]

This ought to make anyone holding JP assets feel a bit paranoid.

“Japan is likely to default before Europe does, which could be in the next five years,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview yesterday. Japanese should hold foreign-currency products, such as those denominated in the greenback, Swiss franc, sterling, Australian and Canadian dollars, Fujimaki said. Should the Japanese government default, the yen may weaken to 400-500 per dollar, and the yields on benchmark 10-year bonds could surge above 80 percent, according to Fujimaki. “I’m buying dollars in case of an emergency,” he said.

http://www.bloomberg.com/news/2012-0...t-by-2017.html

When I first came to these shores (1972) the yen was 368 to the dollar and it has always gone down. Now it is 2012 and it is 78-79 yen to the dollar. In all this time Investment Advising Companies have come and gone. and all their expert have been wrong! I believe, I 'll hold on to my yen holdings a lot longer than the president of Fujimaki, Japan will be president.

[hennagaijin]

I couldn't sleep at night if my assets were in $US..

[madazzahatter]

......it were up your assets,you'd know.

[Super Grover]

When I first came to these shores (1972) the yen was 368 to the dollar and it has always gone down. Now it is 2012 and it is 78-79 yen to the dollar. In all this time Investment Advising Companies have come and gone. and all their expert have been wrong! I believe, I 'll hold on to my yen holdings a lot longer than the president of Fujimaki, Japan will be president.

The question is: How good was/is Mr Fujimaki at his job? Not everyone can advise Soros, who is, himself, very astute. Still, these predictions seem too much to accept, right? Maybe because of this:

http://www.sciencedaily.com/releases...1009140201.htm

http://www.kurzweilai.net/brain-imag...ace-of-reality

And you Majestic, what's your take? I think that Japan is in for some hard times starting later in 2013 (maybe with a weaker yen, but just as easily not), but I have zero inkling as to where the yen might be in 3-5 years. I feel that we are delaying, delaying, always delaying over here. But who wouldn't be loving 79 to the USD these days!

[Majestic]

I really don't know what to make of it. Its the first time I've seen somebody (who is a hell of a lot smarter than I am) put a hard number to the exchange rate should Japan default. Actually I don't even know what it means for Japan to default. Unlike Greece, Japan prints the currency, and Japan owes the money to its own citizens and institutions (for the most part) so I don't see how Japan can default. I can see how they would have to print money to cover debts for which they do not have enough cash to repay - but I don't quite understand the mechanism for how cash is introduced into the system.

But - in response to BDM's comments, I don't think we can be complacent and say that the yen has risen since WW2, and therefore we are safe to assume it will continue at these levels. Japan's debt at something like 220% of GDP is the highest (in terms of percentage) in the world. Its unsustainable, particularly in a shrinking economy/population. Debts must be repaid, as Greece, Portugal, Spain, and Ireland are figuring out. And I think its intellectually lazy to throw up our hands and say, "well the economists don't know anything, so we'll be all right". I don't want to be one of those guys in the articles you linked to - one of the guys who thinks it will all turn out for the best, so no need to worry about the unthinkable. I think its far more likely that in some point in the future, we'll look around and say, "well of course Japan imploded, didn't anyone see the mountain of debt it was sitting on?".

Personally, I have my savings spread around, so exchange rate swings of a few percent don't really faze me. But 500 yen to the dollar... ouch. To me that is a massive, life-changing blow. Not only that, I don't see how Japan could import oil and liquid gas and raw materials and food to sustain itself. At 500 yen to the dollar, all bets are off the table. Japan would be such a basket case that its hard to think through all the implications of such a weak yen. On the other hand, consumer goods manufactured in Japan (assuming the lights were still on in the factories) would be super cheap for Americans, and Japan's manufacturing sector would boom.

I think realistically I will be sitting tight for now, maybe move some cash into the US$ this summer. But if the yen looks like it will breach 100 yen to the dollar I might start moving a lot more money into other currencies. My retirement plan gets blown to high heaven if the yen goes past about 200 yen/$.

[Super Grover]

I really don't know what to make of it. Its the first time I've seen somebody (who is a hell of a lot smarter than I am) put a hard number to the exchange rate should Japan default. Actually I don't even know what it means for Japan to default. Unlike Greece, Japan prints the currency, and Japan owes the money to its own citizens and institutions (for the most part) so I don't see how Japan can default. I can see how they would have to print money to cover debts for which they do not have enough cash to repay - but I don't quite understand the mechanism for how cash is introduced into the system.

But - in response to BDM's comments, I don't think we can be complacent and say that the yen has risen since WW2, and therefore we are safe to assume it will continue at these levels. Japan's debt at something like 220% of GDP is the highest (in terms of percentage) in the world. Its unsustainable, particularly in a shrinking economy/population. Debts must be repaid, as Greece, Portugal, Spain, and Ireland are figuring out. And I think its intellectually lazy to throw up our hands and say, "well the economists don't know anything, so we'll be all right". I don't want to be one of those guys in the articles you linked to - one of the guys who thinks it will all turn out for the best, so no need to worry about the unthinkable. I think its far more likely that in some point in the future, we'll look around and say, "well of course Japan imploded, didn't anyone see the mountain of debt it was sitting on?".

Personally, I have my savings spread around, so exchange rate swings of a few percent don't really faze me. But 500 yen to the dollar... ouch. To me that is a massive, life-changing blow. Not only that, I don't see how Japan could import oil and liquid gas and raw materials and food to sustain itself. At 500 yen to the dollar, all bets are off the table. Japan would be such a basket case that its hard to think through all the implications of such a weak yen. On the other hand, consumer goods manufactured in Japan (assuming the lights were still on in the factories) would be super cheap for Americans, and Japan's manufacturing sector would boom.

I think realistically I will be sitting tight for now, maybe move some cash into the US$ this summer. But if the yen looks like it will breach 100 yen to the dollar I might start moving a lot more money into other currencies. My retirement plan gets blown to high heaven if the yen goes past about 200 yen/$.

Of course it is mostly guesswork, but perhaps there are those with great sense (Taleb?).
It is always good to act in a prudent manner and be ready to act. My greatest "errors" have been to have not been alert to opportunities and the occasional danger sign. Things happen so fast now.
If Japan did see 300,400, or even 500 yen to the dollar, surely that would cause total chaos elsewhere. There is no decoupling anymore.

If the yen went to 300 to 400 per dollar, my better half's lifetime of work would essentially evaporate (everyone else, too, of course.

[shonanfred]

If the dollar goes to 500, I will drive to the bank in my new Maybach to pay off the house.
Fred

[Yukkuri Kame]

One panic in JGB's, rates rise and Japan is the new Greece.

[thefg]

This is never going to happen.

it flies in the face of the Global power shift to asia.

America is f_cked, Europe is f_cked and the powers that be all know it.


The next 100 years will be China, India and her neighbours including Russias turn.

Japan will continue to do what its been doing, only it will be selling to Asia rather than the west.


http://emlab.berkeley.edu/~eichengr/...ts_5-17-11.pdf

[Super Grover]

This is never going to happen.

it flies in the face of the Global power shift to asia.

America is f_cked, Europe is f_cked and the powers that be all know it.


The next 100 years will be China, India and her neighbours including Russias turn.

Japan will continue to do what its been doing, only it will be selling to Asia rather than the west.


http://emlab.berkeley.edu/~eichengr/Global_shifts_5-17-11.pdf

Perhaps you're right. Let's hope so -- well except for the part about we're all f$##ed. Still, Japan has to (doesn't she?) resolve her debt problem. Not a few Japanese critics say that it is not so much of a big deal because it is all homemade debt. I find this alarming and do not buy into it at all. Such reasoning deliberately eschews macroeconomic issues.
http://www.bloomberg.com/news/2012-0...ince-1979.html

Btw, if we look at various Japanese debt clocks, the per person debt is over 7 million!

Right now, there are considerable troubles here even with well known companies. They have trouble selling their products here whether due to market saturation, failure to be able to respond fast enough to change, and/or because of the demographic shift. They have gone to overseas markets (China being a big one) and are finding that the competition is cut throat (and that's being kind). My take is that many businesses are feeling the squeeze and could disappear, only to be replaced by Chinese companies (but not only Chinese) selling essentially the same thing for less (e.g., Haier). Japan may well continue to be an exporter and innovator as always, but I think what will be exported will change enormously.

But back to the main topic: How to resolve the debt? And will the yen drastically decline in worth?

If any of you are reading books about Japan's debt, economic future, etc., I would be interested in knowing about them. I think it is important to be up to speed on this topic.

[Since1990]

Japan will be fine. They have just discovered oil and natural gas near Sado, off the west coast of Akita-ken. Pretty soon we'll all (we in Japan) have free petrol/gasoline and will be driving around in Caddilacs (which will help the US economy) with diamond-studded sunglasses (which will help the Bolivian economy). Meanwhile, the oil has dried up in the North sea of Britain. The UK (let alone Europe) and the US will default before Japan does.

[TJrandom]

No economist here – but my take on it is that all of the larger economies are in a debt cesspool – so to the degree that there is no real difference between them, I do not see a radical shift in the FX rates.

On a more technical note – and contrary to the base article – Europe, not being a country – cannot default, while Japan of course could. But it is unlikely that a major economy country would do so, given the negative impacts that would come with that.

So all in – I am very comfortable with holding yen denominated assets but do believe in diversification – not so much as a hedge against debt defaults, but rather for the impacts of natural and man-made disasters such as wars, etc.

[zmcnulty]

China may not be too hopeful either:
http://www.debtdeflation.com/blogs/2...unist-dynasty/

[Yukkuri Kame]

worth 1000

http://www.zerohedge.com/news/japans-wtf-chart

[Majestic]

Europe, not being a country – cannot default, while Japan of course could

This, to me, is a problem of semantics rather than economics. Any country of Europe could default. The desperate efforts to keep this from happening to Portugal, Ireland, Greece, and Spain is evidence of this.

For Japan, since it is the issuer of currency (or, printer if you like) there will possibly come a day when there are insufficient funds to service the debt. So the choice will have to be either a) default on the debt and face the consequences, or b) print enough cash to service the debt and face the consequences.

I would suggest that any country in a similar position would choose to print in order to service the debt, and suffer the consequences of the loss of faith in the currency (inflation, currency devaluation). I can't imagine the country would default on debt it owes, payable in the currency it controls. It just seems unthinkable to me.

Regarding the chart from Zero Hedge / Harvard, it doesn't faze me that much - I mean, it fazes me as much as the first three charts: Japan owes a lot of money. It owes more money than it has coming in (but then again, so does every homeowner and many corporations). The problem is the continued outlook: grim and grimmer. At some point the debt will require payments surplus to reserves. The Japanese government will then print to cover the outstanding debt. Then...?

[TJrandom]

.... Then...?

Agreed with all of that - but in addition to inflation, taxes will be raised too - such that the correction is a bit less painful and acute. But even with tax increases and inflation, I can't see a major jump in exchange rates overnight - meaning that there should be ample time to adjust.

[edin日本]

Japan will be fine. They have just discovered oil and natural gas near Sado, off the west coast of Akita-ken. Pretty soon we'll all (we in Japan) have free petrol/gasoline and will be driving around in Caddilacs (which will help the US economy) with diamond-studded sunglasses (which will help the Bolivian economy). Meanwhile, the oil has dried up in the North sea of Britain. The UK (let alone Europe) and the US will default before Japan does.

Don't buy your caddy yet! The Japanese don't have the tech to get the LNG out of the rock.

[edin日本]

This, to me, is a problem of semantics rather than economics. Any country of Europe could default. The desperate efforts to keep this from happening to Portugal, Ireland, Greece, and Spain is evidence of this.

For Japan, since it is the issuer of currency (or, printer if you like) there will possibly come a day when there are insufficient funds to service the debt. So the choice will have to be either a) default on the debt and face the consequences, or b) print enough cash to service the debt and face the consequences.

I would suggest that any country in a similar position would choose to print in order to service the debt, and suffer the consequences of the loss of faith in the currency (inflation, currency devaluation). I can't imagine the country would default on debt it owes, payable in the currency it controls. It just seems unthinkable to me.

Regarding the chart from Zero Hedge / Harvard, it doesn't faze me that much - I mean, it fazes me as much as the first three charts: Japan owes a lot of money. It owes more money than it has coming in (but then again, so does every homeowner and many corporations). The problem is the continued outlook: grim and grimmer. At some point the debt will require payments surplus to reserves. The Japanese government will then print to cover the outstanding debt. Then...?

Looking at that chart seriously scares the crap out of me. As it stands now I'm looking at non existant pension payments from both Canada and Japan (no money in either pension funds to service new retirees) and currently any savings I have have been put back into my online company.

If that chart is correct then I foresee a lot of large corporations fleeing the country rather than staying to help the government service the debt. And the bottom line is that despite Japan's so called position as a former industrial giant the country isn't too big to let fail. Let's face it Japan can be allowed to default because most of its debt is held by domestic lenders and not by international brokers.

[Yukkuri Kame]

Debt-based economies are ponzi schemes. The Japanese ponzi scheme has run out of new suckers, negative birth rate and negative migration.

QE has failed to promote growth. Personally, I think growth is stupid. But a debt-based economy is either growing or the ponzi scheme implodes.

The simple solution is for the nation to print it's own debt-free money, but the banking cabal forbids it.

[TJrandom]

.... As it stands now I'm looking at non existant pension payments from both Canada and Japan (no money in either pension funds to service new retirees) and currently any savings I have have been put back into my online company. ....

So how far away from public pension consumption are you? IMO Japan's pension will be just fine - consumption tax to the rescue - but in principle, I'd certainly advise everyone to build their own alongside of the national scheme. If the national is still there when you are eligible to start recieving - then fine, but if not - I wouldn't want to starve or eat at soup kitchens.

[TJrandom]

Looking at that chart seriously scares the crap out of me. ....

That last chart is just saying that if 100% of the tax revenue were used to service the debt (with zero going to current year expenditures) - that it would take 20 years to pay the debt down to zero. But zero is unrealistic, and not necessary - so maybe 16 years worth might be a good target.

So - if taxes are raised, and if inflation comes to the rescue (lowering the value of the debt in relation to future inflated prices and revenues) - then it doesn't look hopeless to me. Definitely a problem to be solved - so I will be picketing and asking for more taxes. Care to join me?

[rainbowtokyo]

Don't buy your caddy yet! The Japanese don't have the tech to get the LNG out of the rock.

Gas isn't extracted from rock as a liquid. It gets liquefied much later, well after it is extracted, as its is easier to store and transport in this form.

But then again, in between the goldfish and the plants and the impotent threats to destroy other peoples computers, you really didn't know that did you? The Canadian chapter of the KKK, although proud of your use of the N-word, would probably disown you for being a right twit.

[Super Grover]

That last chart is just saying that if 100% of the tax revenue were used to service the debt (with zero going to current year expenditures) - that it would take 20 years to pay the debt down to zero. But zero is unrealistic, and not necessary - so maybe 16 years worth might be a good target.

So - if taxes are raised, and if inflation comes to the rescue (lowering the value of the debt in relation to future inflated prices and revenues) - then it doesn't look hopeless to me. Definitely a problem to be solved - so I will be picketing and asking for more taxes. Care to join me?

IF????? In effect, then, paying considerably more taxes because of poor management with no signs of improvement on the horizon (imo).
The new consumption tax increase is designed to fund pensions for people old enough to be eligible. That still does not attack the debt. If income taxes rise much more, some will begin to leave (those who can speak English and who have skills). Personally I see no way out (not that I am a Nobel-winning economist!) unless Japan gets moving extremely fast on exporting new ev and solar tech, among others.

But 500 to a dollar. It seems too crazy to imagine, especially when we are at 79 (also crazy), but way less so than 500.

[rainbowtokyo]

A major devaluation is just months away. The Japanese government and central bank have no other alternative. That said, it won't be anything like 500Yen to the dollar.

An interesting report from an interesting economist: http://www.cnbc.com/id/46863460/The_...oning_Andy_Xie


The following is an opinion piece from Caixin, a Beijing-based media group specializing in Asia business news and financial information.

Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan's major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan's neighbors and its distant competitors like Germany. The yen's devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan's neighbors must have a strong banking system to withstand a bigger devaluation of the yen.

Self-inflicted Deflation

Japan's nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation . Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.


Image Source | Getty Images
Without government deficits, Japan's economy will decline much more. Central government bonds and borrowings plus its guaranteed debts rose by 116.3 trillion yen during the period, equivalent to one-fourth of the level of the nominal GDP in the third quarter of 2011. If Japan had adopted balanced budgets, its economy would have contracted two to three times more. This will lead to a debt crisis in its private sector.

A strong yen [JPY= 78.86 -0.14 (-0.18%) ], deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. When wages and asset prices rise, a strong currency can be justified. When wages and asset prices fall, a strong currency is suicide. Japan's nominal GDP peaked in 1997 and its nominal wages did too. Its property prices have declined every year since. The Nikkei rose in only four out of the last fifteen years and is still close to a three-decade low.

Japanese policymakers, businesses, academics, currency traders and the average Mrs. Watanabe all believe in a strong yen. This belief is wrong but self-fulfilling. It has lasted so long because the Japanese government adopts policies to offset the destabilizing effects of deflation due to a strong yen. Hence, Japan's national debt has marched upwards along with the value of yen. It is expected to top yen 1,000 trillion in 2012, 215 percent of GDP, 7.8 million yen (or roughly US$ 94,000) per person, and about half of net household wealth per capita.


MORE FROM Caixin.com
Slow-Cooking InflationA World Flying BlindCutting 1 Trillion Yuan in Taxes
The sustainability of Japan's deflationary path depends on the market's confidence in Japan's debt market. As Japanese institutions and households hold almost all of the government's debts, their faith in the government's creditworthiness is the mojo for Japan's seemingly harmless deflationary spiral.

A Vast Bubble

In a normal market, greater supply leads to lower prices. The opposite occurs in a bubble; faith in price stability or appreciation exaggerates demand. Japan has the highest level of government debt and the lowest bond yield. The later is necessary for the former. Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1 percent, the interest expense is expected to top 22.3 trillion yen in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.

In addition to its fiscal vulnerability to a rising interest rate , Japan's budget deficit is still too high. The government budgeted 44 trillion yen in net additional borrowing in the next fiscal year, nearly half of its expenditures. It needs to double its tax revenue to balance the budget. But, as the economy is deflating with declining private consumption, a major tax increase would cause the economy to go down more, shrinking the tax base and requiring even bigger tax increases to balance the budget. Even though the government plans to achieve a primary fiscal surplus, i.e., revenue above non-interest expense, by fiscal 2020 to 2021, it is difficult to see how.

The justification for the low JGB yield is deflation. The real interest rate (the nominal rate plus deflation) is comparable to that in other countries. This rationale requires deflation to persist. But, deflation shrinks the nominal GDP or tax base. How could the government pay back its escalating debt by taxing a shrinking economy? It can only sustain its debt by borrowing more. This fits the definition of a particular type of Ponzi scheme.

The JGB bubble explains the seeming lack of pain in Japanese society. A strong yen and deflation haven't led to an employment crisis because the government deficit is pumping up aggregate demand. As long as wages decline in line with prices, one doesn't feel the pain. Japan's household debt is only half of GDP, about half of the level in the United States. Deflation doesn't cause much balance sheet trouble.

The Strong Yen Bubble

Yen bulls usually point at Japan's trade and current account surplus as supporting factors. A trade surplus can reflect a country's competitiveness or lack of it. Current account surplus is savings minus investment. When investment declines, the trade surplus is boosted. When a country cuts investment, it signals declining competitiveness. Hence, the current account surplus shouldn't be viewed as a supporting factor for strong currency.

The combination of a weak economy and strong currency are always suspect. But it has lasted for so long that even foreigners take it for granted. I think this is some sort of mass hysteria. Most people only remember a strong yen. On the other hand, most people haven't seen rising property or stock markets either.

Japanese culture is group-oriented. Individuals usually embrace group activities. This psyche was the reason that Japan's property bubble became so big in the 1980s. In terms of value above the normal level, Japan's bubble was five to six times the size of the bubble in the United States. After the property bubble, the group psyche shifted its power to a strong yen, pushing Japan's economy onto the path of a rising yen, deflation and rising government debt.

Japan's paralyzed political system is the reason the government has accommodated the deflation path by running up national debt. The Japanese people, on the other hand, buy the debt because deflation makes property or stocks bad investments and a strong yen discourages them from buying foreign assets and deflation.


The international financial market believes in a weak yen from time to time. In 1998, the short-selling by foreigners briefly caused the yen to touch 140 against the U.S. dollar. But, as the Japanese hold all of the yen, if they believe in the yen, foreign short-sellers get punished eventually. Over time, yen bears are all weeded out of the market. The remaining yen traders are all believers in a strong yen.

[TJrandom]

...The new consumption tax increase is designed to fund pensions for people old enough to be eligible. That still does not attack the debt. ...

Yes it does - at least it stems the increase in debt - and that is because our taxes are now being used to pay pensions. So if pensions are differently funded - those tax monies can be used to pay off the debt... of course they could also be diverted into other uses....

[Yukkuri Kame]

Good article, RT.

A 30-40% devaluation? Quite a haircut for bond holders. Rates must rise to compensate bondholders for a depreciating currency. But rates cannot rise or Japan defaults...

Catch 22.

[TJrandom]

Good article, RT.

A 30-40% devaluation? Quite a haircut for bond holders. Rates must rise to compensate bondholders for a depreciating currency. But rates cannot rise or Japan defaults...

Catch 22.

Existing bonds have historical rates, and will be retired as they mature (and maybe replaced with new bonds at future/higher rates). No default needed. Right?

What I think might happen - with higher rates, is that more and more of our taxes will need to be siphoned off to pay off those bonds - but that is what should happen. I'd rather my taxes go to paying off debt than to funding the fuel for whaling....

[Super Grover]

A major devaluation is just months away. The Japanese government and central bank have no other alternative. That said, it won't be anything like 500Yen to the dollar.

An interesting report from an interesting economist: http://www.cnbc.com/id/46863460/The_...oning_Andy_Xie


The following is an opinion piece from Caixin, a Beijing-based media group specializing in Asia business news and financial information.

Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan's major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan's neighbors and its distant competitors like Germany. The yen's devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan's neighbors must have a strong banking system to withstand a bigger devaluation of the yen.

Self-inflicted Deflation

Japan's nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation . Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.


Image Source | Getty Images
Without government deficits, Japan's economy will decline much more. Central government bonds and borrowings plus its guaranteed debts rose by 116.3 trillion yen during the period, equivalent to one-fourth of the level of the nominal GDP in the third quarter of 2011. If Japan had adopted balanced budgets, its economy would have contracted two to three times more. This will lead to a debt crisis in its private sector.

A strong yen [JPY= 78.86 -0.14 (-0.18%) ], deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. When wages and asset prices rise, a strong currency can be justified. When wages and asset prices fall, a strong currency is suicide. Japan's nominal GDP peaked in 1997 and its nominal wages did too. Its property prices have declined every year since. The Nikkei rose in only four out of the last fifteen years and is still close to a three-decade low.

Japanese policymakers, businesses, academics, currency traders and the average Mrs. Watanabe all believe in a strong yen. This belief is wrong but self-fulfilling. It has lasted so long because the Japanese government adopts policies to offset the destabilizing effects of deflation due to a strong yen. Hence, Japan's national debt has marched upwards along with the value of yen. It is expected to top yen 1,000 trillion in 2012, 215 percent of GDP, 7.8 million yen (or roughly US$ 94,000) per person, and about half of net household wealth per capita.


MORE FROM Caixin.com
Slow-Cooking InflationA World Flying BlindCutting 1 Trillion Yuan in Taxes
The sustainability of Japan's deflationary path depends on the market's confidence in Japan's debt market. As Japanese institutions and households hold almost all of the government's debts, their faith in the government's creditworthiness is the mojo for Japan's seemingly harmless deflationary spiral.

A Vast Bubble

In a normal market, greater supply leads to lower prices. The opposite occurs in a bubble; faith in price stability or appreciation exaggerates demand. Japan has the highest level of government debt and the lowest bond yield. The later is necessary for the former. Even though the yield on 10-year Japanese Government Bonds (JGB) is only 1 percent, the interest expense is expected to top 22.3 trillion yen in the fiscal year that begins next month. This is one-quarter of the general account budget. If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.

In addition to its fiscal vulnerability to a rising interest rate , Japan's budget deficit is still too high. The government budgeted 44 trillion yen in net additional borrowing in the next fiscal year, nearly half of its expenditures. It needs to double its tax revenue to balance the budget. But, as the economy is deflating with declining private consumption, a major tax increase would cause the economy to go down more, shrinking the tax base and requiring even bigger tax increases to balance the budget. Even though the government plans to achieve a primary fiscal surplus, i.e., revenue above non-interest expense, by fiscal 2020 to 2021, it is difficult to see how.

The justification for the low JGB yield is deflation. The real interest rate (the nominal rate plus deflation) is comparable to that in other countries. This rationale requires deflation to persist. But, deflation shrinks the nominal GDP or tax base. How could the government pay back its escalating debt by taxing a shrinking economy? It can only sustain its debt by borrowing more. This fits the definition of a particular type of Ponzi scheme.

The JGB bubble explains the seeming lack of pain in Japanese society. A strong yen and deflation haven't led to an employment crisis because the government deficit is pumping up aggregate demand. As long as wages decline in line with prices, one doesn't feel the pain. Japan's household debt is only half of GDP, about half of the level in the United States. Deflation doesn't cause much balance sheet trouble.

The Strong Yen Bubble

Yen bulls usually point at Japan's trade and current account surplus as supporting factors. A trade surplus can reflect a country's competitiveness or lack of it. Current account surplus is savings minus investment. When investment declines, the trade surplus is boosted. When a country cuts investment, it signals declining competitiveness. Hence, the current account surplus shouldn't be viewed as a supporting factor for strong currency.

The combination of a weak economy and strong currency are always suspect. But it has lasted for so long that even foreigners take it for granted. I think this is some sort of mass hysteria. Most people only remember a strong yen. On the other hand, most people haven't seen rising property or stock markets either.

Japanese culture is group-oriented. Individuals usually embrace group activities. This psyche was the reason that Japan's property bubble became so big in the 1980s. In terms of value above the normal level, Japan's bubble was five to six times the size of the bubble in the United States. After the property bubble, the group psyche shifted its power to a strong yen, pushing Japan's economy onto the path of a rising yen, deflation and rising government debt.

Japan's paralyzed political system is the reason the government has accommodated the deflation path by running up national debt. The Japanese people, on the other hand, buy the debt because deflation makes property or stocks bad investments and a strong yen discourages them from buying foreign assets and deflation.


The international financial market believes in a weak yen from time to time. In 1998, the short-selling by foreigners briefly caused the yen to touch 140 against the U.S. dollar. But, as the Japanese hold all of the yen, if they believe in the yen, foreign short-sellers get punished eventually. Over time, yen bears are all weeded out of the market. The remaining yen traders are all believers in a strong yen.

The dates are a bit weird.

At the very bottom of the CNBC page it says Copyright Caixin 2011 and then at the top it is published on March 26, 2012. It seems it was first written on March 23, 2012 on another site http://english.caixin.com/2012-03-23/100372177.html

A scary contrarian.

[edin日本]

Gas isn't extracted from rock as a liquid. It gets liquefied much later, well after it is extracted, as its is easier to store and transport in this form.

But then again, in between the goldfish and the plants and the impotent threats to destroy other peoples computers, you really didn't know that did you? The Canadian chapter of the KKK, although proud of your use of the N-word, would probably disown you for being a right twit.

I think the Canadian chapter of the KKK disowned me the night I and a bunch of my uni buddies dropped a member of their's wearing his full regalia off at the corner of College and Dufferin. By the time the West Indians were finished with him there wasn't much left.

[edin日本]

Gas isn't extracted from rock as a liquid. It gets liquefied much later, well after it is extracted, as its is easier to store and transport in this form.

At that depth and under that pressure the methane hydrate is in a frozen form usually referred to as burning ice. It's very difficult to handle and very volatile. The technology to safely extract it is still not ready for use.

BTW, if you REALLY want me to destroy your computers and permanently prevent you from accessing the internet then, keep this up.

[Majestic]

Good article, RT.

A 30-40% devaluation? Quite a haircut for bond holders. Rates must rise to compensate bondholders for a depreciating currency.

But if the functional currency of the bond holders is the yen, the damage from the exchange rate fluctuation is an academic argument. If the asset is listed on the balance sheet in yen, the exchange rate is irrelevant as far as the company's valuation is concerned.

But closer to home, a 30% drop in value would bring the yen to something like 100+ to the dollar (roughly - someone feel free to break out a calculator and start a new thread about how crappy my math is). This would hardly be disastrous for Japanese exporters, contrary to what the article from Caixin stated. Most Japanese exporters are slowly bleeding from the high yen, and a drop to 100/1$ would make Japanese products more affordable overseas, and would give Japanese exporters more pricing maneuverability. I'm sort of surprised that the article would claim that Japanese businesses believe in a strong yen, because the strong yen is seriously damaging the competitiveness of Panasonic, Mitsubishi, Sony, Toyota, Hitachi, Nintendo, etc...

The downside would be the rise in costs of raw materials and the rise in price of gas and oil for Japan, but considering the exchange rate was over 100 yen to the dollar just a few years ago... I don't think there would be blood in the streets.

[Yukkuri Kame]

But if the functional currency of the bond holders is the yen, the damage from the exchange rate fluctuation is an academic argument. If the asset is listed on the balance sheet in yen, the exchange rate is irrelevant as far as the company's valuation is concerned.

Very good point.

The downside would be the rise in costs of raw materials and the rise in price of gas and oil for Japan, but considering the exchange rate was over 100 yen to the dollar just a few years ago... I don't think there would be blood in the streets.

Agreed.

But closer to home, a 30% drop in value would bring the yen to something like 100+ to the dollar (roughly - someone feel free to break out a calculator and start a new thread about how crappy my math is). This would hardly be disastrous for Japanese exporters, contrary to what the article from Caixin stated. Most Japanese exporters are slowly bleeding from the high yen, and a drop to 100/1$ would make Japanese products more affordable overseas, and would give Japanese exporters more pricing maneuverability.

Yes, a weak yen makes sense for Japan...but try as they might, Japan has created nothing but deflation for the past quarter century. So, the debt grows, but the economy does not. But even at 0%, Japan can't stimulate growth, the liquidity trap has already sprung. Fat lady is prepping backstage. Without inflation they can't service the debt. Risk of default increases, which inevitably leads to rising rates.

The only thing for J-gov to do is to spend directly into the economy...but in order to do that they need to borrow more money...

You can't borrow your way out of debt, no matter how low the interest rates are. That is exactly what Greeks tried to do.

The solution is easy. Government issues it's own debt-free money. But the banking cabal forbids it.

[Yukkuri Kame]

Existing bonds have historical rates, and will be retired as they mature (and maybe replaced with new bonds at future/higher rates). No default needed. Right?

New debt must be issued constantly to keep up with spending. Up til now buyers of JGB's have been willing to forgo interest because the currency held it's value, or even increased in value. But with Japan recently getting a credit downgrade and the red ink kicking into a higher gear with the recovery boondoggle... at some point new buyers will need to be compensated with a risk premium. Last I heard, Greek bonds were paying 25% interest, probably much higher now. Do you feel lucky? Japan's debt:GDP dwarfs Greece. Problem is, with the mountain of debt, Japan cannot pay 2%, never mind 5 or 10%.

When you can't make the payments on the debt (default), the IMF and World Bank step in and make you an offer you can't refuse.

The only solution is what Iceland has done. Give the banksters the finger.

[Majestic]

Again we bump up against the question of "default", which in Japan's case seems unlikely since Japan has the very easy option of printing more money (although that comes with consequences that are probably very similar to default). So the J-gov does have one other option other than "borrow".

But I agree that Japan can't borrow itself out of debt, and can't borrow itself to prosperity. Had an interesting discussion with someone on the pot a couple of years ago, and that person was saying that Japan hadn't spent enough money, and that what Japan needed was even more debt. I thought he was a bit loopy, but it is an argument I have seen in a few places.

Anyway, I do think Japan should get its spending under control, and I guess in a high-level way I am keen to see what happens if/when the consumption tax is increased (ever hopeful that the increased revenues will not get spent on paving over some other river or beach).

What is interesting to me is what the inflection point to economic disaster looks like. Rainbowtokyo says a major devaluation is just a few months away (although it could be argued that a move of 79 to 100 yen to the dollar is not quite as catastrophic as some would believe). If that is the worst scenario, then I'll stick around for the ride. On the other hand, 500 yen to the dollar sounds like a bona fide catastrophe. But if it comes slowly, or in waves, I have time to shift some assets around.

Whistling in the cemetery maybe, but when the financial stuff hits the fan, I hope I can move before too many of my yen get turned into Zimbabwean bank notes.

[ozzijp]

Had an interesting discussion with someone on the pot a couple of years ago, and that person was saying that Japan hadn't spent enough money, and that what Japan needed was even more debt. I thought he was a bit loopy, but it is an argument I have seen in a few places.

A few years ago? Same questions then, nothing changed. In fact, the yen has strengthened considerably since then.

Rainbowtokyo says a major devaluation is just a few months away

I base pretty much all of my investment strategies on the smooth ramblings of RT. Currently, have not a single yen to my name. My e-Xmas card thank you note has already been sent. I post-marked it from the Bahamas. They really should start considering a subscription to GP given the quality financial advice on offer.

[rainbowtokyo]

Rainbowtokyo says a major devaluation is just a few months away

Firstly, pay no attention to what RT says. If he really knew, he'd be living in St Tropez. Moving along.....logic would suggest that a currency sell-off will happen sooner rather than later. Assuming, of course, the government and central bank do the responsible thing and take action soon. But then again, logic often defies Japan's policy makers. Alan Greenspan, in his book "The Age of Turbulence," wrote of how mystified he was when talking to Japanese central bankers. Like deer staring at the headlights of an oncoming car, they knew what to do when facing a crisis but seldom did what it took to avoid entirely avoidable disasters. Most central banks in OECD countries are required by law to be independent of government policies de jour. I'm not sure if the central bank in Japan is required by law to be independent in targeting unemployment and/or inflation numbers?

There is no shame in having a weaker currency. Given the abysmally poor growth figures (even after what has to be the most expansionary fiscal experiment in this country's modern history) the central bank and government have no other choices but to target for a lower JPY. Selling off the curency is a painless pill to swallow. It would be great for export industries, bad for outbound tourists or people sending money out of Japan. (Oh a warning to those of us who don't want any more gaijin coming to these shores - a cheaper yen will make it easier for even more gaijin tourists to visit Japan).

All that said, there seems to be plenty of government money sloshing around in Japan. My missus has recently obtained a government grant for her department at a major teaching hospital. The only string tied to the money is that they are required to hire more workers for the next year. Nobody seems interested in the outcome of her research as long as she hires staff NOW. She is struggling to find suitably qualified/interested people for the job and is worried about losing the grant.

[Koenji]

Japan is one of the world's biggest creditor nations, it continues to run a balance of trade surplus, and private debt is relatively low. The same can't be said of most Western countries. Since debt has all these different components, it's rash to say Japan (along with the yen) is headed for a fall.

Global investors recognize this, which is why they're parking their funds here and nowhere else.

Anyhoo, all these analysts (the Einsteins who failed to spot the 2008 meltdown) said the yen would sink from late 2011 onward. They've been wrong, wrong and wrong in the last few years. I'm baffled as to why they still have any credibility.

[rainbowtokyo]

Global investors recognize this, which is why they're parking their funds here and nowhere else. Anyhow, all these analysts (the Einsteins who failed to spot the 2008 meltdown) said the yen would sink from late 2011 onward. They've been wrong, wrong and wrong in the last few years. I'm baffled as to why they still have any credibility.

Good observation. You are right in saying that the JPY has become a safe haven of sorts, its a darn sight safer than the USD. But it is this (seemingly unstoppable) strength in the JPY that is crippling Japanese export industries. Unless the central bank starts selling off the JPY quick-smart, Japan's export industries are going to become increasingly uncompetitive.

Surely the government and central bank will have no other choice but to target for a lower JPY? There seems to be no other way to avoid a slow death of a thousand cuts.

[Yukkuri Kame]

Again we bump up against the question of "default", which in Japan's case seems unlikely since Japan has the very easy option of printing more money (although that comes with consequences that are probably very similar to default). So the J-gov does have one other option other than "borrow".

Yes, that is exactly my point. A nation can print debt-free money, but they do not. It is not easy. It is not allowed in the debt-based money system designed by the bankers.

All money IS debt. By definition, there is never enough money to repay the debt, because the debt is debt+ interest. As long as borrowing keeps expanding (inflation), there is enough new money to make the payments. But even at near zero rates there aren't enough borrowers to keep the supply expanding.