2010-01-17

Japan's debt burden

Ambrose Evans-Pritchard is looking for a psychic shift in Japan as the massive debt load goes from deflationary to inflationary. Psychologically speaking, the Japanese and the rest of the world expect low rates and continued deflation because that trend has existed for 20 years. Socionomically speaking, Japan's social mood is very low, with the Nikkei, as one signal, trading at early 1980s levels. GDP is, nominally, at early 1990s levels.

The Titanic debt burden of Japan, however, becomes inflationary at the limit because the government will reach the point at which it can never hope to repay the debt. There's a limit to how much debt the island can take on and once the general public, foreign and domestic, becomes cognizant of this fact, the yen will tumble, yields will soar, and inflation will take off. Just like the Titanic, the passengers on the good ship Japan debt will realize there is no missing the iceberg and they will jump ship.

A global fiasco is brewing in Japan
The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.
For more information on Japan from Societe General's Dylan Grice, see this post at zero hedge:Upcoming Government Funding Crises: Japan Edition

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