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Guest Post: Collect(ion) Call
Submitted by David Galland of Casey Report
Collection Call
Hello, is this Japan I’m speaking to?
Yes. (tentative). May I ask who’s calling?
It’s the ACME collection agency. We’re calling today because of your outstanding obligations.
Is there a problem?
We’re hoping not, but your creditors are beginning to worry you won’t be able to keep up with your debt service.
Oh. Why the sudden concern?
It was an item in a recent RMB Currency Trader. And I quote:
The Land of the Rising Sun has the dubious distinction of sporting
the highest debt-to-GDP ratio of any industrialized nation in the
world. Now greater than 200%, Japan’s relative debt load is bigger than
that of Greece, Spain, Portugal or the US. Japan needs to borrow over
50% of GDP this year just to stay afloat, according to the International
Monetary Fund (IMF), and its financing needs are expected to reach
almost 60% of GDP next year. (See graph below.) Its strength has been
somewhat befuddling, especially considering this growing burden of
debt.
Why has the Japanese currency been so strong? Because despite
all of the yen’s problems, Japan runs a trade surplus. Traders view
that surplus as a source of funding which can be used to pay down
Japan’s skyrocketing debt, making the yen seem like a
“flight-to-quality” currency despite appearances. However, Japan’s
strong currency is beginning to affect Japan’s ability to export.
Competition from China and rising Asian powers such as Vietnam is also
beginning to take its toll. Japanese industrial output fell 1.9% in
September after dropping 1% in August.
Care to comment, Japan? Japan? Are you there? Hello? Hello?
David again. As you can see from the chart, even though Japan has
managed to stay off the radar of the mainstream financial media, the
country’s economy is in a real mess. And, for the record, the U.S. is
in no great shakes, either, not when you consider the neighborhood it’s
in, in the above chart.
As we have discussed at length in The Casey Report,
while the eurozone is back in the soup just now, Japan could very well
be the next black swan to lay an egg on the global economy.
Heretofore, Japan has been able to avoid the worst consequences of its
many debts and obligations – but that may soon change. In addition to
the exports referenced above, the country’s high internal savings rates
have provided crucial support for the Japanese government’s energetic
issuance of debt at low rates. But as you can see in the chart below
from our own Bud Conrad, those internal savings – like exports – are
now in decline.
The upshot of this is that the Japanese government will increasingly have to turn to external buyers to finance its many obligations. That, in turn, will require competing with sovereign debt offering better yields.
Japan’s extreme borrowing needs over the next couple of years are, at this point, locked in – which almost certainly means that Japanese interest rates will rise – potentially by a lot – relative to the near zero yields now on offer.
Yet it should be obvious from the IMF data that Japan simply can’t afford to have the cost of servicing its massive debt rise even a little, let alone a lot. Which is another way of saying that something has to break, and soon.
Another way to view the situation is by looking at the trend for yields being offered by Japan’s largest competitor for new borrowings, the U.S. As you can see in chart here – which ran in today’s edition of Things That Make You Go Hmmm – yields are clearly moving up.
It all begins to get a bit circular when you consider that Japan’s aggressive financing needs make it likely the country will have to dial back its participation in future auctions of U.S. Treasuries. It would not surprise me if they followed China’s lead in reducing the U.S. paper now held in reserve. That, in turn, could lead to even higher U.S. rates, and even higher rates for Japan. Or it could lead to more monetization of U.S. Treasury debt by the Fed, which in turn leads to Mr. Market demanding higher yields to compensate for the rising potential of inflation.
This Gordian Knot of the interconnected global financial system makes it essential for investors to not only monitor your own house for signs of fire, but to watch your neighbor’s as well. In the case of Japan, smoke is starting to leak out from under the door.
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Don't forget about the rising potential of default. Together, these two outcomes cover the red and black numbers, leaving just that one little green slot with the zero.
http://pokerknave.com/files/2009/12/roulette-wheel_hr.jpg
Cumulatively, yields dropping. Mr. Market spiking them here and there to compensate. The end game approaches...
(returning to corner of room to curl up and rock back-and-forth quietly).
Banzai Bitchez?!>
Japan's debt will be termed 'too big to fail' and the bondholders probably won't have to take any cut. Japan will have to go throught strict 'austerity', many social services will be privatized as well as state assets sold off.
All they need to do is hire Russian Make-a-Baby(r) PR team.
Japan has tried that route already. One minister was booted, i believe, because he said that the shufus should stop thinking of working and think of making broods.
It should go without saying it didn't work.
Japan is not alone in bad demographics. Strip out immigration (and their children) and the whole of the developed world is shrinking. Don't think there is a place that has 2.1 in the developed world. Makes the debts all the more unpayable, getting tossed on fewer and fewer backs.
The debt is extremelly secondary. It's been decades the debt is no longer possible to be repaid. Debt does not matter. The repayment of it.
The loss in demographics is bad news because it decreases the consumption pressure some countries are capable of exerting.
All other things being equal, even with a reserve currency, Japan would be unable to apply the same consumption pressure on the world as the US can.
Simply because Japanese population is one half of the US. Much less demand from them, no matter how hard they try. They could try the same game of starving the world by currency manipulation as the US is currently doing, they would be less efficient. Bernanke is better armed with an army of 300 millions glutoons than he would be with a Japanese army of 150 millions glutoons.
Japan demographics are kicking the bucket too soon in the consumption game. Still so much resources on the table and less and less Japanese to consume them.
ZH I think it's time to join Mish and call for a surge to get Ron Paul appointed to chairman of the MPS.
http://globaleconomicanalysis.blogspot.com/2010/12/dr-mr-speaker.html
Gordian Knot or not the even bigger picture is that ultimately Japan has a much better chance of pulling out of this and landing on her feet than the U.S. does. Much better. The good thing about lopsided demographics is that they are temporary. Unlike America Japan isn't full of politicians intent on expanding their constituent base by cramming the country full of third world peasants.
How much you want to bet that if Japan is at some point forced by economics to increase immigration they will be somewhat more selective about it?
Having a largely homogeneous population with a long history of shared, seriously held cultural values probably isn't such a bad thing during a long period of austerity and de-leveraging either.
Not so fast. The current socialist (no slur) governing party, the DPJ, is trying to pass legislation to allow foreigners to vote and soon will seek to relax the immigration laws. Additionally, they are spending money like it's 1985 (before the Plaza Accord), not only in increased welfare (vote buying) but to the UN (Google "Kan Commitment & UN), Africa, SE Asia, and the IMF (all the talk at ZH about how much the US funds the IMF bailout hides the fact that Japan is a close 2nd in funding amounts...same for the UN.)
While it is true that the culture has helped them in the past, things are changing rapidly. Jobs are becoming scarce as even the automakers are leaving to Thailand, Vietnam, Indonesia, India, and China. Their 5.1% unemployment rate masks a 34% and growing temp work force creating even more funding problems. The current debate is whether the government will continue to fund 50% of pensions or cut back to ~36%...
Despite their funding problems, they will cut corporate taxes, paying for it by doubling their 5% consumption tax. A new environmental tax will go into effect in 2011. Both of these are likely to drive prices up and savings, net income, and consumption down. That's not the formula for growth.
It is interesting to see the parallel between the Obama administration and the DPJ (first Hatoyama, now Kan) and their downward spiral in effectiveness and approval ratings. Currently, the opposition party LDP has higher ratings then the DPJ. Kan's administration approval sits at 23.6%. His predecessor, Hatoyama resigned in June at a 21% rating. So there is the possibility of another turnover in power soon.
Also note, this summer the DPJ lost an election in the Upper House, much like the Dems did in Nov. It's quite fascinating.
If the Japanese members of parliament had any honor, they would just commit a mass sepuku. That would be way cool...
Well I would expect there to be considerable pain (ongoing funding crises, manufacturer flight etc.) and the worst isn't over but it seems like they're further down the road with some of these intractable problems and are so far handling them with more grace and stability than I think the US will when it gets to a similar point. And they're just starting to talk about relaxing already tight immigration laws and things of that nature. I wonder too how much of their UN/IMF type busy work isn't simply an effort to hold their head up high on the world stage without a substantial military. If push comes to shove I don't see why most of those expenses can't be severed overnight.
Of course, if the USA really goes haywire it will be bad news for just about everyone and it will be extremely hard to predict all kinds of outcomes.
Still, given the choice of being the U.S., with dwindling manufacturing capability, but somewhat plentiful natural resources, or Japan, with a healthy manufacturing base but limited resources - which would you choose?
Maybe we could make them a U.S. Territory, assume their assets and liabilities, and then go on to become a global powerhouse (with a cubic butt-ton of debt)?
The fact is, no one's tried to pull off a real, world-wide empire in a long long time and things are so much different nowadays in terms of defense, transportation, communication and other areas that were the source of so many problems 100-500 years ago. I wouldn't be surprised to see someone give it a go. Hell, it wouldn't take much to be the best deal in 100 years for many people in places like Africa.
At the exclusion of the current US empire, of course... Which is by US ideological demands, not a true empire as it would be impossible for a country like the US to developp an empire.
the strenght of the yen is a case of weakness
It is caused by retreating japanese capital trying to make ends meet at home. It plays out exactly like Armstrong is forecasting
Is there any oil left in Indonesia ? - maybe Japan needs to raise a army again - although it may not be cost effective to extract palm oil using a horde of samurai.
Maybe Ireland needs to increase our defence forces to repel invaders who with envious eyes look on at our peat bogs and their precious BTUs.
Diarmuid Mac Murchada agrees.
Kyle Bass is short JGBs. Worstening demographics is reducing Japan's famed savings base - a train wreck in slow motion.
This is a good post, but I think the conclusion that the Japanese will raise rates to fund 60% of their spending is not likely. They'll print yen - they've said as much. They'll remain at near-zero rates, buy their own debt, and have a currency crisis. They want the currency crisis, just like we do, to bring that debt down as a fraction of GDP.
Anyone noticed how bad the economic data out of Japan has been so far this week? Not pretty.
http://www.forexlive.com/economic-calendar
Right, so bond holders know that there comes a point when its more advantageous for them if the issuer defaults rather than stoke runaway inflation. Where is the analysis of that crossover point ever published by bondholders? They do after all have an insurable interest.