Debt Crisis 2012: Forget Europe, Check Out Japan

EconMatters's picture

By EconMatters

The recent massive demand for ECB's LTRO (Long Term Refinancing Operation)--nearly 490 billion euro in three-year 1% loans from 523 banks--only confirmed the suspicion of some market participants that European banks are having financing issues, and that the LTRO is unlikely to flow into the Euro Zone supporting the troubled sovereign debt and economy.


In addition to the current Euro crisis which we discussed here and here, Japan, the world's third largest economy, could have its own debt crisis as early as 2012 bigger than the Euro Zone.(see graph below or at our site


Graphic Source:, 20 Dec. 2011



Japan has long been mired by an aging population, sluggish growth and deflation since an asset bubble popped in the early 1990s.  The country already has the highest debt-to-GDP ratio in the world--about 220% according to the OECD -- and a debt load projected at a record 1 quadrillion yen this fiscal year.


Based on a plan approved by the Cabinet in Tokyo on 23 Dec, the country is now looking to sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen ($1.16 trillion) of spending in fiscal year 2012 starting 1 April.  That will raise Japan budget’s dependence on debt to an unprecedented 49%.


According to Bloomberg, the government projects new bond issuance will surpass tax revenue for a fourth year. Receipts from levies have shrunk about a third this year after peaking at 60.1 trillion yen in 1990.  Non-tax revenues including surplus from foreign exchange reserves also halvedto 3.7 trillion yen. Social-security expenses, now at 250% of the level two decades ago, will account for 52% of general spending next year


Moreover, an April 2011 analysis by CQCA Business Research showed that "Japan has an extremely near-future tilted debt maturity timeline" (see chart below).  CQCA estimated that in 2010, Japan was able to push 105 trillion yen into the future, but concluded it is doubtful that Japan will be able to continue this.



Chart Source:, April 2011


Indeed, as one of the major and relatively stable economies in the world, and since almost all of its debt are held internally by the Japanese citizens or business, Japan has been able to still borrow at low rates (10-year bond yield at 0.98% as of Dec. 26, 2011), partly thanks to the Euro debt crisis going on for more than two years.


So as long as Japan could keep financing a majority of its debt internally without going through the real test of the brutal bond market, the country most likely would not experience a debt crisis like the one currently festering in Europe.


But the chips seem to have stacked against Japan now.  On top of the new and re-financing needs, the Japanese government estimated that the economy will shrink 0.1% this fiscal year citing supply-chain disruptions from the earthquake and tsunami disaster in March, the strengthening of the yen and the European debt crisis.  Moreover, S&P said in November that Japan might be close to a downgrade.  After a sovereign debt downgrade to Aa3 by Moody's in August, 2011, it'd be hard pressed to think Japanese bond buyers would shrug off yet another credit downgrade.  


Burgeoning debt, coupled with the global and domestic economic slowdown, and continuing political turmoil (Japan has had three Prime Ministers in the last two years, and the current PM Noda’s popularity has fallen since he took office in September), would suggest it is unlikely that Japan could continue to self-contain its debt.


It looks like its massive debt could finally catch up with Japan in the midst the sovereign debt crisis that's making a world tour right now.  While some investors might see Japan as a bargain, it remains to be seen whether the country will continue beating the odds of a debt crisis.


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Mario55's picture

In front of such a potentially dramatic situation, what can happen?

What is the amount of the total japanese savings? what portion is invested overseas in foreign currencies? 

Would a japanese debt crisis trigger a massive liquidation of assets internationally for a repatriation to a Japan? What impact on the currencies? a paradoxical yen appreciation? what type of international assets would be most affected? where?

Or could the Bank of Japan orchestrate a huge yen devaluation (the swiss solution power 10) before forcing on the private sector (through taxes) a big repatriation of international assets?

Or could we see confiscation of private savings to offset the public debt (through taxes rather than debt default)? and then a dismal japanese economy for many, many years?

Can the experts on Japan go beyond saying the situation is unstainable and venture into the consequences?'s picture

Japan's savings are mostly in Japan in banks, Japan Post Bank and Japan Post Insurance and other insurance companies and then also directly in JGB's.  Total bank deposits approach $20 trillion and last I saw total for the United States is $8 trillion.  Problem is confidence.  Too much quantitative easing and buying of JGB's by the central bank may cause other Japanese banks to start selling their JGB's and then an avalanche of banks trying to get out as the bonds start losing value.  Bonds are marked to market and market value losses hurt the banks.  Bank stocks start falling, stock market falls, money flows out of JGB's by individuals, insurance companies and banks because they are all loaded up with bonds.  Central bank, Japan Post and the retirement fund would likely be the only buyers.  This would cause concern, a weaker yen and that moves interest rates up again and that moves the yen down.  Outflow of money from Japan to gold and any other currency to protect purchasing power.  FX reserves are only about $1 trillion--would not cover the flow for very long.  Would only cover the budget deficit for a year and a half.

I am short yen, small position because it is likely that Euro will fall first--Euro short--main position; am also short JGB's.  Could be a credit down grade in Japan that causes the crisis to move to Japan or it could be a loss of confidence by one Japanese bank or more or just a lack of buyers at an auction or ??  Once people try to protect their wealth by selling JGB's, moving it out of Japan's banks and other institutions; much will move to gold but the more sophisticated will move it out of yen too.  

falak pema's picture

where is USA on this check list? Numero #1, uno...'s picture

The largest holders of JGB's are net sellers.  Japan Post Holdings ($3.5Trillion), the largest financial institution in the world, is a net seller of JGB's.  Over 70% of their assets are in JGB's and they intend to diversify holdings.  GPIF, the Japanese retirement fund ($1.4T) is liquidating $80 billion of JGB's this year to pay benefits.  Social Security spending is 52% of Government spending.  It does not matter whether there is inflation or deflation or central bank buying, Japan has already run out of big domestic buyers of JGB's.  The savings rate is down to 2% and projected to go negative as retirees withdraw funds for living expenses.  Insurance companies, another big holder of JGB's, are shrinking as they must pay out continually more life insurance proceeds.  Demographics are the controlling factor; social security/retirement/health care for old people, etc are obviously going even higher.  The young people are not making enough to save much and they are moving towards 1 retiree for 1.5 people working and there are few real assets in their trust funds (mostly just promises from their government-JGB's).   They have started liquidating JGB's--this means that buyers must be found to get cash for retiree benefits.  This is a huge issue as funds must be secured for the budget deficit and the social security liquidation and the borrowings for the deficit exceed total government revenue.

K_I_T_T_Y's picture

I don't see a problem for Japan.... maybe somewhere else... actually they would love to have a weaker currency ;-)

Courtesy of Wikipedia

Japan is the 2nd biggest owner of US Treasuries, end of 2010 estimated 882.3 bio of USD, 19.9% of total foreign outstanding.

Robslob's picture


Enough we turn on Japan...China must have settled up somehow.

LookingWithAmazement's picture

China will buy Japanese debt. Problem solved. No crisis.

falak pema's picture

china has bottomless pockets AND pocketless bottom? If the second option is true it'll be a hellava shit storm when that bottom ejects it's pent-up home  debt. As all foreign bond emitters will lose access to the bottomless pockets of pocketless bottom land.

Uchtdorf's picture

And turn Japan into Formosa-North.

flaab's picture

Shorting japanese bonds would be a superb speculation, stay tuned.

obejoyful's picture

Powershares DB 3x Inver Jap Gov Bond ETN (JGBD)

PowerShares DB Inverse Japanese   (NYSEArca: JGBS )


These are thinly traded and I have not bought any yet.  It still seems this goes down when the market goes down so unbeleivably it is a safety trade.

Next BIG move down in the market I will start to accumlate these slowly.  

Kyle Bass is the man on Japan, Google him.

Bear's picture

In futures market short JYH12 now at 128.77 ... as bonds go so goes the Yen

masterinchancery's picture

Japan is on its demographic death bed, with a fertility rate under 1.4, and has a debt 200% of GDP and climbing.  Not sustainable? Duh.

AldousHuxley's picture

why do you think Japan is leader of robotics?


jse111's picture

Thankfully the Fukushima nightmare is under complete, absolute, and definitive control eliminating the most remote potential of the Fukushima-Tokyo corridor becoming uninhabitable!

besnook's picture

how much money do you owe if you owe it to yourself or what do you owe when you can multiply it all by zero. the chinese have the same system. the western economies are the ones who actually have real creditors. that is whu they are in trouble. first the people got assraped dry and now the banksters are going for bloody seconds through the peoples' .gov pimp.

Zero Govt's picture

unfortunately it doesn't work that way

money is just a representation of real wealth (productivity)

the socialist-Marxist Japanese Govt model (52% of spending on the welfare State) consumes/destroys productive wealth. The debt pile up of "owing it to yourself" (Japanese Govt owing it to Japanese pensioners and savers) is zero different to the Western model of owing it to Pimco. You still have to repay the Piper from somewhere (a productive wealth stream)

Nor can Japans productive industry continually afford to see their wealth sapped away through the Bank of Japans fraudulent money printing

The Japanese economy, like the Wests, cannot sustain the sucking of Marxist State models or Fascist State banking... capitalisms Grim Reaper is on its merry way

old naughty's picture

Not to worry, they had 50% more maturity in 2011 than 2012 and they managed.

Or, did they?


AnAnonymous's picture

US citizens with one of their old tricks.

Their econometrics were unable to help predicting the big downturn of 2008.

Still, they rely on them econometrics to try and predict collapse of things, outburts, destruction ...

Big diversion, smoke and mirrors.

Now if you look at US citizenism through US citizenism, it is clear that Japan will do rather fine.

Which does not mean that every single Japanese will do fine as US citizens conceive groups as undivided while individuals are a just that, a collection of fragmented bits from various groups.

Japan will keep attracting money because of Smithian economics.

Smithian economics concentrate wealth by transfering wealth from an exterior to an interior.

When the exterior is drying up, the effort is going to grow intenser to transfer the remaining of the exterior wealth to the interior.

It is like development project. If you develop your houses, primary and secondary, if you run out of money, you scrap the lesser projects, the secondary to focus on the primary house, where you are going to live.

We are reaching the turning point when it comes to finite earth. Not enough wealth left to develop other parts of the world than the already developed ones, so what? It means that wealth will keep being directed toward Japan, no matter their fiscal, debt situation.

Theft is theft. In all cases, a thief do not pay what he steals. Japan as a standard bearer of US citizenism, is a big thief and will keep stealing its way to the terminal stop.

BigInJapan's picture

"Japan will keep attracting money because of Smithian economics.

Smithian economics concentrate wealth by transfering wealth from an exterior to an interior."

Japan is the very definition of Keynesian economics. You've obviously never been here nor paid taxes into Tokyo's broken black hole. Smithian.... Jesus. I don't know whether you attended a special needs school or if you're just a paid Chinese shill with grammatical hubris, but that was some of the worst writing I've been victim to in my eight years in Japan.


Japan - make no mistake about it - is fucked on a level that most will never be able to comprehend. The rats (like me) are about to begin fleeing the sinking ship. Furthermore, Tokyo won't have anyone to blame, try as they might, when those bond yeilds start to creep up.


Smithian, my ass.

AnAnonymous's picture

Made me laugh. Ah, US citizens. Unable to sustain anything. Hopefully, their nature is eternal, they do not have to sustain that one.

So, no justification made, nothing but personal attacks, statements made through hubris etc...

What is called keynesian economics is no opposite to SMithian economics. It is an effective extension.

Smithian economics is about concentrating wealth onto an interior by taking from an exterior.

What is called keynesian economics is a system of unsustainable debt that allows to transfer much more from an exterior onto an interior without bothering to ever pay back.

No opposition.

So what?

The exterior is fucked up, not the interior. Japan is part of the interior.

donpaulo's picture

I too have been living in Japan for about 8 years.

One has to also consider that Japan has changed its economic model to earn profits from Chinese production and consumption. The earnings are then plowed back into Japanese salary jobs involving endless meetings where very little is decided.

It took me awhile to appreicate the concept of working very slowly for an excessive number of hours. 60 or 70 hours a week is rather SOP in corporate Japan but there is a lot of water cooler time, chatting about non work related things too. BUT they work 10-12 hours a day for decades.

Also factor in that Japanese own their own debt, so issuing a haircut is a rather simple model as the culture here does not protest to any significant degree.

Doesn't mean its smooth sailing but chaos in the streets is not forthcoming either.

Never underestimate the ability of the Japanese to tighten the belt and take one for the team. The boomers will simply go with 30% less than they had before.

The issue for Japan are demographic but a country the size of Montana with 125 million peope could probably use less people.

The Japanese embrace long time frame slow paced change in their models. Currently the national consumption tax is 5% but it should probably be north of 10%. I would guess that an increase of 1% per annum is in the making. That fits their mindset. Obviously things can change... look no farther than Mayor Hashimoto in Osaka if you want to see the face of "radical" change in Japan.

Non Passaran's picture

I agree, I'd rather live in a collapsing Japan than US.
Of course there are better choices (if you *can* choose), but contrasting the US and Japan in severe crisis, my choice would be Japan.

Georgesblog's picture

The debt stories are like holes in the dike, multiplying by the week. I haven't seen that the debt load is given the importance it should hold, in economic forecasts for 2012. Repeatedly, I see inflation understated and consumer activity overstated. 2012 won't be as good as the forecasts.

Non Passaran's picture

Junked for annoying bolding...

JW n FL's picture



Here.. write about this.. Japan will be better off than Most of the World.. and that's after a Tsunami! and includes better off than us here in the U.S.!

Industry Balks at NYSE Sub-Penny Plan

By Peter Chapman

An NYSE Euronext proposal to permit its members to quote in sub-pennies is proving highly controversial.

The exchange operator's "Retail Liquidity Program" would create dark pools at the New York Stock Exchange and NYSE Amex, where members could vie for retail order flow with quotes only a tenth of a cent better than the market's best displayed prices.

Read the full story


we cant have the Goy Slaves taking pennies from off the top! LULZ!!

Stuck on Zero's picture

A declining population is a wonderful thing.  Instead of consuming most of the nation's resources building infrastructure for a booming population everyone gets more and more for less and less.  Here in a California we have a shitty economy and a booming immigrant population which is sucking up more and more of the state's resources. California is experiencing a rapid decline in the standard of living.

Lucius Cornelius Sulla's picture

I think public employees who retire at 55 with 6 figure unfunded pensions are a way bigger problem to CA than immigrants.

midtowng's picture

All the fundamentals are against Japan. But yet the technicals keep going in the other direction. I have to wonder how long it can keep going that way?

steve from virginia's picture


Since Japan's debt is denominated in Japan's currency, it can keep issuing debt for as long as the Japanese themselves accept that these debts will be paid for by way of monetization.

Since the Japanese designed this system for themselves it is unlikely they will some day object to it.

The Japanese can issue ten- or a thousand times as much debt and not worry, only if they stop issuing will there be a problem.

 Debt issue is a problem for countries using -- and borrowing -- in another's currency as is the case with the silly Europeons.

A bigger problem for Japan is shrinkage of export markets: it trades output for petroleum. That -- not debt -- is where to look @ Japan.

BigInJapan's picture

Wrong. This is a country devoid of natural resources.

Do you think that Japan could possibly print it's way out from under its own debt while at the same time not suffering an economic cataclysm? Nobody from outside the country would take the paper. The anchor chain would be broken and the anchor lost overboard. Japan set adrift it would get mghty cold around here in winter without oil... mighty hungry with no imported food nor oil to run farm tractors...mighty dark when the folks who run the power plants have starved to death... mighty crazy when the major cities become uninhabitable as residents head to the countryside to scrape up whatever plants they could eat...

Sure, just print and issue its own debt. They'd be the richest country in the world, on paper... for about 5 minutes.

When I look out my window, the only thing I see is Japanese people. There is nothing else here. No resources to speak of.


Arthur's picture



The Japenese debt is mostly internal and they have been experiencing deflation for 20 years.  The Japanese can print their way out of the problem if buyers do not materilaze.

I would not short this one anytime soon on the hope of a near term Greek like implosion.

And oh by the way, how many timed Greece's trouble correctly and had the ability  to make real $$.

vato poco's picture

I think the lesson here is pretty obvious: Anime and schoolgirl tentacle-porn cartoons will fuck up a country even more than government-mandated 'charity'. Also, Pachinko & Karaoke: Satan's pinball and Pazuzu's DJ playlist.

Winston Smith 2009's picture

There are 3 million fewer Japanese in Japan now than there were three years ago.  By 2013, adult diapers are projected to outsell baby diapers there.  Two of the largest Japanese pension funds have said they will be net sellers of gov't bonds in 2012.  More people are now leaving the pension Ponzi scheme than entering it and Japan will need to entice more foreigners to fund its debt. With a worldwide recession in 2012 and if bond buyers wake up to Japan's hopeless position and no longer see their bonds as a "safe haven", that will only accelerate their fall.

Right Time for the Big Japan Short

Lucius Cornelius Sulla's picture

Its safer to wait until the carnage is over and pick from the debris.  Timing JGBs has proven more than difficult for most everyone.

Lucius Cornelius Sulla's picture

There must be thousands of traders who have lost big bucks going short JGBs.  This is a bubble for the record books!