"Defying Gravity" - Counting Down To Japan's D-Day In Two Charts

Tyler Durden's picture

While the distractions of the Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ's monetization of 70% of Japan's gross issuance have all been a welcome diversion in a society struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed. 

One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?" and which begins with the following pessimistic sentence: "Recent studies have shown that the Japanese debt situation is not sustainable." Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.

Presenting the countdown to Japan's D-Day. 

Exhibit A.

The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan's debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.

and Exhibit B.

Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.

The paradox, of course, is that should Japan's economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.

In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt - without any real plan B - is because, all else equal, it has about 8 years before it's all over.

Here is how the authors summarize the dead-end situation.

Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.



A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.

Finally, this is how the BOJ's epic monetization was seen by the paper's authors back in March 2012.

Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.


The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.


An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.

For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then...

Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis.... If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.

Ah... rational.

* * *


The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.


In Figure 6 , the authors calculate Japan's debt'GDP over the next three decades using the following assumptions on the interest rate:

  • R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
  • R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
  • R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .

R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies


A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person.... The upper bound for the debt accumulation is reached by 2024 at the latest.

Full paper

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unrulian's picture

rational bitchez

Occident Mortal's picture

If the expense of servicing the debt grows by a greater NOMINAL amount than GDP then a country passes the certain default threshold.


The only way to avoid default under such a scenario is mass immigration to boost GDP.

CH1's picture

Keep obeying your politicians. All is well.

markmotive's picture

The Chinese economic miracle is dead and could go the same way as Japan's.


TheFourthStooge-ing's picture

2020 Tokyo Olympics = MOAR GROATH!!!

financial apocalyptic contagion's picture

seriously? 8 years? thats a long fucking time why the fuck are we even discussing this now

there will be robots and shit everywhere by then doing all the hard work, cancer won't exist anymore, jesus mightve come back

wtf in 8 yrs i might have a kid or something

Jumbotron's picture

I've been saying for years after seeing some inital Peak Cheap Energy charts printed in 2005 looking out to the year 2050 that, taken by itself with no other economic data AND how important CHEAP energy is as a feedstock to the American economy, that the collapse of the American economy would accelerate starting in 2020.  In the years after, with much illumination from ZeroHedge in particular, when you combine data from Peak Cheap Energy with data looking forward concerning Medicaid, Medicare, Social Security, VA benefits, pensions both private and public, the Age Wave (Baby Boomer retirement), Peak National Debt and the interest paid on it, Peak Student Loans, the continuing and more rapid rollout of software automation and robotics, Global Slave Wage Arbitrage, Obamacare costs now, and of course QEternity......that 2020 is even MORE of a definite and inevitable date of destiny for the U.S. for things to REALLY start to unravel fast and faster every year after that.

Now couple this data concerning Japan.....and how interconnected we all are to EVERYONE....but especially Japan.....then 2020 is really a cornerstone date.  Not that a Black Swan or two could accelerate things.  Quite possibly if not probably.  But we all like to have SOME kind of forward guidance, especially when it comes to time and dates.

Plan accordingly.  Act now.  And if you have been planning AND acting.......accelerate both.

NoDebt's picture

So.... we're good for another 10-20 years?  Cool.  I'll put a tickler in Outlook to check in on the situation every 5 years.

BigJim's picture

Yes, tell Mr. Bass we hope he can stay solvent longer than the Japanese can monetize.

Greenskeeper_Carl's picture

+1 I was scrolling down to say much the same thing. " sometime between 2019 and 2024" for Japan should mean we have at least another 20 years to party. FOARWARD BITCHEZ. Hopefully that whole dismantling Fukushima thing goes well for them. But it is kinda depressing that this shut show could last that much longer. I have always felt like we missed a great opportunity to right some wrongs and rebuild our financial system on something resembling solid ground back in 08. But Japan is showing us the way to kick the can a few more years, papering over the problem instead of actually attempting to fix it. Fuck it.

denverdolomte's picture

Well at least they have a ready supply of seafoo......oh wait. 


ebworthen's picture

Those charts bring to mind my progression in a night of martini's.

The first one tastes really good and warms the belly.

The second one tastes better and gets the buzz on.

The third one doesn't taste as good but makes me want to fuck anything with legs.

The fourth one I don't taste and makes me wonder what in the hell I did when I wake up the next morning.

NoDebt's picture

I'm messaging your my sister's phone number.  She's short, ugly and shaped roughly like a beach ball.  And she keeps calling and hitting me up for money.

Call her after your 3rd martini.  Help out a fellow ZH'er.

lasvegaspersona's picture

But..does she have legs?

He at least maintains THAT standard (up to 3 martinis anyway).

wisehiney's picture

You fokkers are still hilarious with this mornings buzzed hangover. (buzz is quickly departing, hangover cleared for landing)

Seize Mars's picture

Sorry, a bit OT:

Hawaii Official who released Obama Birth Certificate dies in Plane Crash


DanDaley's picture

After an appropriate amount of time, mind you...nothing too... tawdry, nothing to draw suspicion.

walküre's picture

Why was Sandy Hook demolished?

Rhetorical question.

Seize Mars's picture

Only criminals destroy evidence. The government did it and is covering their tracks.

gearbaby's picture

I hope that whole dolphin-killing, whale-murdering country goes down in flames. I wish they were hit by a 9.0 earthquake every year.

AngelEyes00's picture

I agree gearbaby!  Just saw a news flash yesterday showing 3 japanese vessels heading out to get 900+ Minke Whales, 50 endangered Finn whales and 50 Humpback whales, all for "Scientific Studies".  What galls me is no country stands up to this nonsense.  Doesn't any country care?  The sooner Japan's economy takes a dive the better.  Of course that will probably mean they will double those numbers.  Yikes!

disabledvet's picture

Kim Jun Un doesn't survive the weekend.

walküre's picture

Quite possibly not unless he's got cover from the brass for his actions. He didn't execute his uncle personally, but had him executed. The army is obiously following the chain of command.

Not My Real Name's picture

Please do not worry.

suteibu's picture

Abe raised the consumption tax by 60% (from 5% to 8%) which is projected to generate an additional 12.5 trillion yen annually.  The increase was sold to the public as necessary to pay down the out of control debt (The shemale Legarde and the IMF were major advocates along with the good people at the UN and the OECD).  This week, Abe and the ruling party passed a 5.5 trillion yen "special budget" stimulus to mitigate the damage the tax increase will cause to the consumer economy (can't have those corporations lose profits).  Who knows what they plan to do with the other 7 trillion but the whole thing looks like a direct redistribution of funds from taxpayers to corporations. 

Abe is facilitating the looting of what is left of the economy before the collapse. 

firstdivision's picture

AH trading in futures is saying that gravity is alive and well

chump666's picture

They'll be at war. 

All monetization now is going into Japan's war machine.


walküre's picture

Could it be possible that TPTB start WW3 in 2014 excactly 100 years after WW1 and the creation of the Fed? China vs. Japan is reminiscent of Germany vs. France.

wisehiney's picture

Now I'll be all fucked up when I play army with the nephews. "OK Rangers, we're gonna scale these cliffs at Pointe Du Hoc and take out those Japanese bunkers!"

eddiebe's picture

Sucks when you have to do what your masters tell you to do.

JamesBond's picture

William Banzi hot asian chick pic in 3, 2, 1....

hangemhigh77's picture

The only answer to this problem is to feed the politicians and the banksters more radiated Fukushima rice.  Throw some radiated sashimi in there too.

Vint Slugs's picture

"Recent studies have shown that the Japanese debt situation is not sustainable." Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.


Well, here's a third chat - a technical look at the JGB - just popped yesterday and free access:


Notarocketscientist's picture

So I shouldn't be buying tickets to the 2020 games then?

Uchtdorf's picture

Sadly, suicide rates are sure to rise. Lived in Japan for 8 years. My home away from home.