Chinese Business Media Cautions Japanese Bond Bubble Is Ready To Burst, Anticipates 40% Yen Devaluation

Tyler Durden's picture

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon. Oh, and this: " If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen."

Why has Japan been able to sustain its deflationary collapse for over 3 decades? Simply - an ever rising currency.

A strong yen, 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.


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.

There's that. And also that it is nothing but a ponzi. In Xie's words.

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.

Deflation is ok, if in addition to collapsing GDP, it is paralleled by declining wages.

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.

Unfortunately this is unsustainable by definition, as the divergence is a finite series at which point it become self-destructive. And yet the strong Yen is the glue that ties the rickety house of cards together... for now.

Despite the fact Japan has had a bad economy for so long, the yen has remained strong. It reinforces the Japanese psyche on the issue. The strong yen has become a cult.


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.

So far so good: any cult can exist in its own bubble if left to its own devices. However, as much as it is trying to avoid it, Japan's secular role in international society is changing, and very soon the habitual self-delusion of its citizens, politicians, and FX traders will do nothing to offset the advent of reality.

While the Japanese can always take care of business within, they cannot control the outside world. The country's Achilles heel is losing trade competitiveness due to the destructive impact of deflation on business confidence and the strong currency itself. When a trade deficit emerges, it signals the beginning of the end.


Japan has lost competitiveness in a swath of industries that it used to dominate. Its automobile industry is losing out to Germany, South Korea and the United States. Japan's automobile industry used to be competitive in cost and far superior in quality to its global competitors. But the world has changed. The yen has dropped below 110 from as high as 160 against the euro. The South Korean won was about ten against the yen and is now 13. Cost-cutting cannot offset such a big change in exchange rates. The U.S. auto industry cut its labor costs and debt burden through the government bailout. It is now more competitive than Japan's.


The automobile industry is the pillar of Japan's economy. Its decline leaves Japan's economy nowhere to turn. Indeed, if the auto industry leaves Japan, it will become a poor country.


Japan's electronics industry, still significant to its economy, is losing out big time to its Asian competitors. Nothing hot in electronics is made in Japan now. U.S. companies like Apple leverage China's manufacturing sector to turn out hot products. South Korea is embracing the vertically integrated model and churning out competitive products like Japan used to.


Nothing symbolizes Japan's decline like its electronics industry. It was the envy of the world and had all the ingredients to take the industry into the mobile internet era. Instead, it embraced insulation and made products just for the Japanese market. Now it is almost irrelevant to the outside world.


Japan isn't just facing macro troubles. Its micro competitiveness is rotting away. It is just bizarre to see that the whole world believes in a strong yen when Japan is failing on such a grand scale.

This is especially true in the aftermath of the Fukushima disaster, when one of the primary drivers of economic growth - energy creation, has collapsed, and as of Today Tepco has shut down its last reactor. Thus an energy crisis imminent. It will also accelerate the transition of Japan from a trade surplus to deficit econoy. In this case the trend is certainly not Japan's friend.

Japan's trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreigners' views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash.

There is only one controlled way out for Japan: take the pain now, or let a veritable epic econoic collapse sweep everything that Japanese society stands for. Recent overtures by the BOJ show it understands what has to be done. It is, alas, not doing it fast enough.

Japan has only one way out – a massive devaluation. If the stable national debt is 120 percent of GDP, the yen needs to be devalued by 40 percent because devaluation is ultimately equal to the nominal GDP increase. The devaluation is likely to sustain 2 percent to 3 percent of nominal GDP growth for Japan beyond the repricing induced increase, which is necessary to restore Japan's tax revenue. Deflation has caused Japan's tax revenue to decline as a share of GDP. It can be only reversed through restoring nominal GDP. A devaluation of 40 percent can restore Japan's competitiveness against Germany and South Korea, which will lay the foundation for Japan's industrial recovery.


The Bank of Japan is trying to weaken the yen through expanding its balance sheet. It has an asset purchase program of 65 trillion yen and a lending program of 5.5 trillion yen. The two are equivalent to 15 percent of GDP, comparable to what the Fed or European Central Bank have done. The effectiveness is limited so far. Because Japanese businesses, households and investors believe in a strong yen, the printed yen largely stays in the country and just slows down money velocity. The U.S. dollar has risen 10 percent against the yen from last year's bottom. This is probably due to the financial market upgrading its view of the U.S. economy rather than the BoJ's action.

To Andy Xie, the day of reckoning has never been nearer. And to those who have grown disenchanted with the Kyle Bass view of an epic JGB bubble pop, it may be time to refresh your lost cost hedge. Because a devaluation, to be truly effective, will not be visible from a mile away: it will be sudden, and very, very shocking, unless the government opts for the worse of to evils - a bond market collapse.

Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market.


The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.

Finally, no matter how it's spun, the outcome, whether a 40% JPY deval, or a JGB bubble pop, will have devastating consequences on both the regional, and global economy.

A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Korea's experience in 1998 demonstrates.


Both China and South Korea have weak banking systems. South Korea's banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again.


Overinvestment and a property bubble make China's banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause China's banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, China's situation is much worse. Hence, a yen devaluation could wreak havoc to China's economy.

Perhaps there is a reason why the global market (not US stock futures of course - those only care what comes out of the Chairman's mouth) is so very concerned with what is happening in China right now: perhaps the Chinese hard landing (which will come, no doubt about it) is not so much an underlying cause of the Chinese malady but a symptom of the Japanese deflationary unwind, which like a tsunami will drag first the Koreas, then China, then Southeast Asia, and finally the world underwater. And this time no amount of trivial Greece-like headline posturing ad headlines will have any impact whatsoever. 

Yet following all that, we fully expect nothing to change, because the entire world is now hypnotically rushing toward the cliff, very likely bringing Dow 36,000 with it, if only for one instant, because with nothing getting fixed, the moment of global euphoria will be truly transitory. It will be then followed by an all out deflationary collapse... or much more likely since in this day and age printing a trillion, quadrillion or quintillion, is only a CTRL+P keystroke away, hyperinflationary.

And just to show the sensitivity of the world's most indebted nation to interest rates, here again is Andy:

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.

Yup: a mere "surge" in interest rates to a whopping 2.00% will destroy the Japanese economy.

Good luck.

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qussl3's picture

Sony, o sony where art thou?

Ahmeexnal's picture

But...but....a square mile of real estate in Tokyo is worth more than all of California.

So surely they can sell a few square miles (in and around Fukushima) and pay up all their debt....can't they? can't they?

Sudden Debt's picture

Yeah, but that warm feeling you get in that piece of real estate in Tokyo is actually.... Radiation boiling your guts.

markmotive's picture

When Japan implodes and the central banks print like crazy PM investors will be showered by their gold.

I will call this phenomenon a "golden shower".


The Big Ching-aso's picture



The Japanese yen to debase their yen urges other to yen for the same yen.


Popo's picture

So... The Japanese, who have been desperately trying to debase their currency for years now, in order to stimulate exports -- are on the verge of succeeding and at last representing a massive threat to Chinese, European and US manufacturing.

Why pray tell, are the world's central banks going to allow one of the world's industrial power houses to succeed with a 40% debasement?

Does anyone believe that the Powers that Be wont step in and "save" the Yen as they have in the past?

3MonthsZHober's picture

That's crazy talk monkeyboy.

Popo's picture

The only crazy talk is the notion that a weak Yen would hurt the Japanese economy. Or that it would somehow run counter to a wet-dream scenario for Japan's manufacturers.

As for this quote from the article,  I am speechless regarding it's deep inaccuracies and misunderstanding of FX:

"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." 

Bzzz. Wrong.  I trudged through the article further, but frankly there's no point reading past the above.    This Xie idiot apparently doesn't understand the underpinnings of Japan's GDP.   Japan has been fighting a strong yen since the early 90's and the strength of the yen has allowed Korea and China to steal Japan's pole-position in electronics, and the strong yen continues to decimate Japan's automotive-industrial business (still the heart of Japan's economy).  

To put it another way:  If the yen were to drop 40%,  I would put every penny I had in the Nikkei as the Japanese economy would explode upwards into the greatest bull market in 30 years.   Except... it ain't going to happen because the value of the yen isn't controlled by the BoJ.   The yen is high *despite* the BoJ.   

sixers333333's picture

why dont BOJ just print more money like the fed?

mediaprizm's picture

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The Big Ching-aso's picture



Golden showers are usually a precursor to violent brown storms.

Gully Foyle's picture

The Big Ching-aso

You are mistaken, What you are envisioning is the one where someone pisses in your ass during anal sex.

markmotive's picture

That doesn't sound healthy.

KnightsofNee's picture

Urine is actually sterile when it leaves your body. It is also used as a secondary ingrediant in the production of Santorum.

jonjon831983's picture

I'd like a golden shower, plz.



Wait... what are you doing? What? OH GOD? NO! STOP! NOT THAT!

Antifaschistische's picture

When the price of oil quadruples in YEN, Japan will realize it's only option is to expand it's utilization of nuclear power.  I can't wait.

Vampyroteuthis infernalis's picture

Japan, you could have reduced your pain by defaulting about a decade ago. Cleaned house and gone the way of Iceland. Noooooo! Denial of reality will now force your society into and unending depression. Pitchforks time!

DeadFred's picture

But their bankers had ten more years of the good life. Get your priorities straight!

Bananamerican's picture

"Pitchforks time!"

and who will be weilding those pitchforks?

Elderly Japanese.

Maybe that's the true kick the can game...wait till demographic changes have rendered your populace too frail and senile to swing a 'fork...

JohnKozac's picture

40% devaluation means prices will more then double. Remember when Russkies devalued, food prices there more then tripled.

It's not a 1:1 correlation. Funny thing is the japanese savings have been decimated already by 20 years of the Emperor's printing presses from 1990 to's all printing from here on out.

As far as the Fuki radiation goes, didn't the J. Gub'mint tell its people, "it's only a tiny leak?"

i-dog's picture


"While it is not yet over, and radioactivity continues to come out of the devastated plant, the good news is that there are still precisely zero deaths attributable to the release of radiation at the plant, and on the basis of doses received, zero are expected."  (Asian, April 24, 2011)

Now, 12 months later, Greenpeace puts out a scare story on nuclear energy ... which contains precisely zero references to the number of people killed or critically ill from radiation at Fukushima:

What are the current facts about radiation deaths and illnesses at/from Fukushima? Are there any credible ZHedgers in Japan who can enlighten me/us? Enquiring minds want to know....


3MonthsZHober's picture

What you fail to understand is the Vatican has a cloak of secrecy wrapped around Japan. They are the real profiteers in this saga and they have even managed to silence GW.

i-dog's picture

Oh, I fully understand the Vatican's involvement in the Meiji Restoration and the Jesuits' long history of meddling in Japan ... including being on the ground at Hiroshima and Nagasaki in 1945. The first Jesuit on the scene even ended up becoming the Black Pope 20 years later (rather than dying from radiation poisoning, as one might have expected).

As for GW being "silenced", his last article referencing Fukushima was posted here, and on Alex Jones' Voice of the Vatican, just 5 days ago!

I ask the question again: Since even Greenpeace omitted any reference to the number of [claimed] radiation deaths in their fear piece on nuclear energy a few days ago -- yet they are/were on the ground in Fukushima province and would surely have mentioned a figure if it would help their case -- what are the facts?

I have this sneaking suspicion that Anne Coulter may have indeed been close to the mark last year ... which would explain quite a lot about the fear-mongering around nuclear energy and nuclear arms proliferation!

Something smells fishy....

3MonthsZHober's picture

The real problem is: The Vatican has successfully imported heroin into Japan bringing the common man to his knees. Much like the lizards did here in the US. The lizards had their bio-engineers in tel aviv create strains of Cannabis so potent that it minics heroin. Night-night you weak minded 'mericans.

i-dog's picture

Errrm ... concentrate!! The question was:

"Since even Greenpeace omitted any reference to the number of [claimed] radiation deaths in their fear piece on nuclear energy a few days ago -- yet they are/were on the ground in Fukushima province and would surely have mentioned a figure if it would help their case -- what are the facts?"

Please leave lizards, heroin, cannabis, Tel Aviv and Rome out of it, for now. You'll have a chance to discuss them later....

Nassim's picture
Former Fukushima Governor vs. Tepco: My friends committed suicide — One still in coma

i-dog's picture

WTF does that have to do with actual facts on actual radiation deaths!?!

Global Hunter's picture

there have a few cases of people in that area dropping dead for unexplained reasons, check in on the website posted by the poster above you daily for 2 weeks and you'll begin to get a grasp of what is going on in Japan.  It has come out the last week or two that Tokyo itself has radiation levels that if in the USA would obligate the authorities to label it a "radiation zone".  Check out for more information its there.  A lot of evidence that a lot of plutonium has been released as well.

edit from March 15th

i-dog's picture

You, along with the others, are still missing my point about facts relating to number of deaths directly attributable to radiation poisoning!!!!!!!!!!!!!!!!

These statements of yours are not such facts:

"A few people dropping dead for unexplained reasons"

"Tokyo radiation levels....."

"a lot of plutonium has been released"

"30 children with thyroid lumps"

They are simply vague unrelated snippets perpetuating the scare mongering that I'm trying to get to the bottom of.

BigInJapan's picture

You have otunderstand the mentality of the proletariat over here.

The government will point the finger at foreign "Gaijin" meddling and the people WILL get behind it. No sign of government cuts in sight - the very concept dopesn't even enter peoples' minds over here.

I've said for a long time now that this country will go Commie if SHTF.

tenpanhandle's picture

I wonder if at some point radioactive cabbages can become reactor fuel.

TomGa's picture

A uncontaminated square mile in Tokyo is probaly worth even more, considering the verified Cobalt-60 deposits across the city.  



Gundersen’s Latest: Think about ramifications for Tokyo… How would you like kneeling in radioactive waste to pick flowers? Cobalt-60 in majority of samples, up to 1,481 Bq/kg 



"Couple of weeks ago though, I was in Tokyo and when I was in Tokyo, I took some samples. Now, I did not look for the highest radiation spot. I just went around with five plastic bags and when I found an area, I just scooped up some dirt and put it in a bag. One of those samples was from a crack in the sidewalk. Another one of those samples was from a children’s playground that had been previously decontaminated. Another sample had come from some moss on the side of the road. Another sample came from the roof of an office building that I was at. And the last sample was right across the street from the main judicial center in downtown Tokyo. I brought those samples back, declared them through Customs, and sent them to the lab. And the lab determined that ALL of them would be qualified as radioactive waste here in the United States and would have to be shipped to Texas to be disposed of."

--Arnie Gunderson, Fairewinds Associates

March 25, 2012

Michael's picture

So all you have to do to make a dirty bomb is get some soil from Japan in a ziplock baggy, duck tape it to some fireworks, and light the fuse. Sounds easy.

TomGa's picture

And our trusty Department of Homland in-Security allows such highly radioactive waste to waltz right into the old US-of-A with not so much as a license or even a courtesy full-cavity body search.  Just put it in your carry-on and tell 'em it's dirt. What could be easier?

Spitzer's picture was worth more then all of New Zealand in the tech bubble. Thats all the stocks and real estate in the whole country.

DeadFred's picture

But are you including all the sheep?

TradingTroll's picture

I call BS

If $94,000 is half the avg individual wealth, on an economy (unlike the US) that still has a large middle class, this means the bubble will go on. Ms Watanabe is only halfway through using 100% of her wealth on JGBs

So maybe she doesn't get to 100%, but why stop at a mere 50%$ It will continue because it can, and because Japan still has real net wealth.

Poor Grogman's picture

"The Bank of Japan is trying to weaken the yen through expanding its balance sheet"

I call BS also, the BOJ is monetizing just enough to prevent rapid debt deflation. If they wanted to, any central bank could crush a currency as fast as you could type "100 quadrillion".

This will continue because this is the planned end game.

Central bank control of the entire society...

This type of article is just more smoke and mirrors, because people don't wish to acknowledge what is sitting right in front of them.

The BOJ controls Japan period. Get over it Sheeple..

I don't like It any more than anyone but there it is, The only thing that can threaten the CBs grip on everything is ..GOLD....

Prepare accordingly.

gangland's picture

stratfor, that paragon of intelligence and security, says it would only last 48 hours.....


"A former IDF military intelligence agent, codenamed IL701, claimed to Stratfor that

if an attack were to be conducted by Israel, it would be driven by “political and oil reasons and not nuclear”

and the Israelis will only initiate such an attack “as a contractor for other nations or if Iran or its proxies attack first,” emails released by WikiLeaks show....


...IL701 is David Virgil Dafinoiu (doc-id 5441681 link to internal emails), currently president of NorAm Intelligence and is commonly relied upon by Fred Burton, Stratfor’s VP of counter-terrorism, for insights on Israeli operations...

another "analyst" said this:

"... the Israelis “already destroyed all the Iranian nuclear infrastructure on the ground weeks ago.”

He added, “The current “let’s bomb Iran” campaign was ordered by the EU leaders to divert the public attention from their at home financial problems.”

“The result,” Dafiniou further claimed, “will be massive attacks on Gaza and strikes on Hezbollah in both Lebanon and Syria.”

Dafiniou was then asked to elaborate further on his extraordinary statements.

He clarified, “Israeli commandos in collaboration with Kurd forces destroyed few underground facilities mainly used for the Iranian defense and nuclear research projects.”

Moreover, Dafiniou alleged that “the promoter of a massive Israeli attack on Syria is the axis India-Russia-Turkey-Saudi Arabia,”

while “the axis US-Germany-France-China” was against such an attack.

“Not many people know that Russia is one of Israel’s largest military partners and India is Israel’s largest client,” he said.

“If a direct conflict between Iran and Israel erupts,” he continued,

“Russia and Saudi Arabia will gain the advantages on oil increasing prices”

while “China and Europe are expected to loose from an oil crisis.”

In regards to any Israeli plans drawn up for such an attack, Dafiniou claimed that an attack on Iran “will last only 48 hours” and “will be so destructive that Iran will be unable to retaliate or recover and the government will fall.”


brewing's picture

you sure are posting a lot of claptrap today...

gangland's picture

for a douchebag who's been here 10 weeks and change, you sure add a lot of value...

brewing's picture

i'm just here for the sarcasm, and reading your fascinating posts of course...

brewing's picture

it was so close to being interesting...