Guest Post: The Japanese Writing On The Walls

Tyler Durden's picture

Submitted by NJB Deflator

The Japanese Writing On The Walls

With "unlimited" bond purchases confirmed by Super Mario and the ECB and the Fed essentially doing the same thing without calling it so, it is nothing short of integral to juxtapose the current western world central banking revolution with that of the Bank of Japan in the 80s.

Japan faced an asset bubble that forced the nationalization decapitation of many Japanese banks whose lending practices and balance sheets depended upon the appreciation of said frothy assets (mainly real-estate, sound familiar?), which threw the country into recession in 1990...four years after the crisis was considered to have begun.

Japanese 10-year Treasury yield (blue) and Japanese debt-to-GDP (green) since 1975

Interestingly, the bulk of Japan's debt creation (relative to GDP) did not actually occur during their crisis; the above chart clearly depicts how Japan's monetary accommodation followed their financial crisis as a way to help deleverage the economy smoothly (again, familiar?).  The result of that first round of dovishness has since rendered the Japanese economy addicted to debt monetization, as depicted by the unperturbed rise in debt-to-GDP.  The debt creation that was meant to bolster growth and counteract deflationary forces became the status-quo.  This is empirical evidence that once growth within a country becomes central banking-centric, it remains so.  Economies, like actual drug addicts, are not willing to revert to weaker highs.  Once market participants experience the windfall of "free growth" that monetary accommodation yields, they are not wiling to revert to traditional growth schemes.  This notion is wildly short-sighted, and the pursuit of such a growth scheme is barely sustainable without extreme measures (ahem, Japanese debt-to-GDP).

Supported by the Japanese debt-driven recovery as an analog to that of the United States, I propose that the United States can be considered in the early stages of amassing the same anvil of debt that has been weighing down Japan and kneeled the Japanese economy to the mercy of the Bank of Japan.

US 10-year Treasury yield (blue) and US debt-to-GDP ratio (red, not indexed as a %) since 1975

Japanese interest rates peaked in 1975, whereas US interest rates peaked in the early 80s.  These interest rate trends are the product of the accommodative central banking regime that presented itself in the 80s in the US, which I wrote a paper about.  Similar dovish actions undertaken by the Bank of Japan following the onset of their financial crisis have pushed down Japanese interest rates since said crisis.  The front and middle parts of the Japanese yield curve flattened to such a degree that 10 years following their financial crisis, their 10-year Treasury yield (and all paper of shorter maturity) hit 0%, and has remained at 0% since then.

Will the US follow the same path of balance-sheet-centric growth as Japan?  That remains to be seen, but the Fed promising easing while US equities are hitting multi-year highs is not a good sign.

Lest we forget that this time it will surely be different.

S&P500 (red) and the US 10-year yield/S&P differential (blue, Treasury yield minus S&P level, both indexed) since 1990    

...and all the quants said that mean reversion was dead!  Talk about range-bound: We see that the US entered into a vicious bubble-deflate-reflate cycle in the 90s and nothing indicates that this range should be broken anytime soon.  With the Fed's guarantee of further largesse, I'd say this relationship has a couple more good years to run...

Gold is still your friend.

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Snakeeyes's picture

Excellent post!

TruthInSunshine's picture

I'm sure there's a scenario that can be intelligently set forth whereby the U.S. can avoid turning Japanese, but I have yet to see/read/hear it.

Remember, boys & girls, the Nikkei peaked at 40k in 1989, at a time when Time Magazine had "Japan, Inc." cover stories and Americans feared Japan was soon to own the North American continent (in wake of trophy purchases of Pebble Beach & Sony purchasing Columbia Pictures).

So, one would think that as Japan has taken the lead as the most indebted nation (officially; I still presume this badge of honor depends on how one analyzes the debt load of any particular sovereign), printing more fiat in the last 23 years to pave roads and do other "stuff" to ensure that they could at least maintain an orderly decline in their standard of living and relatively slowing the letting the air out from their credit/debt crack-up hot air balloon, that the yen would have lost purchasing power relative to competing fiat currencies; yet, the yen has seen an astronomical surge in purchasing power against all major competing fiat currencies- I threw this currency part in just to remind everyone as to how broken and irrational markets can become under the racketeering ring that is comprised of fractional reserve fiat central banks acting in concert with each other to "fix" solutions, prices and schemes.

I"m sure Krugman, douchebag emeritus, would have much to say about how piling on more debt to resolve a debt hangover that's crimping aggregrate demand can and will still work, in spite of the Japanese real world example, and he's probably already said much about this magical unicornian scenario, so there....

The one critical thing to remember is that under our present system, the parasitic wards of the state that exist in the form of banking and financial institutions that are literally TBTF, and protected by the likes of Charles "Fuck Flyover USA" Schumer and Spencer Bachus alike (R or D, there is no difference on the big issues), will profit off the misery no matter which way it unfolds.

vast-dom's picture

"I'd say this relationship has a couple more good years to run" if FED prints hard and fast SP will go higher FASTER and the 10y yield could POP and we could see a correction sooner than "years" but no matter, since gold is your friend forever and ever at this rate. 

(I just can't get my head around several more years of this, therefore i'm biased and see much sharper slopes than your last chart.)

Clever Name's picture

"He'd be damned if any slopes was gonna put their greasy, yellow hands on his boys birthright, so he hid, it in the one place he knew he could hide something, his ass."

AldousHuxley's picture

Peter Thiel predicted US following Japan in 2007ish in "Inside the House of Money"


2004 predictions

  • Oil to rally
  • Equities overvalued especially financials
  • housing bubble with fannie mae

also sold out facebook stocks = meaning predicting bubble to crash soon




css1971's picture

As JimmyJames points out. Japan at least had the US debt bubble to export into.

There are no more bubbles left.

agNau's picture

Japanese fiat comes these days with anti- counterfeit radiation signature.
Quite literally "hot off the presses!"

fnord88's picture

"I"m sure Krugman, douchebag emeritus, would have much to say about how piling on more debt to resolve a debt hangover that's crimping aggregrate demand can and will still work, in spite of the Japanese real world example, and he's probably already said much about this magical unicornian scenario"


Krugman has had a lot to say about Japan's stimulus measures. Here is a 3 word summary: Not big enough. 

TruthInSunshine's picture



Krugman's Left-Wing Bullying of Bernanke

Paul Krugman vaulted over the line recently, issuing an ad hominem attack on Fed Chair Ben Bernanke  for not doing enough to boost the economy. Krugman’s anxiety that the stuttering recovery will bounce President Obama from the White House seems to have loosened his already-fragile grip on reality. His conclusion – that “right-wing bullying” is holding Bernanke back – seems especially nonsensical, even for the truculent Mr. Krugman...


Specifically, Bernanke once advocated that Japan’s bank could “take a larger role in financial markets.” Krugman suggests that the Fed could travel this road as well. Having driven down short-term rates, the bank could step harder on longer-term rates. Krugman considers insufficient “Operation Twist,” in which the Fed bought $2 trillion in long-term bonds and mortgage-backed securities for just that purpose. On the contrary, many analysts think another round of quantitative easing might spark a weakening U.S. dollar and consequent jump in commodities prices.


Krugman should just come out and admit that he's 100% pro-debase the USD (or Federal Reserve Note, to be precise) as much as possible, in as short a period as possible, and that's the fundamental cornerstone of the monetary policy that he endorses.

Not only would his strategy not be effective in reducing unemployment or increasing aggregate demand, it would produce the opposite effects in a world whereby wages are no longer "sticky" due to a glut of global labor used by multinational corporations, and that as savers and wage earners (who are still employed but not seeing wage increases to keep pace with currency debasement, and might see actual wage decreases during a time of currency debasement) in the U.S. see their purchasing power eroded, they will only deleverage (i.e. reduce consumption) even more, as their only possible strategy for surviving.

Krugman is batshit crazy to the nth degree. He is the poster "bubble boy." He actually believes that the employment and aggregrate demand crisis in the U.S. is cyclical, rather than a structural one born of massive, excess global labor pools and a flight to low-wage and subsidized labor markets by multinational corporations.

q99x2's picture

 A pattern of random walks.

fourchan's picture



what gets accustomed to, must be maintained long after it is feasable,

to pay for this feel good dream, massive debt is created until it can be created no more.

the debt lags the benifit until all thats left is debt and no benifit.

Black Markets's picture

RE: last chart

I am blown away!!!

I never realised that (x) and (1/x) would be inversely correlated!!

Holy shit!


Muppet of the Universe's picture

SHHHH!!  Don't let the muppets know!

cognus's picture

what's not to love.

the average japanese male has his white shirt, sake, ciggies, and public transportation.  what more is there to life? do that for a few years while your purchasing ability dwindles, then die.

bank guy in Brussels's picture

Indeed, what is left unsaid in most of these Japan-bashing articles is that life in Japan for nearly everyone, remained pretty good despite the 'debt crisis', massive government debt, and massive decline in asset values.

The difference with Japan, is that they gave priority to keeping employment up - even if the jobs were 'fake' and the workers had little to do. They kept Mr Watanabe in his job getting a salary, and in their social contract, they 'bailed out' the worker as well as the banks.

That is what is missing in the West, both in the US, and in the southern countries of Europe that are imposing their vicious destructive 'austerity' (meaning cutting benefits and jobs of the working and poor classes, not talking about de-leveraging overall).

If the working classes were cut in on the bailout 'deals', it would all be a different story. This is a subtle but important theme in the writings of Richard Koo.

We should all be as lucky as Japan ... 22 years after the giant 'crash', life is still pretty good in Japan for most people, Fukushima aside.

vast-dom's picture

EXCELLENT POINT BGIB! That is also why I think the last chart may need to be tightened up at the 2012-2013 range with sharper SP and 10y convergence.

jimmyjames's picture

We should all be as lucky as Japan ... 22 years after the giant 'crash', life is still pretty good in Japan for most people, Fukushima aside.


During most of those 22 years-the rest of the world was in inflation and the world economies were booming and Japan was exporting into that-so unemployment was low and industry revenues were strong-

Now that most world economies are in contraction Japan's export industry/economy/jobs will suffer-

At some point Japan's bond market will react and if rates are forced up with 200+% debt to GDP-borrowing costs could become unsustainable-

slackrabbit's picture


I guess you have a different version of Japan than I did.

You know, the one where 'dad / hubby' went to work...except he didn't, he just pretended to go to work because   unemployment was the social equivalent of having AIDS in the 1990's....And that was with out the murder know the ones that don’t get reported overseas.

I guess the banking system was different.....just like now....lots of bail outs and bankers keeping their jobs...they rest of us? Not so much...but then as the saying goes,  'morale is always fine amoung the officers'.



DanDaley's picture

Japan had high savings rates and were able to borrow internally.  If they had to go abroad for the dough, as they soon may have to, then the worm will turn. 

Poor Grogman's picture

The worm that turns is comatose, it cannot turn it's very existence depends on a constant flow of toxic new fiat currency.

Millions across the developed world are already totally reliant on this insanity, without the new fiat they would be destitute, they know no other way, than to suckle at the teat of the beast.

What we have is what everyone doesn't want.

A slow painful languishing cancer eating at the very fabric of our society, destroying the aspirations of our young, destroying the entrepreneurial flair that is the true engine of wealth.

The banksters creature is consuming everything in it's path
as another ZH member correctly stated we have crossed Keynesian event horizon. What is behind us, what good things we once knew will not return, we may never again know what real freedom tastes like until we first pass through the singularity that will wipe away the present system.

There are better times ahead....but the journey itself will be too much for many of the travelers....

Kimo's picture

"do that for a few years while your purchasing ability dwindles"

Oh, but fixed income purchasing ability does just fine in deflation.

The catch is, be ready to die when TSHTF.

apberusdisvet's picture

Waiting for the evacuation of Tokyo; certainly planned but won't be implemented until the Japanese sheeple finally wake up.  The radiation is still spewing, totally uncontrolled with no easy answers in sight.  Still no alarm from any in the controlled media.

Mike in Tokyo Rogers's picture

Ha! Ha! Ha! Radiiation levels in Tokyo today as just read by my handy dandy Mazur Instruments PRM-8000 Geiger Counter - Nuclear Radiation Detector and monitor? 0.0423 Gy/h... That's 1/4 of what they are on any average given day in Hong Kong or Rome Italy and 1/10th of Sao Paolo Brazil. Evacuation? Right! Evacuate 35 million households?... Chuckle.... Quit reading the Zany Foaming at the Mouth News (Global Warming, SARS, Swine Flu, Bird Flu is going to kill us all too, right?)  If you want to see the daily radiation levels in Tokyo (compared to even before the nuclear accident) see here:


etudiant's picture

Funny that that monitoring shows a peak on Sept 8 of .176 Gy/yr, which is the highest on record, even higher than in the days immediately after the Fukushima meltdown.

Maybe just a little puff from somewhere?

Fecklesslackey's picture

Mene, Mene, Tekel u-Pharsin ... God

Translation ... You have been measured and found wanting

Flushy De Toilette's picture
The Myth That Japan Is Broke: The World's Largest "Debtor" Is Now the World's Largest Creditor

papaswamp's picture

I think we will go more Zimbabwe. Our population continues to grow as opposed to shrink. Plus the good citizens of the US won't buy our own debt like the Japanese do. We are in for something far worse.

Munkey's picture

Facinating article. More of the same for many years to come. I might have to adjust my spending away from zombie apocalypse survival gear and increase my gold holdings for the long grind ahead.

Colonel Klink's picture

What a pretty Christmas....errrr holiday tree.  What happens when we hit the stump?

Kreditanstalt's picture

Yes gold is still our friend.  Because all they're doing is COUNTERFEITING.  Some day, somewhere, all that "money" will need spending...

Canadian Dirtlump's picture

I've always  thought Japan could be the atomic debt bomb to send things into the abyss... yet a generation later we are still kicking. Great article.


Fuck it all anyways. I just sold my house. Time to buy a monster box or 2.

EscapingProgress's picture

I can't read Japanese writing, so I don't see a problem here.

dxj's picture

Subtracting one index from another is bogus. The purpose of indexing is to bring two series to the same relative starting level, which this chart does not do. You can clearly see from the first chart that the interest rate on the 10Y has very little correlation with the S&P500. 

chump666's picture

A creditor nation (China) that is actually running out of money (Yuan outflows) with inflation tearing though it like wildfire as companies desperately pile into USDs.  Wants to do more stimulus:

  • Late Sunday Xinhua said China to unveil another 2.2 bln USD of stimulus



ZackAttack's picture

Side issue: Mt. Fuji magma chamber pressure highest since 1707 eruption. Could be the death blow for Japan.

chump666's picture

Send in the Keynesian clowns:

SYDNEY, Sep 10 (***) - Asia's fourth largest economy today announced a new stimulus package valued at 4.6 trillion won ($4.1bn) for this year.


writingsonthewall's picture

Hey - that's copyright!