Japan

Continuing our tradition of listing what according to Zero Hedge readers were the key news events of the year for the third year in a row (2009 and 2010 can be found here and here), we present, as is now customary, the most popular posts of the year as determined by the number of page views, or said otherwise - by the readers themselves. So without further ado, here are this year's top 20.

It seems that it is not just the Europeans that are USD cash starved heading into year-end as the Swiss and Japanese gorged themselves on two-week maturity FX swap lines during the last week. The total outstanding under the Federal Reserve's USDollar Liquidity Swap Operations jumped from $62.599bn to $99.823bn - or more than 59% during the week ending 12/28. Admittedly, the size of the additional Swiss draw-down, $320mm more compared to $75mm the previous week, is a drop in the bucket compared to the ECB's additional $33bn this week. However, the more-than-$9bn additional draw-down by the Bank of Japan perhaps helps explain why USD-JPY cross-currency basis swaps eased so much this week (as the desperate need for USD through this counterparty-risk-exposed form of funding reduced by around 12bps or more than 25%). Perhaps it is time to take a closer look at some of the Japanese banks as while the stigma of borrowing from these lines is talked down, clearly there are funding/liquidity needs that are rising dramatically.

In this interview we had a chance to discuss Paul Krugman’s  latest bearish article on China, the linkage between the European crisis and Chinese and Japanese bubbles.  We revisited sideways markets, profit margins (I picked a bone with Apple’s high margins), and concluded with Microsoft.

In addition to the current Euro crisis, Japan, the world's third largest economy, could have its own debt crisis bigger than the Euro Zone as early as 2012.   

In the wrong direction. And the finance minister's solutions: a consumption tax and a miracle....

While the world is watching Europe and the US for signs of imminent decoupling, and now has added China to its insolvency focus list, things in Japan, which is "fine" courtesy of a self-destruct autopilot, are just getting plain ridiculous. As we reported earlier this year, Japan's marketable public debt, already the largest in the world at $11.2 trillion compared to America's $10 trillion (of course this assumes the whole SSN sleight of hand is funded, which it isn't), is due to surpass ¥1 quadrillion any month now (aka the exponential phase). And that's just the beginning. As Bloomberg reports, "Bond sales to the market will climb to a record 149.7 trillion yen ($1.9 trillion), while the national budget’s reliance on debt for funding will rise to an unprecedented 49 percent in the year starting April 1, Japan’s government said Dec. 24. The government said it plans to sell 44.2 trillion yen of new bonds to fund 90.3 trillion yen of spending in next fiscal year’s budget. It estimates that tax revenue will total 42.3 trillion yen in fiscal 2012, meaning that new bond sales will exceed tax revenue for a fourth year." In other words, in a world increasingly disconnected form any sort of reality, very soon no taxes at all will be needed: after all each and every government (or uber-union in teh EU's case, once the imploding Eurozone turns to the final Deus Ex - a fiscal protectorate issuing joining Eurobonds) will simply fund all its cash needs by printing its own money. Naturally, anyone daring to suggest that this is beyond idiotic will be given an MMT 101 manual and/or incarcerated for grand treason. And any last voices of sanity will be promptly muted: "I think the reliance on bonds to compile budgets is reaching its limit,” Japanese Finance Minister Jun Azumi said Dec. 24, after the announcement of the budget plan.

Scouring through the news screens, we nearly fell of the proverbial chair after reading the following Bloomberg headline paraphrasing a Nikkei report: "Japan May Buy Chinese Govt Bonds, Nikkei Says....Japan is seeking to diversify forex funds and strengthen economic cooperation with China by helping make yuan more international. Japan may purchase a total of $10b worth in stages." Naturally, there are two interpretations: the ugly one is that Japan, the 3rd largest holder of US debt after the Fed and China, is considering gradually abandoning the dollar or, as the term is better known in polite circles "diversifying." The second one, and the far more amusing one, is that Japan will somehow bail out China by providing the much needed credit money that will translate into GDP (at a sub 100% ratio of course, because as is well known by now the world has reached the stage where one unit of debt generates less than one unit of incremental growth). The reason why this is amusing is because as the chart below shows, Japan's debt is now a hair's width below ¥ 1.... quadrillion. And yes, ignore the fact that the demographic squeeze in Japan is already forcing households to proceeds to monetize the largely domestically held debt. So, we wonder, where will the JGB debt curve go next in the deflationary basketcase that is Japan? As for where it has been, see below.

Proving once again that when it comes to fudging numbers, Japan (which previously was best known for changing the minimum legal radiation absorption dose on a daily basis following the Fukushima disaster, anyone remember that?) is leaps and bounds ahead of even China and the US, the Nikkei reports that the Japanese government will change the method it uses to calculate GDP, and the result will be an "increase" in the country's economic output by JPY 5-10 trillion. As a reminder, Japanese GDP is currently JPY 540 trillion, so in essence the math fudge could add about 2% to Japanese "growth." Accordingly, the main difference is inclusion of interest rate spread earned by financial institutions: we were wondering how long until blowing out CDS spreads would add to sovereign GDP. We now know. The new method will be applied to figures to be announced Friday. At least Japan has not yet adjusted its GDP pro forma for foreign currency gains vis-a-vis the dollar (there is time). And that's how things are done in a Keynesian world in which everything is now fraud, lies and relentless number fudging. Furthermore, we are 100% certain no analyst will look at the number on an apples to apples basis, and the result will be a miraculous Japanese golden age. Expect this experiment in excel spreadsheet modelling to come to a developed banana republic near you very soon.

Prime ministers get replaced every 8 to 15 months. Bureaucrats and corporate interests stay. Public debt turns into a mushroom cloud. Is it finally time to bet against Japan Inc.?

Japan will reward investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times according to Japanese Finance Minister Jun Azumi. Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal. The offer suggests the return could be boosted to 89,000 yen should gold prices remain at current levels, more than the approximate 15,000 yen one would receive from the bond. The coupon on conventional three-year retail government debt to be sold on Jan. 16 is 0.18 percent. 10 year debt remains near multi record lows of 1%. Silver coins weighing 31.1 grams issued as 1,000 yen currency will be distributed to those who own more than 1 million yen of the bonds, the government said. The coins will be offered for debt going on sale in March. All investors receive a thank-you note from the minister, who showed his to reporters in Tokyo today as proof of his purchase.  Chief Cabinet Secretary Osamu Fujimura also bought the bonds, Azumi said, without saying how much.  This is a sign that the Japanese government like governments internationally is very concerned that they will not be able to sell their government debt.

Japan is starting to heat up a little in terms of risk and we hope that Noda is watching carefully. While the strengthening trend in USDJPY and JGBs has been a long one, the last few days are starting to worry some traders and most notably, Bloomberg points out that not only are FX options the most USD bullish-biased (JPY-bearish) in seven years, swaptions (bearish rate bets) have screamed to their highest in over seven months at 54bps. The growing concern that the European crisis will spread to Japan is extremely evident in these option bets, supporting the sentiment of S&P's recent 'downgrade' chatter, Bass's grave concerns, and the IMF's decidely negative perspective on fiscal sustainability as Japan's 'savior' trade-surplus is expected to drop significantly. Perhaps the sad inevitability of the real endgame of Richard Koo's balance sheet-recessionary view of Keynesianism is closer than many believe.

Geopolitical risk remains elevated and Middle East tensions are escalating globally with Russia appearing to be prepared to risk conflict over Syria with NATO and the US. Yesterday, Russian President Dmitry Medvedev threatened to target and, if necessary, destroy the U.S. missile defence shield in Europe once it is built. A marked deterioration in US–Russian relations and concerns of a new ‘Cold War’ may support gold prices.  While all the focus has been on Europe, and to a lesser degree the US in recent months, two of the other largest debtor nations in the world, Japan and the UK (including corporate and bank debt), have been under the market's radar.  This will change soon and will likely lead to the next phase of the global financial crisis. The fact that we have a global debt crisis which will almost inevitably lead to an international monetary crisis is as of yet not acknowledged or realized by the markets and the media. Today, the IMF warned in a new report that market concerns over fiscal sustainability could trigger a "sudden spike" in Japanese government bond yields that could "quickly" render the nation's debt unsustainable as well as shake the global economy. 

When we discussed the specifics of the ongoing European bank run, we cited from the NYT which noted the actions of a core Japanese mutual fund with European sovereign exposure, namely that "earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt." The Nikkei has just reported that this was merely the beginning: "Kokusai Asset Management Co. has sold all Spanish and Belgian government bonds that were part of its flagship fund, Global Sovereign Open, The Nikkei learned Monday. As of Nov. 10, Spanish and Belgian bonds accounted for 1.8% and 3.1% of the fund, respectively. The share of the bonds in the fund's portfolio fell to zero as of Thursday." Just what prompted this drastic move and very loud slap in the face of the European confidence building exercise? "A Kokusai Asset Management official said the company sold off the bonds, amid widespread concerns about the outlook for Europe's sovereign debt crisis to avoid hurting the value of the fund, given volatile prices of the bonds. The mutual fund operator had already divested the fund of all its French government bonds in October and all Italian bonds in early November." It is safe to say that where one core asset managers has been (and no longer is), everyone else will shortly follow. For the simple reason that it is now if not cool to not have European exposure, it is certainly required by one's LPs to cut down on all European bonds. Kokusai is merely the canary: expect everyone else to go ahead and dump the €741 billion in non-domestically held Italian (and then all other European sovereigns) bonds. Good luck ECB buying these in the secondary market. And one market where the ECB can do nothing by charter, is the primary issuance one, where as the following update from Morgan Stanley shows, things are getting from from bad to worse.

Minutes ago, the always delightful Munk Debate on the American economy concluded, which pitted two skeptics: David Rosenberg and (yes, he is a skeptic when it comes to his belief in the "proper" implementation of Keynesianism) Paul Krugman on the one hand defending the null motion of the debate, against Larry "Warren (watch the clip)" Summers, best known for destroying capitalism, and Ian Bremmer. The core debate topic was as follows: "North America faces a Japan style era of high unemployment and slow growth an accurate forecast of the future." Naturally, as Krugman immediately explained, by North America the organizers mean the US, simply because Canada is too small and hasn't screwed up enough (we would add that the screw up has not been perceived yet: everyone has screwed up, but luckily we have enough distractions for the time being). Either way, the progression of the debate should not come as a surprise to most, neither how each particular economist will perform: that Rosie sees Japan in every aspect of the US should not surprise anyone; that Krugman does too unless the politicians agree to being invaded by aliens, is also to be expected. On the other side, "Warren" Summers' argument can be simplified to his fallback motto of Keynesianism and Central Planning 101 in which he believes that the printing of money and job creation are sufficient to fix all US problems. No surprise there either: after all this is the man who three weeks ago said: "The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."

Today, for the first time in months, the New York Fed disclosed that in addition to its outstanding $1.9 billion in swap lines with the ECB, it had opened for the first time since the swap line reopening, two new USD liquidity lines with the Bank of Japan, a 7 day and an 83 day one, for 1.1%, or just modestly more than what the 7 Day Drawn line with the ECB costs. The combined is for $102 million which brings up two questions: how much longer will the BBA pretend its LIBOR quotations are even remotely useful: after all today, according to the daily bank matrix, the most expensive 3 Month unsecured USD loan in the interbank market was 0.575% (courtesy of Credit Agricole). Yet the BOJ had to borrow from the 100x levered FRBNY at double that? Amusing. And also, just what the hell is the BOJ doing: after all in the past week the bank supposedly bought over $200 billion worth of dollars (and sold Yen) in order to weaken its currency. Where did all this money go if the bank was forced to serve as a conduit for a meager $102 million. We are sure the explanations will be fast and furious, and none of them will be right.