Japan

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.

The ramifications of the “set up” are rather significant.

Japan’s six reactor Fukushima Daichi nuclear complex has inadvertently become the world’s bell-weather poster child for the inherent risks of nuclear power ever since the 11 March Tohoku offshore earthquake, measuring 9.0 on the Richter scale, triggered a devastating tsunami that effectively destroyed the complex. Ever since, specialists have wrangled about how damaging the consequences of the earthquake and subsequent tsunami actually were, not only for the facility but the rest of the world. The Fukushima Daichi complex was one of the 25 largest nuclear power stations in the world and the Fukushima I reactor was the first GE designed nuclear plant to be constructed and run entirely by the Tokyo Electric Power Company, or TEPCO. Needless to say, in the aftermath of the disaster, both TEPCO and the Japanese government were at pains to minimize the disaster’s consequences, hardly surprising given the country’s densely populated regions. But now, an independent study has effectively demolished TEPCO and the Japanese government’s carefully constructed minimalist scenario. Mainichi news agency reported that France’s l’Institut de Radioprotection et de Surete Nucleaire (Institute for Radiological Protection and Nuclear Safety, or IRSN) has issued a recent report stating that the amount of radioactive cesium-137 that entered the Pacific after 11 March was probably nearly 30 times the amount stated by Tokyo Electric Power Co. in May.

I had to come see for myself. What does the worst radiation and natural disaster in history look like? Chaos. Devastation. Cataclysm. Right? Actually… none of the above. Fukushima and the surrounding prefecture is as quaint and picturesque as ever. Eight months on, there are hardly any signs of a nuclear accident or major earthquake, at least on the surface. I was half-expecting the town to have a permanent decontamination facility… with radiation detectors as far as the eye can see, and legions of workers in biohazard suits. After all, this town of nearly 300,000 is now the world’s largest dirty bomb. But riding through the surrounding area and walking around the streets today, Fukushima looks like any other small(ish) town. Schools, temples, shops, and restaurants… everything is normal. In fact, it’s almost eerily normal, like something out of an old Hitchcock film.

Chaos theory states than in complex systems, a butterfly flapping its wings in Japan can cause tornadoes in California. Whether or not that is true, a Banker in Belgium buying Greek bonds can impact the lives of factory workers in Germany. Europe continues to head down the path of making the system more complex than ever and ensuring that no bad lending, investing, or borrowing decision is ever punished.

Deflation phobia has broken out again, and Japan's "deflation spiral" is held up as sheer horror. So here is my experience with that horror. Alas, in one category, deflationistas have been right.

Remember all those daily rumors (prmarily courtesy of the FT) that either China, or Japan, or Europe itself would bailout Europe (yeah, don't ask). Well we can put them all to rest...for at least a few more hours. Because in the battle of inverse counter disinformation, it is important to refute the rumors you yourself have created just so next time the same rumor is spread it has some impact.... Unfortunately said impact will be less, much less, with every single iteration, until just like central bank intervention, its impact is lost in the noise. Per Businessweek: "Officials from China and Japan, the world’s second- and third-biggest economies, indicated that their support for Europe will have limits  and the region needs to solve its own debt crisis. Japanese Finance Jun Azumi said in Washington today that while his nation can buy European Financial Stability Facility bonds if needed, there is no blank check. “At the margin we can do quite a bit to help,” Chinese central bank Deputy Governor Yi Gang said in a panel discussion yesterday at the International Monetary Fund in the same city. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves." Good luck in that whole Europeans coming up with a solution: after all it was mere hours ago that France’s Baroin said that the Eurozone is "open to support from others." Translation: "Show us the money." In other news, the countdown for the latest European bailout rumors from the FT is now on.

The Japanese quagmire has been getting deeper and more perilous for years, but now the unique factors that supported its catastrophic indebtedness have reversed. The endgame has started.