Japan

A massive magnitude 8.9 earthquake, the 5th strongest since 1900 and 7th largest in history, struck Japan last night off the coast of Sendai, launching a 10 meter Tsunami across the entire Pacific ocean, killing numerous people and sending Japan into a tailspin. Bloomberg reports: "Prime Minister Naoto Kan mobilized Japan’s Self-Defense Forces and the central bank pledged to ensure financial stability after a magnitude 8.9 earthquake struck off the coast of Sendai, a city of 1 million, causing damage across the east coast of Japan. “I call on citizens to act calmly,” Kan told reporters in Tokyo after convening his emergency disaster response team. “The Self-Defense Forces are already mobilized in various places. The government is making its utmost effort to minimize the damage,” he said, saying later in a news conference that the impact was widespread. The Ministry of Finance said it’s too soon to gauge the economic impact of the temblor, the world’s biggest in more than six years. Japan’s central bank set up an emergency task force and said it will do everything it can to provide ample liquidity. The BOJ, which has already cut its benchmark rate to zero in an effort to end deflation, had last month said the economy was poised to recover from a contraction in the fourth quarter." The financial reaction was swift: "Japan’s stocks slid 1.7 percent in Tokyo today as the earthquake struck less than half an hour before the market closed. The yen advanced 0.2 percent to 82.77 per dollar as of 5:07 p.m. in Tokyo. The MSCI Asia Pacific Index dropped 1.4 percent as of 5:22 p.m. in Tokyo, with losses accelerating after the quake. Futures on the Euro Stoxx 50 Index fell 1 percent. The central bank said in a statement that its settlement system was working and that it was able to settle all accounts today without disruption." News agencies report a ship carrying around 100 was swept away by the tsunami. The assessment of the impact is only starting and will likely be massive when all is said and done.

When Takahiro Mitani, Chairman of Japan's $1.4 trillion Government Pension Investment Fund (GPIF) expresses concern over his country's mounting public debt, you'd better pay attention...

And just in case the stock market needed a little more risk off impetus...

The two most prominent defenders of the Japan-inflation theme, Dylan Grice and Kyle Bass, have just gotten a key reinforcement:Goldman Sachs. Last night, Goldman released its much anticipated 6th trade, to its roster of top trades for 2011. It just happens to be a bet on Japanese inflation. Which, however, begs the question - is this one of those trades where Goldman is, naturally, on the other side and is selling Japan inflation to clients. If the performance of the Squid's Top 10 trades for 2010 is any indication, we would be very cautious, although the fundamentals presented previously by Grice and Bass certainly present a very convincing case for why Tokyo may soon have no choice but go schizo with money printing (all over again), only this time with the gusto previously exhibited only by such monetary madmen as von Havenstein, Gono, Mugabe and, naturally, von Bernankestein.

A realistic look into just how likely it is that we can experience 20+ years of housing price declines in the US.

Not all debt is the same, so it would seem. Expect runs on Ireland, Greece and Portugal way before Japan despite the fact Japan has twice the debt as a proportion of GDP!

From S&P: "The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand."

While not necessarily a new topic, one which has been previously dissected by such strategists as Dylan Grice, the quandary of Japan's deteriorating demographic shift is one that the country can not afford to delay in addressing, yet continues to do just what the US does so very well, by kicking the problem into the future, and hoping it will resolve itself on its own. Today, Sovereign Man Simon Black shifts his focus on the Japanese demographic crunch in a piece titled "Japan is causing its own demise." As always clear and concise, the questions he brings up are critical. And therefore very unlikely to get an answer by anyone in "control" before it is too late. "With a median age of 44.6 years, Japan already has one of the oldest societies in the world (compared to 39.6 in Singapore, 40.7 in Canada, 36.8 in the United States, 28.9 in Brazil, 25.9 in India, and 31.7 here in Chile). One would think that the Japanese government would be rolling out the red carpet for young foreigners, yet Japan remains a fairly closed society. Foreign residents comprise less than 2% of the population according to government statistics, not enough to even qualify as a drop in the bucket. Without serious addressing this issue and attracting young foreigners both at the economic and cultural level, Japan runs substantial risk of fading into obscurity."

If you were worried about the Portuguese auction tomorrow fear not! Japan decided to be proactive fighting this latest break-out of European sovereign CDS rates and extend a very unselfish hand. Indeed how could one doubt their good intentions? All they want is to make sure their currency stops appreciating in order to keep the youth unenployment rate in Italy around 29%. Following China's lead Japan announced they would buy European bonds. With only 200% debt to GDP ratio it makes sense for them to go ahead and chip in to help Portugal throw bad money after an even worse structural issue. China gets relatively little bad press for supporting European markets as conventional wisdom assumes their official 20% debt to GDP ratio is accurate. Other analysts much better informed on the subject than I am, in fact some even created a fund dedicated to benefit from when China's economic miracle is exposed for the ponzi scheme it is, claim actual numbers are much closer to 120% but the people's republic uses all sorts of accounting trickery and local government vehicles to disguise the true extent of its indebtedness. Japan however shall not benefit from the general public's stupidity with debt levels well publicized. Indeed as we discussed many times before, Japan's public debt is astronomical...Obviously Japan's announcement had not so much to do with their desire to rescue Portuguese finances, but instead is aimed in my opinion to the obvious secondary effect of weakening the JPY. That will work to temporarily slow down the fall of EURJPY, but when it comes to USDJPY it is exclusively driven by the 2Y UST/JGB rate spread. So if Japan really wants to weaken the Yen they might as well start dumping their 2Y treasuries. With the time interval between solvency crises shrinking exponentially as the eventual end game approaches, I have my doubts as to how much good will come from this touching display of Eurasian brotherly love. Perhaps is this why the Dollar index refuses to trade South this morning... - Nic Lenoir

Perpetual motion is impossible, but Japan has managed the illusion of perpetual debt for 20 years. Perpetual motion--a machine which produces more than it consumes indefinitely, without any visible energy source--is impossible. So too is an economy which consumes more than it produces and fills the gap with debt. Yet Japan has maintained the illusion of a perpetual motion debt machine for 20 years.

Nomura's inimitable macroeconomist, Richard Koo, whose views we have often repeated on Zero Hedge, is out with his latest prediction which unfortunately has nothing good to say about the future of the US: "We have shown—using the example of the ¥2,000trn in output that was saved in Japan and the fact that the fiscal stimulus provided by World War II quickly pulled the world’s economies out of depression—that fiscal stimulus can be a potent tool during a balance sheet recession. Unfortunately, participants in the US fiscal debate remain oblivious to this point and continue to discuss the pros and cons of fiscal policy using fiscal elasticities measured when the economy was not in a balance sheet recession. This implies that economists are heavily underestimating the elasticity of fiscal stimulus during such recessions—just as their counterparts in Japan did a decade ago—making policymakers reluctant to implement further stimulus. This reluctance leads to further economic weakness. The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes." To be sure, Koo is more in the Krugman camp when it comes to rescuing a fallen Keynesian regime, and believes that stimulus at any cost is the only resolution. That said, the US now exists in a universe in which all the incremental debt issuance is being monetized directly by the Fed: an event is unparalleled in the history of the country. As such we fail to see how one can extrapolate arguments from even a bearish case that may be applicable to the current global state of affairs, which courtesy of Reinhart and Rogoff, we know is at or beyond a tipping point in terms of sovereign leverage.

Fears America is "turning Japanese" have been rampant ever since our real estate
bubble burst.

Just as Japan's policymakers were unable to stave off deflation after their
credit bubble burst in 1989, despite their best efforts, conventional wisdom
holds that all of Ben Bernanke's "reflation" policies will ultimately be
overwhelmed by deleveraging and debt destruction.

Bull Bear argument

Earlier, the Japanese government approved the BOJ decision to monetize in addition to the traditional JGB securities, also ETFs, REITs, and BBB and higher-rated bonds. In other words, the BOJ is now permitted to do what the Fed will have authority to do with a few months: buy virtually all risk assets, as buying ETFs is the same as buying the general market courtesy of the most traded security in the world, SPY, to push and pull the entire market in whatever direction it goes. There are two questions at this point: is the BOJ allowed to buy foreign (read US) assets that fall under the above buckets, and whether the FX currency swap line recently established with the BOJ will allow the Fed to use Japanese proxies to monetize various US assets. Or will the Fed first seek input from the BOJ on how to proceed with sending the Dow to 36k.