Japan

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.

Interview with Vitaliy Katsenelson on the challenges facing China and Japan and the implications to the rest of the world.

A quick look at gold price action demonstrates that someone somewhere is actively debasing currencies. An even quicker scan of headlines confirms this to be the case: per Reuters "Bank of Japan Governor Masaaki Shirakawa said on Wednesday the central bank will consider expanding a new scheme for buying assets ranging from government bonds to exchange-traded funds when deemed necessary." Harakiri Shirakawa continued: "We have taken a very bold measure ... If the need arises in the future, making further use of the new fund as part of monetary policy is one of our strongest policy options." Judging by the chart below, either gold has a tent in its pocket or was really happy to hear this announcement.

Oh shit is it on. Japan decided to cut their rates to 0%, the ISM released a number slightly more than a nut hair above guesses, and the lovely yet vibrator-challenged Christine O'Donnell assured voters that she is not a witch (and Money McBags is 95.6% sure that is a real video).

War does not determine who is right, only who is left. - Bertrand Russell

Just as everyone was expecting things between China and Japan to moderate quickly following the fishing trawler incident, things just got heated again. Early Sunday, Japanese PM Naoto Kan violently rejected China's demand that Tokyo apologize and compensate for detaining a Chinese fisherman. The PM has already suffered stinging critique at home for relenting to release the boat captain after Chinese pressure, demonstrating just how tight tensions between the two countries remain to be, especially when it comes to how weak they believe they are perceived by the international community. "Senkaku is a Japanese territory. From that point of view, apology or compensation is unthinkable," Kan told reporters. "I have no intention at all of meeting (the demand). Both sides should first become calm and (then) deepen mutually beneficial strategic ties. What is necessary is for both to calm down and act based on a broad perspective."And while the boating incident occurred near islands in the South China Sea where the waters are believed to be rich in oil and natural gas, the last thing this spat is about is commodity access: it is all about the historical animosity between the two cultures, and with China's economy on the ascent, and owning more American IOUs than Japan, one can see why the Japanese sense of sovereign pride may have been challenged.

As we have been expecting, the literature coming out of the investment banks analyzing the "Japan case", and specifically how it pertains to the US and the rest of the world, is coming hot and heavy. Yet the attached report by Soc Gen Klaus Baader and team could well be the definitive analysis on the topic. While we do not necessarily agree with the paper's finding, which is simply that "Japan is not the endgame", the multivariate analysis conducted is second to none. And another key topic analyzed by the Soc Gen economists is whether EM growth can offset the deleveraging in the mature economies: a topic near and dear to Jim "BRIC|N-11 Decoupling" O'Neill. Here the conclusion is more palatable: "We see the Chinese economy following Japan, but more of Japan in the 1950s and 1960s. Chinese policy makers also see this repeat pattern, but are taking steps to avoid the preconditions of a bubble economy that afflicted Japan in the 1980s." The paper's conclusion is presented with just the right dose of optimism and pragmatism (it does after all come from a sell side team): "Managing capital inflows is the next challenge. FX adjustments, fiscal and monetary tightening, domestic prudential regulation, and capital controls are the tools available to manage these inflows. These have significant investment implications. Further, slippages could exacerbate global imbalances and slow growth and other needed reforms."

Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced. But as a look at the balance of payments shows, Americans and their government have gone into massive debt with the rest of the world, in order to finance all their spending over the last 35 years. Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people. This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means. —Gonzalo Lira