Japan

The most convoluted monthly report issued by the US Treasury, that of Treasury International Capital (TIC) flows was released on Friday, and it disclosed some troubling data points. While foreigners overall continued purchasing domestic assets, their appetite continues to decline. In particular foreigners increased their purchases of Treasuries marginally, while they continued selling off corporate bonds and agencies, while buying corporate stocks. Yet, most troublingly, the Big 3 (China, Japan and the UK) purchased the least net total of Bonds and Billsyear to date: as the Fed now dominates the market for Treasuries, traditional buyers are becoming increasingly nervous.

Since we are already in a deflation, the argument over inflation or deflation is moot. The real question is: how long will we remain in a deflation? And, if deflation ends, will we then see inflation, hyperinflation, or real growth?

Many deflationists assume that since we are following the Japanese path that we will have the same economic results as Japan. That is, a stagnant economy with generally falling prices as has been seen for the last 19 years in Japan.

While it depends mostly on what the government's responses will be, our experience will more likely be stagnation with long-term inflation rather than long-term deflation. The economic differences are significant.

"For years investors laughed at any attempt on my part to draw comparisons between the
inflating bubble in the US and the Japanese experience. For most in the West, Japan might as
well have been on another planet, its post-bubble experience held so little relevance. They’re
not laughing so much now. Yet we hear an increasing chorus that the extreme policy response
will safeguard the West against a repeat of Japan’s lost decade. I remain skeptical." - Albert Edwards

I was on CNBC a few days ago discussing the Japan debt situation, here are my talking points and some additional thoughts a lot of them I did not have a chance to cover in the previous note or the interview.

Japan's ruling party for the past 50 years is set to lose the elections tomorrow. The opposition has threatened to demand payment from the United States in yen.

The Japan External Trade Organization has released its latest trade figures, which paint a grim picture for foreign trade by the world's second largest economy. Year to date imports have dropped by 31.9% to $252.9 billion, while exports have plunged 36.8% to $252.2 billion. Most stunning is the disclosure on trade flows with the United States: exports to the US have dropped by 43.5% to $40.5 billion, resulting in Japan's largest positive trade balance. Another development is that China has now replaced USA as Japan's primary trade destination. However that is not saying much: trade with China has declined for the 8th consecutive month. The last fact is among the primary reasons why the Chinese Central Bank has blown a credit bubble of epic proportions in order to mitigate the unprecedented collapse in Chinese trade with its traditional trade partners.

A blast from the manipulated past (via Bloomberg). When will domestic regulators demonstrate they are at least on par with their Japanese colleagues.

Nikko Salomon Banned From Japan Trading for 20 Days

Moody's is swinging the axe again, and in a move which could spell trouble for the rating for the US itself, it downgraded Japan's last triple-A foreign currency credit rating. Amusingly, Japan has almost no foreign currency debt exposure, so the action may be perceived as posturing by Moody's as it prepares for some sort of credit action on the US. In Moody's own words:

Spin this: