Sometimes you just have to laugh; or else committing harakiri comes dangerously close to mind. Japan's increasingly terrifying fiscal situation combined with a central bank that is rapidly becoming the laughing stock of the world (though all the other central banks are merely mimicking its actions) is becoming so self-referential (with its almost total domestic ownership of government debt), so short-termist (with its dramatically high short-term funding requirements constantly rolling), and demographically challenged (with its elderly almost entirely reliant upon government transfer payments) that it is hard to comprehend how much longer this farce can carry on. We have previously discussed Japan's WTF charts, but the following collection from Deutsche Bank's Torsten Slok must be seen to be believed. For now - the problem in a nutshell is government-debt per working-age person in Japan will be $140,000 in 2016 - almost triple the rest of the G7.
But They are Fiscally FUBAR...
- Significant Fiscal Deficits
- Gross Financing Needs Are Remarkable
- Debt/GDP now above 80% in all G7 Countries
- Debt/GDP ratio up significantly in Spain, Greece, Portugal, and Japan
- In most G7 countries short term debt is 20% to 30% of total debt outstanding
and Financial Repression and Domesticization has become rife...
- For Japanese investors JGBs look attractive
- Foreigners own only 5% of JGBs
- Japan: Holders of government debt as % of total outstanding. Foreigners hold 5%
- Institutional investor holdings of government debt
which has lead to a nation (people and banks) that are entirely as one connected to this SNAFU...
- Japanese banks have been increasing their holdings of Japanese government bonds
- Japanese banks: Deposit growth higher than loan growth
- Japanese banks buying JGBs for their surplus deposits
- Japan’s elderly rely mainly on public transfers when they turn 70
So - how does this all end? Who knows but the build up of outliers, black swans, bugs in search of windshields, and mushroom clouds waiting to happen is simply remarkable - and there is little doubt that with the right convexity the upside from this debt saturation's final death will be huge. The background can be found here - on how we got here and while Richard Koo can prescribe an ever-increasing budget of fiscal stimulus to plug the deflationary spiral - in the end, there is only one way out for Japan.
Please do not repeat the simplistic response to a Japan 'crisis' bet - that it has ruined many traders - this is simply incorrect in the last decade or more - with JGBs practically unchanged (it has merely been a carry loss) and their broad equity market down over 50%.
As SocGen's Dylan Grice once noted, Will 2012 be the beginning of the end of flawed Keynesian economics?
Maybe Japan's will be the crisis that wakes up the rest of the world and triggers some tough decisions on world-wide debt loads. Or maybe not - maybe the Greeks will beat them to it? or the Irish or the UK, or the US? Like banks in 2007, developed market governments today rely on sustained capital markets more than any time in their history. What if they shut?
Charts: Deutsche Bank