Why Japan May Spark The Next Crisis

Authored by Simon Black via SovereignMan.com,

In a world full of reckless and extreme monetary policy, Japan no doubt takes the cake.

The country has total debt of more than ONE QUADRILLION YEN (around $10 trillion) pushing its debt-to-GDP ratio to a whopping 224% – that puts it ahead of financial basket case Greece, whose debt-to-GDP is around 180%.

Japan spent 24.1% of its total revenue (appx. 23.5 trillion yen) last year servicing its debt – both paying down principal and interest. And that percentage has no doubt moved even higher this year.

And, keep in mind, this isn’t some banana republic. It’s the world’s third-largest economy.

The country’s economy is so screwed up that the Bank of Japan (BOJ), the central bank, has been conjuring trillions of yen out of thin air to buy government debt.

The BOJ printed yen to buy basically all of the $9.5 trillion of government debt outstanding. When it ran out of bonds to buy, BOJ started buying stocks. Now it’s a top 10 shareholder in 40% of Japanese listed companies.

Most recently, the central bank has started “yield-curve control,” which basically means they’ll do whatever it takes to make sure the government doesn’t have to pay more than 0.1% interest.

But something interesting has happened over the past few weeks…

Despite the BOJ’s promise to hold rates and bond yields down, the other owners of Japanese government bonds (JGBs) have been getting nervous. And they’ve been selling.

The selling pressure pushed bond prices down (and, inversely, yields and rates up)… In just under two weeks, yields on 10-year JGBs soared from 0.03% to 0.11% – an 18-month high.

If you own an asset and you don’t think it will perform well, you sell it. And clearly that’s how people feel about Japanese debt. The bonds pay close to zero, after all.

Japan has been fighting deflation for a long time. And with deflation, when the purchasing power of your money increases every year, you may consider holding a bond that pays close to zero… because you’re still maintaining your purchasing power.

But for the past decade or more, Japan has been committed to producing inflation. And now it’s getting inflation of around 1% a year (with a target of 2% annual inflation).

Now, anyone holding JGBs is guaranteed to lose money. And who in their right mind is going to hold an asset that guarantees you’ll lose money?

So people are selling those bonds. And yields are going up as a result.

Yields increasing from 0.03% to 0.11% may not sound like a big deal to you. But think about what it means for Japan…

The country already spends a quarter of its tax revenue just to service the debt. They cannot afford even the tiniest increase in interest rates.

And because bondholders are selling, and rates have been rising, the BOJ has intervened three times in a single week… buying up all the bonds people are selling in a desperate attempt to hold interest rates down.

This is a clear-cut case of BLATANT financial desperation.

And, to be honest, it’s a bit scary.

Japan is already in debt up to its eyeballs… but the BOJ is telling the world that they’re just getting started buying more bonds, no matter what the cost.

It’s crazy when you hear the most powerful economic policy makers in the world’s third-largest economy say that they’re going to hold interest rates down with ZERO consideration for the consequences.

It means they don’t care about fiscal responsibility, they don’t care how much they will plunder the power of people’s savings through inflation, or about their underfunded pensions struggling to generate returns. None of that matters.

The government’s only focus is to hold down interest rates… which they have to do to make sure Japan doesn’t go bankrupt.

If interest rates in Japan went to, say, just 1%, the nation’s annual debt service would literally exceed all of government tax revenue.

Here’s why this is a really big deal…

Remember how crazy things got in June, when some Italian finance minister didn’t get the job?

Markets around the world completely freaked out.

The potential downfall from what’s currently happening in Japan would be 1,000x worse. Remember, this is the third-largest economy in the world.

The Japanese government is fighting for its life right now (with absolutely ZERO concern for its other financial obligations). And it’s clear that they will spend whatever it takes to combat a rise in interest rates.

This won’t end well.

And it’s time to start loading up on the safest assets you can find.

Comments

Yellow_Snow yrad Thu, 08/02/2018 - 14:25 Permalink

If you haven't figured out the end game scenario for F-R Central Bank systems... 

Japan 'zombie' nation is it...

There's no future growth...  nor is there a 'reset' coming

Eventually real negative rates [ZIRP = The Langoliers]

Slow death...  so slow hardly anyone notices...

until it dies

In reply to by yrad

hedgeless_horseman Thu, 08/02/2018 - 11:45 Permalink

 

And who in their right mind is going to hold an asset that guarantees you’ll lose money?

Anyone with a bank franchise who is going to hold that, "asset," as fractional-reserve collateral that guarantee they can make 10-100 times more, "assets."

It's, "assets," all the way down.

BitchesBetterR… Thu, 08/02/2018 - 11:57 Permalink

Hold on: 

So few years ago was the Greek crisis that was going to spark the collapse, then it was Deutsche Bank with their Derivatives monstrosity, then few months ago has been China with their massive debt to GDP ratio...........

 

and now is........ Japan?

Socrates55 BitchesBetterR… Thu, 08/02/2018 - 12:04 Permalink

Out of all catalysts for a collapse, this one is something anyone can grasp. DB and China can kick the can down the road and are about "perception", whether people feel like they have to rush for the exits. Greece is peripheral. Japan, though... People have said their monetary experiment was extreme and would eventually crash, it seems like it is crashing right now.

In reply to by BitchesBetterR…

all-priced-in Thu, 08/02/2018 - 11:59 Permalink

If the BOJ owns all the government bonds - why does the interest rate matter?

 

If I loan myself $1 trillion dollars - do I care what rate I charge myself?

 

Fuck - I can just loan myself more to cover the higher interest cost.

jm Thu, 08/02/2018 - 12:08 Permalink

The BOJ is up to its eyeballs in debt. I venture that the BOJ cannot blow up even if it posts enormous losses on JGBs. It can simply write them off at a stroke or hold them to maturity and never realize a loss. The BOJ must hold the yen down, hence buying assets to get yen out there. 

Corporate and households balances sheet are by and large something to envy. Maybe these two items are related phenomena a la Richard Koo.

What Japanese polity has to figure out is why no one is having babies; and in general what is causing extreme social aberrations; and take measures to fix this. 

malek jm Thu, 08/02/2018 - 13:39 Permalink

>hold them to maturity and never realize a loss

/facepalm

Great news for non-Central-Bank entities:
You can achieve the same by holding fiat!
If I never try to sell/exchange my Zimbabwe bills, I'll also never realize a loss!!
 

In reply to by jm

youngman Thu, 08/02/2018 - 12:18 Permalink

It is amazing what you can do if you print your own money...they will print trillions more..its free money to them..need to make the next government payroll.....print it up

Naruhodo youngman Thu, 08/02/2018 - 14:17 Permalink

The USD is the default currency of the world's forex system and also known as the PetroDollar.

China is the world's biggest production house.

Japan is the world's leading household brand and tech innovator. Also used to be the world's largest production house decades back before dethroned by China.

 

Why not they can't create as much money and debt as they want?

 

In reply to by youngman

Ron_Mexico Thu, 08/02/2018 - 12:22 Permalink

"Most recently, the central bank has started “yield-curve control,” which basically means they’ll do whatever it takes to make sure the government doesn’t have to pay more than 0.1% interest."

What's the over/under on when the US Fed starts “yield-curve control”??  Mathematically, that is inevitably the beginning of the "reset."

Naruhodo Don Sunset Thu, 08/02/2018 - 12:51 Permalink

You don't have to, people around the world beg to buy Japanese household brand products. That reason alone is enough to allow them to print to OBLIVION. How many days you can go without a sushi meal? Is your home free of any Japanese brand product or item?

For as long as Japanese society is willing to work, innovate with impressive technologies and a net exporter of the world's household brands, the value of the Yen will NEVER be diminished. There'll always be buyers no matter how much you numbers you "create".

This is the SECRET of money creation. Human demand generated through activity will always continue to fuel value behind money as long as its society wants to work hard in life, has the interest of the world eyeing their products and monogenous society that is undivided or conflicted.

In reply to by Don Sunset

Naruhodo Thu, 08/02/2018 - 12:36 Permalink

Japan is quite different from other 3rd world countries out there. Besides being the 3rd largest economy, it is also the world's  household brand leader that continues to innovate technology. We know the frauds of money creation, a country can afford to keep creating money infinitely for as long as its people is willing to work till death and its economy generate human activity, it'll never fail.

Unlike Venezuela and other 3rd world nations with sand fills where their societies are lazy, caste based, fossil fuel mining dependent, and relies on foreign investments to build sweat shop mills for taking advantage of peasants. Self sufficient and hardworking monogenous societies such as Japan,China and South Korea are very different models.

So as many have said, if your society is still willing to work and lead the world in tech innovation, has jobs that prioritize only your own kind, a net investor outside your own country, a household brand around the world, no matter how much money you create, there will always be buyers and value in the notes you print.

 

Heck, loan yourself $1 Trillion? $10Trillion? $100Trillion?Just keep everyone addicted with yellow fever, people will keep crawling back for more.

Naruhodo Socrates55 Thu, 08/02/2018 - 14:01 Permalink

Well fiat money is just a figure to confuse "shallow minded lots". The real purpose that generates value for it is DEMAND. Whether its physical or abstract, such as 10kg or gold or 1 Zimbabwean Dollar, if people don't see a point or driven to trade in it, then the currency/money itself is of no value.

Economists and bankers love inflating figures and adding zeros in finance. It's merely to distort and mislead the public. Thus it is why currencies varies in value around the world. Some countries has $10 as their $1 note equivalent, some has $100 as a dollar equivalent, $1000, $10000, $1M so forth. Does it matter how many ZEROs are added to the notes if there's no DEMAND for that currency? Instead of carrying bags of notes just to buy eggs like in Venezuela and Zimbabwe, why not their central banks just print new notes with many zeros behind to match the decline of their value?Similarly, Japan's $1 note equivalent is a 100yen note yet there's string demand around the world for it?

Why debt has no limit? Same reasoning. You can borrow as much as you wish with the condition that people has interests in you. In fact if demand outpaces your ability to serve/supply, by creating enough of debt/money it'll be detrimental on your part. Your country's people will start losing interests in taking jobs, becomes unmotivated, avoids spending which reduces money flow further etc.

In reply to by Socrates55

DavidC Thu, 08/02/2018 - 12:37 Permalink

Why Greece May Spark The Next Crisis

Why Portugal May Spark The Next Crisis

Why Italy May Spark The Next Crisis

Why Brexit May Spark The Next Crisis

Why Japan May Spark The Next Crisis

...And so it goes on...

 

DavidC

rf80412 Thu, 08/02/2018 - 12:40 Permalink

The problem with sovereign default is that it throws the entire country into financial disrepute.  If the Japanese government did the rational thing and declared bankruptcy like any failing business would, the world would instead act like every business and citizen in Japan had also run out of money and would never again have any money.  The disaster would be compounded as capital flees the country, Toshiro Q. Public gets his credit card cut up by a man in a suit from the credit card company, and a noodle shop with a foolproof business model and regular revenues can't get a loan of a few thousand yen to buy a new stove.

The obvious followup question is how on earth do you liquidate a state?  Who would be the receiver?  Would the Japanese people and Japanese businesses actually benefit from "vulture capital" coming in and buying up state assets for pennies on the dollar?  Would they expect to become the new government, or would they be content to rent seek off the new government?

Naruhodo rf80412 Thu, 08/02/2018 - 13:36 Permalink

Think of this funny reasoning of money. No matter how many ZEROs you add behind your currency note, as long as your country's brand, produce or product is in demand people will always still buy from you. There will always be jobs created for your locals. If $1 is equal to 1,000,000,000yen with the product worth $3. The Japanese will not sell you for 3 yen. They'll sell you for $3,000,000,000 in exchange for the trade and if their locals know their money worth, they'll certainly refuse to work unless they're paid accordingly in dollar conversion. The mechanics of debt is also similar. What does it matter if your borrow to oblivion when you know there's always customers lining up in front of your store everyday?

In reply to by rf80412

Naruhodo Thu, 08/02/2018 - 13:03 Permalink

Japan is very different from other nations that went the bankrupted route such as Venezuela or Zimbabwe which relies on foreign investments to create sweatshops for their peasants with little value creation.They're the world leader in household branding and net exporter of innovative tech. That makes a HUGE difference. The whole world is addicted to Japan and sees it as a role model.

When you're in this position, can you afford to create infinite money? Of course. No matter how much you dilute your money, there'll always be interested buyers or Japanophiles around the world that support your country's products.BOJ can keep creating debt to ensure its people won't stop turning the threadmill.Moreover it's internal debt, they're self sufficient. Do the opposite and restrict the money supply/debt creation, people will lose interests in working that's even worst.

Naruhodo Thu, 08/02/2018 - 13:17 Permalink

Similarly to the US currency when it's called the PetroDollar or the "DEFAULT" currency of the world's forex monetary system, does it care if it creates as much debt as it wants? The whole world will still have demand for it. The SECRET behind creating value for fiat currencies is DEMAND. Being a default currency of the world, are nations willing to do without it?

For China, it's the world's manufacturing production house. Japan also enjoys being a household brand around the world.

The lesser known 3rd world countries trying to follow their footsteps? It's just dumb and futile. No one knows you, no one wants your brand in their household, no one cares or gives a damn. Everyone else can do without you, your existence doesn't matter.

Kendle C Thu, 08/02/2018 - 13:18 Permalink

So why not buy up those bonds then burn them or erase the digits. If you owe the interest to yourself as the owner, flush them down the toilet and erase all entries. Better, the bonds owned by the Rothschild bank should be defaulted on. Turnabout is fair play when you're getting fucked. Stop being part of the IMF and World Bank. Stop kissing the USA's ass. If you want harmony in your country, cut all the strings, eliminate the debt, announce the jubilee, but do it before they know it, and before they can send the Yakuza. In fact consider hiring them to tamp down the resistance. It is known that Locusts turn red and eat meat during the height of a plague. Stop pushing paper, kissing ass, and listening to slick talkers or intimidators. Stop being a "Comfort Woman" for the carry trade.

Naruhodo Kendle C Thu, 08/02/2018 - 13:27 Permalink

That is thing thing that Japan is caught up with themselves. In order to continue creating value and demand for its products from around the world it needs the help of the central bank world cartel's approval.Continuing to create demand around the world is vital to sustain their economy and currency, the Yen which is where its value derives from. Don't be fooled by the debt figures they're churning up, no matter how much you dilute your money and inflate debt what really matters at the end of the day is that there're still interested buyers which still create value for your currency.

In reply to by Kendle C