Checkmate For Japanese Sovereign Debt

Seeking Alpha ^ | 02/02/12 | Asa Harrington

[TigerLikesRooster]

Checkmate For Japanese Sovereign Debt

4 comments | February 2, 2012

Global Debt Crisis: Greece -> Europe -> Japan?

From my previous article: Greece and Portugal are stuck in a very vicious cycle. Greek and Portuguese sovereign bond yields have risen substantially making it nearly impossible for these nations to roll over the debt with yields they can pay. For Greece, rising yields have brought it to the edge of default several times. To prevent a Greek default, the Troika (European Commission, International Monetary Fund, European Central Bank) has been sending large tranches of money to Greece to keep Greek bonds afloat and the Greek government solvent. Last year Portugal became the third EU country to ask for aid from the EU and IMF. In June, Portugal will need to rollover 10 Billion Euros of debt and it is a dubious notion that Portugal can do this without paying extremely high yields, unless the troika again becomes the lender of last resort. When Greece went this route two years ago, massive amounts of money were needed in aid and bond buying to keep its country from default. When I see headlines fearing the end of the world for Greek bond owners and possibly Portuguese Bond owners, I have to think, "Whose head will roll next?" In my previous article examining the future of Japan's equities, I came to the conclusion that Japanese debt is not a safe haven, but is sailing into a tsunami. In this article, I hope to develop an even stronger argument for why Japan's sovereign debt is an unsafe investment and why I suspect Japanese sovereign debt will soon be bludgeoned by a tide of rising yields, which we have seen wreak havoc on both Greek and Portugal bond prices, their economies and political stability.

[TigerLikesRooster]

P!

[blam]

Godzilla Will Come Out Of Tokyo Bay Before Japan Economy And Stock Market Rebounds

[Zakeet]

The other day, some wag quipped that things were so bad that Godzilla would rise out of Tokyo Bay long before the Japanese could sort out their financial situation.

[Revel]

The difference is that if the interest rates on Japanese bonds raise to only 2 or 3 percent then the country goes belly up. That is how far in debt they are.

[TigerLikesRooster]

Bailing themselves out for 20 years by burning money. It is bound to end at some point. Probably the longest bailout in history.

[OwenKellogg]

Probably the longest bailout in history.

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So far. Obama wants to be Number 1.

[Vince Ferrer]

Japan’s demographic problem means they can’t grow their way out of it either. Hyperinflation and default is about the only way to go.

[familyop]

Then our own US downgrade and bond problems will probably arrive sooner.

[BfloGuy]

Japan's debt is enormous, but the thing to remember is that it is all owned by Japanese banks and by Japanese citizens. That tends to ease the pressures that foreign debtors and bond speculators can cause.

I don't think the Japanese will default themselves. The Prime Minister would have to commit hara kiri on live TV were such a disgraceful and face-losing event to come about.

[BfloGuy]

Japan’s demographic problem means they can’t grow their way out of it either. Hyperinflation and default is about the only way to go.

Japan's unemployment rate is 4.6%, inflation is nil (that means the Yen's purchasing power is stable or increasing), their life span is up and their per capita GDP is rising. Their trade surplus continues to increase as does their standard of living.

Yeah, all the signs of a nation about to go belly up.

[DuncanWaring]

Their trade surplus continues to increase...

Guess again.

Ageing Japan faces 'chronic' trade deficit after Fukushima.

[Vince Ferrer]

Japan is no longer in a trade surplus, they have a deficit now, and it will likely continue. Much of this is due to shutting down nuclear reactors after the earthquake, and having to import more natural gas.

They are already at a point of losing population, having lost about 100k this year. This is a trend that will continue and grow until 1 million in population are lost in a year. By 2060, Japan will have lost one third of its population of today, and 40% of it will be over 60 if current birthrates continue. Yet the debt of the country remains the same or increases, to be paid by fewer productive workers. Any technological progress to increase GDP must overcome the demographics.

Japan estimates population to shrink by one-third by 2060, seniors to account to 40 percent

These numbers are already mostly baked in. If current birthrate trends continue, which they never do of course, but if they did, Japan will become completely depopulated in 937 years. For that to not happen, though, the birthrate must change, and so far, for several decades now, it has not. The US has had a higher birthrate, near replacement levels, but we are also willing to accept immigrants. Japan so far is not.

[Lurker]

I’d pay good money to watch a politician disembowel him or herself on live tv.

[gogogodzilla]

Consider this. Japan's debt is mainly owned by their citizenry... as part of their retirement savings.

Add to that their below-replacement-level birthrate... and high inheritance taxes.

And Japan faces the prospect of seeing a large percentage of their debtholders dieing off without ever reclaiming the money they loaned their government. Then, just to add a cherry on top, their high inheritance tax ensures that much of the bonds that were bought aren't passed on to the next generation.

So, just how much of Japan's debt is actually ‘real’, considering...

[gogogodzilla]

See post #15.

[CitizenUSA]

BfloGuy: “Japan's debt is enormous, but the thing to remember is that it is all owned by Japanese banks and by Japanese citizens.”

True, but what about Japan's aging demographics? That money won't stay there forever. Won't the increasingly elderly Japanese want to use their money, for example, for retirement? If so, that reduces the Japanese government's access to the funds that have allowed deficit spending for so long. With government debt over twice their GDP, even a 1% increase in the interest rate would devastate them.

[Sawdring]

In the Seeking Alpha piece they have a graph that shows most of the debt is in five year bonds or less. These bonds are then payed out and more short term bonds are sold to cover the payments. Read the whole article, the author lays out a pretty convincing case. This is the money paragraph where he lays it on the line:

After all this doom and gloom, the remaining question is how to take advantage of the situation? I am currently picking entrance points in (JGBS) Inverse Japanese Government Bond Futures ETN and (JGBD) 3x Inverse Japanese Government Bond Futures ETN. One thing I am keeping in the back of my mind is the possibility of a flight to safety after a credit event in Europe, which may temporarily cause an inflow of capital into supposedly "safe" bonds like JGBs. I don't wish to experience the pain of failing to understand the basic rule of a short, "markets can remain irrational longer than you are solvent." But after this small capital inflow, I expect the sea of capital to recede in preparation for the imminent tsunami of panic.

[Vince Ferrer]

Investors can sell Japanese bonds before maturity just like most bonds. The elderly Japanese will sell these bonds in order to fund their retirements, which leaves a smaller younger population to buy them, along with the new debt created by the government. Japan is right about at the point where the elderly will be cashing out investments at a faster rate than the public is currently buying them.

[tbw2]

If Japan defaults on its debt and cannot pay its elderly, the only demographic group growing right now, it faces either lots of angry old folks or pushing them to die quickly for the common good to save the rest. The third choice is using robots to replace the retirees since there are not enough young to do so, but robots don’t really pay taxes.