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Japan’s recent surge is due to its new quantitative easing program—its largest in years—and the stated intentions of Prime Minister Shinzo Abe to weaken the value of the yen and boot Japan out of the deflationary slump it’s been in for the better part of two decades.
But Abe should be very careful what he wishes for. Deflation is what keeps Japan’s borrowing costs as low as they are. At time of writing, Japan’s 10-year government bonds yield a pitiful 0.75%. According to financial writer John Mauldin, an increase of just 100 basis points in borrowing costs would devour 10% of tax revenues.
Japan 10 Year Government YieldWriting for Bloomberg, Gary Shilling notes that debt service now accounts for 43% of Japanese government revenues and quarter of all spending. Furthermore, more than half of all Japanese government spending is financed by new borrowing. This means that half of every yen borrowed is used to service existing debts. It’s a debtor’s nightmare that gets worse every year with budget deficits that are consistently higher than 7% of GDP.
All of this has been made possible by Japan’s seemingly inexhaustible supply of domestic borrowers. But those days are now over. As Japan’s population ages, its savings rate plummets. Once you stop working, you stop saving and you start living off your investments instead. As Japan is the oldest country in the world (and rapidly getting older) its savings rate has shrunk below that of the free-spending United States.
This means that Japan has two choices going forward. Tap the international bond market and risk the beating that Spain and Italy took last year or finance the government directly via the central bank. Neither of these two scenarios end well.
How long can this song and dance last? It’s impossible to say, but you’ll know ahead of time that it is coming to an end. Eventually the bond market vigilantes will wake out of their stupor, and then the jig will be up.
Keep an eye on the Japanese 10-year yield. Thus far, it hasn’t budged much in response to the quantitative easing plans. Yields popped from 70 basis points to 84 basis points before drifting back to current levels.
When the yield approaches 1.5%, get ready for the short opportunity of a lifetime in Japanese assets. Because once Japan loses control of the situation, it will be only a short matter of time before it implodes into a hyperinflationary meltdown.
About the author:
Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.
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- The interest payments on the debt held by the BOJ will go back to the government (same as in the US) and 95% of the debt is held domestically in their own currency. The first part basically cancels itself while the second part gets devalued along with their currency.
- Most of national debt is held by banks and pension funds and an increase of the interest puts more money in the pockets of retirees, thereby stimulating demand
- Their social safety net and interest on the national debt are not included in japanese GDP numbers, therefore it's not comparable to the GDP of the US, which includes all sorts of funny stuff, financial products and so forth.
-The balance sheet of the government of Japan resembles more to that of a bank, in fact they have banks like Japan Post Bank which are government entities.
Long story short: Japans numbers look bad, but in Japan a lot more entities are on the government balance sheet, which would be privatized in the US.