I am in a Japan debt crisis watch. I am very concerned that Japan may fall into a crisis that may drag the world[1] soon.
That’s if Japan’s bond markets will remain in convulsion which I fear might be sustained.
For the past two weeks, each time the yield of Japan’s 10 year bond encroaches on the .90% level, Japan’s stock markets tailspins. And the .9% levels seem as the watermark for BoJ’s interventions.
The attempt to generate price inflation while expecting a docile bond market represents a head-on train collision between wishful thinking and economic reality.
I am defying what the IMF sees as “a promising start[2]”.
From my perspective, there seems no way out for Japanese government and the BoJ. It’s checkmate for them.
If the BoJ desists from current policies, then the earlier boom will regress and cause a recession. This would balloon the widening chasm of fiscal deficits as tax revenues sink amidst growing government expenditures[3]. With a decline in domestic bond buyers, and insufficient foreign demand to cover for such shortfall, the Japanese government will have little choice but to step in or declare default.
If instead the BoJ continues with the current program of doubling of monetary base, the turmoil in the bond markets will likely continue as bond holders seek to preserve their savings from such policies designed to ignite price inflation or to confiscate the purchasing power of yen holders through the “inflation tax”.
As expected, banks were reported to have pared down their JGBs holdings by 10.8% in April[4]
Given the huge near quadrillion yen (¥909 trillion-see top pane) of JGBs[5], the BoJ will likely run out of ammo to support the bond markets sooner rather than later.
It’s hard to become bullish the Japanese financial markets considering that banks hold 42.7% of JGB outstanding, life and non life insurance 19.2%, public pensions 7.1% and pension funds 3% as of December 2012. These numbers are certainly significantly less now.
Yet these financial institutions are candidates for insolvency once JGBs crashes and burns. And the huge debt burden severely limits the Japanese government from further rescues unless officials would be willing face the risks of hyperinflation.
The Japanese government would mostly call on the US government via the US Federal Reserve to assist or even perhaps to her geopolitical rival China.
Finally if BoJ adds more to the current policy, these may buy sometime. Or maybe not.
A bigger asset purchasing program would lead to greater inflation expectations. This will force more bondholders to scamper for safety. This means a bigger stampede out of JGBs which will likewise translate to inadequate bond market interventions. Thus the feedback loop between inflation expectations and perceived government interventions by the market.
The Japanese government’s tax revenues have been estimated by the Ministry of Finance at ¥ 43.1 trillion for 2013. National debt service accounts for ¥ 22.241 trillion which accounts for 24% of the general account budget or 51.4% of tax and stamp revenues. This may have been computed using perhaps less than 1%, if based on the yields of 10 year bonds. Thus a spike of interest rates to 2% will most likely wipe out the Japanese government’s ability and capacity to pay her obligations.
A debt crisis in Japan will ripple through the world.
Since the banking sector would likely be the biggest casualty, banks and other financial firms or other entities with yen-JGB exposure from other nations will also get hit.
While the Philippine central bank, the Bangko Sentral ng Pilipinas, has record Gross International Reserves (GIR), 84% has reportedly been allotted to foreign (currency) investments, about 10.6% has been yen denominated.
From the BSP’s annual report[6]:
In terms of currency composition, majority or about 79.1 percent of the end-December GIR (excluding gold) were denominated in US dollars. Meanwhile, 10.6 percent of the reserves were in yen, 4.2 percent in euro and the remaining balance of 6.1 percent were in SDR and other currencies.
So whether via yen or yen based JGBs, this just shows how values of reserves can easily be eroded once a crisis sets in.
And despite their territorial squabbles, the Chinese government also remains as one of the biggest holders of JGBs[7]. So China is also vulnerable to a small haircut on their reserves if Japan defaults (directly and indirectly)
And given the constrained options of the Japanese government, I think that they could or most likely resort to the Cyprus bail-in model. They may be targeting part of the ¥1,230 trillion for bank deposits haircuts. Poor households[8] (as of December 2012)
I hope I am wrong about all these. But it pays to take the necessary precaution.
Until the chaos in the JGB markets calms, global financial markets are likely to operate under the umbrage of volatility risks.
[1] See Kuroda’s Abenomics May Trigger Global Financial Market Earthquake April 22, 2013
[2] IMF IMF Mission Concludes the 2013 Article IV Consultation with Japan May 31, 2013
[3] Ministry of Finance Japan's Fiscal Condition January 2013
[4] Reuters.com Major Japan banks' JGB holdings plunge in April - BOJ May 30, 2013
[5] Quarterly Newsletter of the Ministry of Finance, Japan "Quantitative and Qualitative Monetary Easing" of BOJ and trends of JGB Market Ministry of Finance April 2013
[6] Bangko Sentral ng Pilipinas 2012 Annual Report
[7] ECNS.cn China remains Japan’s largest foreign creditor May 29 2013
[8] Bank of Japan Basic Figures of the Flow of Funds -- Fourth Quarter of 2012 March 28, 2013
You write, according to Investopedia, credit means borrowed money “must be paid back to the lender at some point in the future.”
ReplyDeleteI reply, Liberalism’s credit will be paid back by Authoritarianism’s debt servitude and austerity.
And you write, Given the constrained options of the Japanese government, I think that they could or most likely resort to the Cyprus bail-in model. They may be targeting part of the ¥1,230 trillion for bank deposits haircuts. Poor households [8] (as of December 2012). I hope I am wrong about all these. But it pays to take the necessary precaution.
I reply that during May 2013, Jesus Christ pivoted the world from the old economy to the new economy; that is 1) from the paradigm of liberalism to the paradigm of authoritarianism, 2) from the fiat money system to the diktat money system, and 3) from the banker regime of US Dollar hegemony to the beast regime of regional governance, totalitarian collectivism, debt servitude and austerity, as foretold in Bible Prophecy of Revelation 13:1-4, also known as the ten toed kingdom of regional governance, as presented in Daniel 2:25-45. The world is passing into Authoritarianism's wildcat governance, where t leaders will bite, rip and tear one another apart, to become top dog leader, Revelation 13:5-10, and top dog banker, Revelation, 13:11-18.
Kuroda Abenomics, the BoJ program to end deflation and revitalise the Japanese economy, is failing as Japan, EWJ, JSC, which traded parobolically higher on its anticipation, is now trading verticaly lower on its implementation.
In as much as Japanese Financial Institutions, NMR, IX, MTU, SMFG, MFG, which according to you hold 42.7% of all the outstanding JGBS, I consider them to be insolvent financial institutions.
Japan’s monetary program induced the failure of Aggregate Credit, AGG, and has started a global currency war by currency traders who are short selling currencies, starting a tidal wave of global competitive currency devaluation, as well as starting derisking out of Nation Investment, EFA, and Small Cap Nation Investment, IFSM.
Of economic note Monami Yui and Shingo Kawamoto of Bloomberg report Japan's government bond yields have climbed to levels near lending rates, reducing the incentive for banks to make loans and undermining the effects of the nation's unprecedented monetary stimulus. The average rate on new long-term loans was 0.9% in April, bringing the gap with yields on benchmark 10-year sovereign notes to 9 1/2 basis points.