Japan Spirals into Bankruptcy?

ralph00 · Nov 6, 2009

Quote from Martinghoul:

Lots of discussion of this issue here:

http://www.nuclearphynance.com/Show Post.aspx?PostIDKey=135553

I priced up some high strike structures in yen and they are crazily expensive. It's almost like a bi-modal distribution or a massively fat tail on the high rates side. Maybe it's just domestics expecting stupid price-insensitive Westerners, I don't know.
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My guess is that when Einhorn or Kyle Bass, among others, are all over the place crowing about their out-of-the-money puts on JGBs, now would be the time to be a seller, not a buyer of these options.

m22au · Nov 6, 2009

another FT article:
http://ftalphaville.ft.com/blog/2009/11/05/81676/japan-einhorn-and-tontine-fantasies/

scriabinop23 · Nov 6, 2009

All of these articles, esp the Hayman piece whets my appetite for a 'short JGB etf'.. Anyone know of any trading in the US?

Better than the 10 year JGB future I'd love to short a 30 year JGB. I'm sure a long maturity ETF could take care of this with ease. I can trade SGX, but honestly i'd be more comfortable rolling over some itm options on a US equity (in keeping my size within respectable boundaries)...

nelsanity · Nov 6, 2009

Yes they have been on the tightrope for the past 20 years. I read some interesting articles over past few months where people think the tipping point comes soon.

These are the highlights from what I remember:

Pension Funds will have to be net sellers of JGBs for first time just to make payments.

Japans massive debt issuance will have to compete with Uncle Sam's.

Only good thing Japan has going for their debt situation...is that most of it is held internally.

m22au · Jan 26, 2010

I'm guessing that the S&P credit rating news came out at 2am ET, which coincides with the spike from 89.60 to 90.40.

http://finance.yahoo.com/news/SP-lowers-Japan-credit-rating-apf-588045828.html?x=0

bearice · Jan 26, 2010

Quote from m22au:

I'm guessing that the S&P credit rating news came out at 2am ET, which coincides with the spike from 89.60 to 90.40.

http://finance.yahoo.com/news/SP-lowers-Japan-credit-rating-apf-588045828.html?x=0
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I will post the article here for everybody.

S&P lowers Japan credit rating outlook

TOKYO (AP) -- Standard & Poor's lowered its assessment of Japan's fiscal health Tuesday, threatening a credit rating cut if the economy stays weak and debt remains sky high.

In a surprise move, S&P affirmed the country's "AA" long-term debt rating but revised its outlook to "negative" from "stable."

"The outlook change reflects our view that the Japanese government's diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures," S&P said in a statement.

Japan shoulders the biggest public debt burden among industrialized countries and S&P predicts the country's debt will balloon to 115 percent of gross domestic product over the next several years.

Other developed nations including Britain and the U.S. could also face headwinds for their credit ratings as government debt swells due to massive deficit spending to prop up struggling economies.

With Japan struggling to sustain a fragile economic recovery, its young government has prioritized economy-boosting spending over fiscal discipline. Lifting the purchasing power of voters has become all the more important amid a slide in Prime Minister Yukio Hatoyama's approval ratings.

Recent media polls have shown voters growing increasingly disenchanted with the Democrats since they swept into power last summer. A top party official is mired in a fundraising scandal, and Hatoyama was forced to replace his finance minister when Hirohisa Fujii quit earlier this month due to health problem.

A new stimulus package worth 7.2 trillion yen ($80 billion) in spending passed the lower house Monday and is set for upper house approval later this week. Next on the agenda is a record $1 trillion budget for the next fiscal year starting April, which will require the government to issue some 44.3 trillion yen ($492 billion) in bonds.

"The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected," S&P said.

S&P is maintaining Japan's "AA" rating -- its third highest -- for now based on international assets, the yen's status as a reserve currency, the financial system's resilience and the diverse economy. Japan's gold and foreign exchange reserves of more than $1 trillion are second only to China's, it said.

The credit rating agency said it will be monitoring policy, particularly Japan's medium-term fiscal plan scheduled for release by mid-year.

Christian Carrillo, senior rates strategist at Societe Generale in Tokyo, suspects Japan's sovereign credit rating might take a hit if the government is forced to issue more than 44.3 trillion yen in bonds, "which might happen in the second half of 2010."

zdreg · Jan 26, 2010

Quote from observer67:

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending - and allowing it to push public debt beyond the point of no return. The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats - raising $550bn (Â£333bn) to help fund their blitz on welfare and the "new social policy" - have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at SociÃ©tÃ© GÃ©nÃ©rale. Yukio Hatoyama (pictured left), the new Japanese prime minister, has several large challenges to tackle ... Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default". The IMF expects Japan's gross public debt to reach 218% of gross domestic product (GDP) this year, 227% next year, and 246% by 2014. This has been manageable so far only because Japanese savers have been willing - or coerced - into lending for almost nothing. The yield on 10-year government bonds has been around 1.30% this year, though they jumped to 1.42% last week. - Telegraph

Dominant Social Theme: Don't look to the man behind the curtain?

Free-Market Analysis: The UK Telegraph more than any other mainstream newspaper we read (at least on the âNet) seems to make the occasional stab at analyzing what's really going on in the world. It's covered the desperate difficulties of Eastern Europe, the deepening troubles in Ireland (resulting in the unfortunate pro-EU vote), the unrolling depression in Spain and now, the terrible problems that Japan is facing. These are not stories that you find in the New York Times for the most part, or other mainstream American and Western media. The idea that most of the mainstream media seems to run on these days, (including the Telegraph most days) in fact, is that one must not "talk down" the economy (what's left of it anyway).

But is this not really a specious argument? Yes, a Keynesian, socialist argument, to be sure, in that it assumes that the problem with the economy is that consumers aren't consuming and that one must tread carefully until sentiment reverses itself. In fact, as most anyone who understands economics knows (free-market economics being real economics), the problems that the world regularly experiences have a great deal to do with central bank overprinting of money and subsequent booms and terrible busts.

We don't mind pointing out the difficulties the world is in because the mainstream press is generally so reluctant to do so (and, of course, if the mainstream press did its job there would be less room for the Bell). In any event, most of the commentary these days seems to be about the West's nascent recovery, so it is salutary to remember that there are still a few problems lurking in the background. And, no ... we don't think we'll much aggravate the world's desperate situation by making a few modest points in this regard. Consumers, the ones that are left, will still spend their ever-depreciating cash.

Thus it is, we've taken up the cudgel once more and reminded our mostly perspicacious viewers of what they likely already know: that there is a commercial real estate crunch waiting in the wings, that derivatives issues (hundreds of trillions of dollars) remain unresolved, that the current inflation of assets across the board is preparing the marketplace for a "carry trade" crash of major proportions. And on and on. The world is not a safe place despite the best efforts of central bankers. In fact, the world is in a quandary exactly because of them. Here's some more from the Telegraph's article on Japan:

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3% to 4%, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40% of GDP since 2000. "The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr. Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27% in tax revenues. Industrial output is down 19%, even after the summer rebound; exports are down 31%; the economy is 10% smaller today in "nominal" terms than a year ago - and nominal is what matters for debt. Tokyo's price index fell 2.4% in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry. "This is incredibly dangerous," said Russell Jones from RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral." ...

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future. It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

We were pleased to see in the above excerpt, the reference to China's current asset bubble, as we've long harped upon it. When the China bubble finally bursts (tomorrow? in a decade?) the world will truly find itself in a desperate way. We've done our best to point this out numerous times, and to see it acknowledged by the mainstream press is a step forward in our opinion (kind of like an alcoholic breaking through by acknowledging his addiction).

As for the conclusion to the article above, we differ of course. We do not think that what put Japan into the metaphorical clink was a baby strike or even the jettisoning of its mercantilist model. In fact, when the heck DID Japan jettison its mercantilist model? The Japan we know and love is like a clam: the pearl of the marketplace is firmly nestled in the midriff of the statist mollusk. Japan is mercantilist. The West is mercantilist.

The difference between Japan currently and the rest of the West is probably one of time and perhaps of culture. The population seems very hard working and not prone to disorderly bursts of insurrection. The Japanese tolerate a great deal, in other words, and their culture discourages discord. In a fiat money economy, a lack of opposition to the central banking power structure makes the inevitable decay that much more likely and deeper ... sooner rather than later.

The Telegraph calls for Japan to cut back its social spending and open the floodgates of cheap money. This is indeed probably all that can be done when fiat money has worked its black magic and wreaked its havoc. But the West generally is well down the road toward this solution (the wildly cheap-money part, anyway) and the result will only be more tears. It is impossible to grow a stable world by applying this treatment because the booms only get wilder and the busts only get deeper.

Conclusion: There is a real solution, of course, one that would not be hard to implement. A private market-based gold and silver standard would provide a platform for real and sustainable growth. Asia (Japan and China) will learn this along with the rest of the world when the current global fiat money regime achieves the finality of the collapse it so richly, inevitably, deserves

http://thedailybell.com/578/America-Grows-Closer-to-the-Third-World.html
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original source was http://www.rightsidenews.com/200911057142/politics-and-economics/japan-spirals-into-bankruptcy.html

Ghost of Cutten · Jan 26, 2010

Quote from Martinghoul:

Japan has been spiraling for arnd 20 years now. Every year, it's one of the more popular trades among the Western hedge fund types (e.g. Julian Robertson) out there to short JGBs. Every year, like clockwork, these Western hedge fund types get spanked by japanese domestics and leave with their tail between their legs.

Maybe now is finally the time to pay the piper for Japan. However, you need to be aware that people have been saying the same thing for a long time now, but so far, no juice.
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Actually there was a period about 6 years ago where JGBs and Euroyen got hammered for a few months. But yeah, apart from that it's been no dice.

Still, simple logic says you can't increase your debt load forever. Once the issuance gets big enough to absorb all domestic savings, or the economy starts to experience inflation, bonds will go into a long bear market. It's a bit reminiscent of US bonds from 1929 to 1980. From 1929 to 1942 they had a steady bull run, yields eventually falling to 1.5% in the early 1940s. Everyone expected a bear market then led by war inflation, but yields didn't get that high and in the 1950s they stayed low again. Even after Vietnam and a commodity boom, yields didn't get to 10%+ until the late 70s/1980 under Volcker. Still, anyone who bought bonds in the late 60s or 70s got massacred. Anyone who was shorting in the 30s, 40s, or 50s got killed too. I guess the lesson is that timing is important if you are a speculator.

In other words, if you want to short an entrenched bull market, you need a catalyst that i) makes sense and ii) the market actually responds to. It's a bit like shorting the dot.com or housing bubbles - overvaluation is not enough, you need the internal fundamentals to start falling apart and the market to start reacting very negatively to this deterioration. When that happens, a long Nikkei/short JGBs spread will probably make a crapload of money.

bearice · Jan 26, 2010

Which...why.....Like Dominoes.....I believe when It starts, It will take most everyone with It....

Not a single country or economy will be unaffected...

This has gotten, way too big, and out of hand...

bearice · Jan 27, 2010

Into 2009, governments around the world went into serious deficit mode as taxes fell but spending rose. They also bailed out many banks and took on their debt load. The US's bailout of AIG has cost $180bn so far, and the total bailout cost in Britain is a stunning $1,380bn. In late 2009 and continuing to today, sovereign (government) bond markets are showing some strange signs.

Some facts doesn't make sense. Japanâs public debt has already risen above 200% of GDP, but the government can borrow for 10 years at 1.4%. In contrast, Australiaâs government debt is much lower at about 25% of GDP, but it pays over 5.5%. Other rich countries with varying debt ratios all pay roughly 3.5-4%. Everyone is watching the sickest governments, which include Japan ("a bug in search of a windshield") and the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). Greece is especially important.

To avoid scaring bond buyers (who buy the government bonds to finance deficits), governments need credible 5-year plans to bring deficits down. They must convince markets of their discipline to get their fiscal houses in order. Germany has done this with a Constitutional amendment forcing a balanced budget by 2015; the US and UK have done nothing. Read about the German's prudent Constitutional Deficit Rule here: IMF on German CD Rule.

Members of the EU normally must abide by a clause of the Maastricht treaty where deficits remain under 3% of GDP. All the EU governments have collectively ignored this, but some have put measures into place to get back there (Germany, the Netherlands), whereas others have 6-8% deficits that may go on for a long time. This is bad for bonds. Across the eurozone, where countries lack control over their money supply, the risk of default is more real. That is one of the reasons why the Markit SovX index, a basket of sovereign CDS on Europeâs top 15 nations, at 71.5 basis points (bps), is now 14% more expensive than the the index for the regionâs top 125 investment-grade companies. To wit: an index of government bonds costs more to insure than an index of corporate bonds - bond investors prefer the full faith and credit of companies over countries! This is shocking - Western governments are supposed to be safer and more stable than companies headquartered inside them, because theoretically they can tax the companies and the populace to pay their debts.

Greece seems to be the worst offender of the PIIGS. Its total debt is estimated as high as 875% of GDP, compared to rich world normal of 500-600% (this includes all on and off balance sheet debt and an estimate of social spending commitments, according to McKinsey). Greece's outstanding government debt alone is between 120-130% of GDP. The Greek deficits were worse than what the previous Conservative government published of 6%. The Conservatives under Kostas Karamanlis basically lied through the national statistics department. The new, Socialist government under George Papandreou came in on October 2009 and published the correct number of 12% (recently revised up to 13%).

http://seekingalpha.com/article/184...matters-for-governments-and-investors-part-ii