8 ms·

A lot of hedge funds (e.g. Kyle Bass and George Soros) think that we've reached a tipping point in Japan. Their government already spends 1/4 of all revenue on

by J_ 13y ago

A lot of hedge funds (e.g. Kyle Bass and George Soros) think that we've reached a tipping point in Japan. Their government already spends 1/4 of all revenue on debt service because their debt is monstrously huge. If inflation happens, their debt bomb is going to go off because no one will want their money in low yield bonds in an inflationary environment. If JGBs (I've never heard them referred to by the JTB abbreviation before) move 200 basis points (which is what the government is targeting for inflation), the government's debt service will exceed revenues. Yields spiked 25 points in 3 days last week. A debt crisis looks imminent. Kyle Bass is asserting that they're going to have to default and the value of the yen is going to plummet to something like 200 to the dollar. This is just the beginning of the end. Get your money out of yen.

rluhar 13y ago
I have heard and read similar analysis. I reckon the Government could force the mega-banks and pension funds to just take the pain and keep hoarding JGBs. Not having to deal with external yield hungry investors has it's advantages. I can imagine the government making an appeal to patriotism, which may be more successful in Japan than in other places.
hudibras 13y ago
"If inflation happens...": that's a huge caveat you've got buried there. Let me guess: You think I should buy either gold or bitcoins, right?
- J_ 13y ago
  I shouldn't even say if because it's happening now. The yen's fallen more than 20% in the past 6 months. Their government is printing 7 TRILLION yen every month for two years to force inflation. That's almost as much as the Fed is doing in an economy that's a third our size. I'd put my money in US stocks. I tend to think Buffet's right about gold being a lousy investment and really don't have any idea how bitcoins will do.
  - hudibras 13y ago
    The yen falling in value is a good thing. The targeted inflation rate is 2%, not exactly Weimar Germany. I guess we're going to have to agree to disagree.
    - J_ 13y ago
      It's not if you're Japanese and it causes a bond crisis. Their debt equals over 20 times their government's revenues. Even 2% inflation will cause yields to move and debt service to exceed government revenues. They will be forced to default or inflate. Either will cause the value of the yen to nosedive.
      - daliusd 13y ago
        What's is government's revenues? Isn't GDP we should worry about or that's what you have in mind?
ddeck 13y ago
Bass' thesis is basically sound. Japan is well beyond the tipping point and as he notes, JGB yields will eventually become untenable for the government. Unlike the European nations facing similar issues though, Japan prints it's own currency. As such, it will never default. Given a choice between default and monetization, monetization is always the lesser evil. So the central bank ends up just buying all the debt that can't be sold at sustainable yields. Net result is extremely high inflation and massive Yen devaluation (i.e. >200). Impact on the population: - poor stay poor - rich stay rich as their wealth is in real assets - middle-class get wiped out. This is the end game and is likely a few years away yet, but there seems little chance of any other outcome.
- hudibras 13y ago
  "there seems little chance of any other outcome" Except for Japan's economy to grow faster than its debt burden, causing its debt ratio to decrease. There's a denominator in that ratio, don't forget.
  - rluhar 13y ago
    I think there are real structural problems that need to be overcome for the economy to grow. Debt monetization is OK - but what about a shrinking population, stagnant productivity and very low immigration levels? Japan's economy has got a nice jump-start due to the unprecedent monetary stimulus. But, as others have commented, there are also issues are energy prices and the negative effects of inflation. Japan still remains an expensive place to do business. I wonder where the economic growth will come from without further reforms.
    - pyre 13y ago
      | very low immigration levels It doesn't help that (politically at least), Japan treats immigrants/foreign workers with distrust (even though the terrorist attacks that have happened in Japan were by Japanese nationals).
    - w1ntermute 13y ago
      Abe's strategy does not end with quantitative easing. The whole idea is to use it to gain legitimacy in the short term that he can then leverage to force through structural reforms.

by J_ 13y ago

rluhar 13y ago

I have heard and read similar analysis. I reckon the Government could force the mega-banks and pension funds to just take the pain and keep hoarding JGBs. Not having to deal with external yield hungry investors has it's advantages. I can imagine the government making an appeal to patriotism, which may be more successful in Japan than in other places.

hudibras 13y ago

"If inflation happens...": that's a huge caveat you've got buried there. Let me guess: You think I should buy either gold or bitcoins, right?

J_ 13y ago
I shouldn't even say if because it's happening now. The yen's fallen more than 20% in the past 6 months. Their government is printing 7 TRILLION yen every month for two years to force inflation. That's almost as much as the Fed is doing in an economy that's a third our size. I'd put my money in US stocks. I tend to think Buffet's right about gold being a lousy investment and really don't have any idea how bitcoins will do.
- hudibras 13y ago
  The yen falling in value is a good thing. The targeted inflation rate is 2%, not exactly Weimar Germany. I guess we're going to have to agree to disagree.
  - J_ 13y ago
    It's not if you're Japanese and it causes a bond crisis. Their debt equals over 20 times their government's revenues. Even 2% inflation will cause yields to move and debt service to exceed government revenues. They will be forced to default or inflate. Either will cause the value of the yen to nosedive.
    - daliusd 13y ago
      What's is government's revenues? Isn't GDP we should worry about or that's what you have in mind?

ddeck 13y ago

Bass' thesis is basically sound. Japan is well beyond the tipping point and as he notes, JGB yields will eventually become untenable for the government. Unlike the European nations facing similar issues though, Japan prints it's own currency. As such, it will never default. Given a choice between default and monetization, monetization is always the lesser evil. So the central bank ends up just buying all the debt that can't be sold at sustainable yields. Net result is extremely high inflation and massive Yen devaluation (i.e. >200). Impact on the population: - poor stay poor - rich stay rich as their wealth is in real assets - middle-class get wiped out. This is the end game and is likely a few years away yet, but there seems little chance of any other outcome.

hudibras 13y ago
"there seems little chance of any other outcome" Except for Japan's economy to grow faster than its debt burden, causing its debt ratio to decrease. There's a denominator in that ratio, don't forget.
- rluhar 13y ago
  I think there are real structural problems that need to be overcome for the economy to grow. Debt monetization is OK - but what about a shrinking population, stagnant productivity and very low immigration levels? Japan's economy has got a nice jump-start due to the unprecedent monetary stimulus. But, as others have commented, there are also issues are energy prices and the negative effects of inflation. Japan still remains an expensive place to do business. I wonder where the economic growth will come from without further reforms.
  - pyre 13y ago
    | very low immigration levels It doesn't help that (politically at least), Japan treats immigrants/foreign workers with distrust (even though the terrorist attacks that have happened in Japan were by Japanese nationals).
  - w1ntermute 13y ago
    Abe's strategy does not end with quantitative easing. The whole idea is to use it to gain legitimacy in the short term that he can then leverage to force through structural reforms.