[smiley]

A while back in another tread I suggested that as soon as the financial situation in Europe has stabilized the financial flash mob would seek a new target. I argued that Japan would make easy pickings. High debt, socioeconomic problems, political problems, natural problems, energy problems and a central bank which is even more vigorously trying to destruct its currency than the FED and ECB combined.

Now the situation in Europe seems to be holding (be it with a lot of gaffa tape of promises still to be fullfilled) I see some signs that the heat is being turned on when it comes to Japan. First of all there was the news that Japan posted its first trade deficit in 30 years.
Japan's economy stressed, turns trade deficit after 31 yrs‎
Japan’s Trade Deficit Widens to a Record as Export Slump Deepens: Economy

Bang on cue came the first of the rating agents to warn of a downgrade
Japan’s AA- Credit Rating May be Cut if Economic Outlook Weakens, S&P Says

And now there seems to be an increased focus on the Japanese debt in the mainstream media. Just some titles from the past week.
Is Japan Doomed?Welcome to our next stop in the Sovereign Crisis World Tour‎
Japan's economy going into trauma: Expert
Insight - Japan slowly wakes up to doomsday debt risk
Japan's $10 Trillion Debt Worry Can't Be Ignored
Tsunami of debt: Japan faces costs of credit‎

So is this just a product of my deranged mind, or is Japan indeed in for a rough ride?

[copious.abundance]

11 years and counting. Still waiting for Japanese financial doomsday to arrive.

From 2001

Japan's Runaway Debt Train (2001)

Imagine, if you can, an economic Hell in which the U.S. government was borrowing 40% of its annual budget, creating annual deficits of 900 billion dollars a year; where 65% of all tax revenues were gobbled up by interest payments on a mind-boggling $13 trillion public debt; and where there was no conductor in sight to stop this runaway debt train.

Welcome to Japan, where that Hell is reality.

Reports on Japan's weak economy and the mountains of bad debt in its banking system have been percolating for over a decade; every once in a while, a downgrade bubbles to the surface, and then the whole "crisis" sinks from view again, lost in the complacency of seemingly permanent malaise.

But after a decade of half-hearted attempts at reform and repeated stabs at "kick-starting" its moribund economy with pork-barrel spending, time is finally running out for Japan. For despite the endless hand-wringing about weak banks, Japan's real financial cancer lies in the public sector, run not by bankers but by politicians.

[...]

[copious.abundance]

Bang on cue came the first of the rating agents to warn of a downgrade
Japan’s AA- Credit Rating May be Cut if Economic Outlook Weakens, S&P Says

This will have about the same effect that Japan's downgrade from AAA to AA had: Pretty much nothing.

[copious.abundance]

One other thing:

First of all there was the news that Japan posted its first trade deficit in 30 years.
Japan's economy stressed, turns trade deficit after 31 yrs‎
Japan’s Trade Deficit Widens to a Record as Export Slump Deepens: Economy

A persistent trade deficit will tend to weaken the yen in the long run, which will help both Japanese exports in the longer run, and will help the Japanese stock market, thus, overall, helping their economy.

[careinke]

11 years and counting. Still waiting for Japanese financial doomsday to arrive.

From 2001

Japan's Runaway Debt Train (2001)

Imagine, if you can, an economic Hell in which the U.S. government was borrowing 40% of its annual budget, creating annual deficits of 900 billion dollars a year; where 65% of all tax revenues were gobbled up by interest payments on a mind-boggling $13 trillion public debt; and where there was no conductor in sight to stop this runaway debt train.


[...]

Isn't that pretty close to what we have today? Cool we have at least 11 more years! We should all party. Why am I thinking...Not so much...?

[Pops]

Crimney, doesn't the doom vs BAU contest ever stop?
Simply because events don't present in the black/white doom vs BAU frame doesn't mean there aren't problems.

Japan pays extremely low interest on government bonds...

It comes down to three things: 1) financial repression, 2) home bias, and 3) dysfunctional equity markets.
...
Although many of Japan's legendary bureaucratic ministries have dramatically weakened in power and prestige since the 1980s, the Ministry of Finance (MOF) is still extremely powerful. Japan's financial system, like many financial systems in Asia, is dominated by large banks. In order to finance the government's huge deficits, the MOF puts pressure on the big banks to buy lots and lots and lots of Japanese government bonds (JGBs).

More

[JJ]

Bang on cue came the first of the rating agents to warn of a downgrade
Japan’s AA- Credit Rating May be Cut if Economic Outlook Weakens, S&P Says

This will have about the same effect that Japan's downgrade from AAA to AA had: Pretty much nothing.

evacuating Tokyo because of Fukishima might have some effect....

[Quinny]

Greek debt levels are not significantly higher than other nations. It's the interest rates on bonds that's the killer.

If the bond traders go for the Yen who knows what will happen. I think they go for the smaller countries because they can!

who are these bond traders and don't hide behind 'the market '?

[Wootan]

As a rule, bond traders for for bonds and currency traders go for Yen. Japanese gov. bonds are mainly held by Japanese corporations and individuals, they are keeping it in the "family", which makes speculation less probable. Their CB has always shown ability to intervene.

One big problem they face is their aging population. Along with Europe, they are the geriatrics of the world economies.

[smiley]

11 years and counting. Still waiting for Japanese financial doomsday to arrive.

Very true, Japan has a long history of indebtness and people crying wolf only to make a fool of themselves. And quite possibly someone like you will point at this post several years forward to argue that Japan is not on the verge of collapsing.

However I see one reason why this time might be different. Japan has always got away with its debt because its strong industrial and financial base. The government and the country are not seperate entities its the aggregate which counts. Whether the government extracts money from the country via taxes or via loans, does not make a difference short term. The bills get payed in the end.

The problem now is that this base seems faltering. This process has been longer underway, but has hit the accelerator after the tsunami. Both the trade balance as well as the current account balance are now in the red. This means that for the first time in recent history Japan cannot rely on domestic investors to buy their debt, but increasingly needs foreign investors to step in as well.

But persuading more foreign buyers that JGBs are a sound longer-term investment could prove “critical” in supporting prices this year, says Christian Carrillo, Tokyo-based head of Asia-Pacific interest-rate strategy at Société Générale. By Mr Carrillo’s “guesstimates,” overseas investors will account for Y12.5tn of net JGB demand in the coming fiscal year – more than banks (Y12tn), insurers (Y9tn) and the Bank of Japan (Y9.5tn)

http://www.ft.com/intl/cms/s/0/24076ef8 ... z1niDCIso1

The influx of foreign investors in JGBs IMHO represents represents something which could change the rules of the game and make the goverment debt very real.

[Wootan]

smiley, but Japan still has a lot of investments abroad. Years of surplus will take some time to erode.

[smiley]

smiley, but Japan still has a lot of investments abroad. Years of surplus will take some time to erode.

They also have "a lot" of debt. Japans net foreign assets are rougly 3 trillion dollars source whereas the government debt is about 10 trillion dollarssource.


Another thing I wonder is what the real state of the Japanese (financial) industry is. What is the quality of all these assets both domestic and foreign.

I find the Japanese business culture very secretive. There is a large tendency to ignore/hide problems. Combined with poor oversight and I am certain that there are quite a few Enrons and Lehmans lurking beneath the surface.

Take these three cases for example.
AIJ
elpida
olympus

I fear that you may find that a lot of the spoils of the 80's have already been eroding for a while now under pressure of Asian competition. it just hasn't shown up in the books yet.

[Wootan]

I'm sure they have a huge secret forest of dead Enrons and Lehmans, from when the real estate bubble burst. They wiped it under the carpet, flushed it with zirp and endless money printing. If the losses had surfaced, a lot of CEOs would have lost face and done the honourable thing: harakiri. Must not happen. There is still a lot of citizens in Tokyo living and paying on apartments bought during the bubble. They have not defaulted on the debt, even if they are seriously under water, I wouldn't be surprised if even their children have taken over the debt/RE, paying to avoid shame. Recently an elderly couple and their son were found dead in an apartment, probably starved to death.

I have not looked at the numbers, but if the 10 Trillion gov. debt owed, is 90 % internal, they still - as a nation - have 2 Trillion in foreign holdings.

After the Euro-countries get their shit together - if that happens, I'd bet that the next countries on the menu will be Eastern Europe outside the Euro. Austrian and Swiss banks are loaded with bad Eastern European debts. If the markets turn down, those bank managers will be pissing barbed wire. Those countries/currencies trade and react as emerging markets, any slump in the world economy and they nosedive. Both companies and individuals have loans denominated in (mostly) Swiss Francs.
Japan is a huge economy, Hungary a tiny economy, very vulnerable to both the Euro economies and speculation.

[babystrangeloop]

Recently an elderly couple and their son were found dead in an apartment, probably starved to death.

kodoku-shi (Forsaken death)

[kiwichick]

re japanese starving to death.......... how many americans died of lead poisoning last year??

hey punk , make my day

[radon]

Debt held internally is not really a debt. The government effectively says – I will print 100 for you to “earn” and you will “lend” back (give me back) 50. Even if the Japanese suddenly decide to redeem their bonds all at once, the inflation will quickly it up their money, with a few intermediaries booking handsome profits in the process.

90% of 10 trillion – 9 trillion of fake debt, 1 trillion of real debt against 3 trillion of foreign assets – leaves them with 2 trillion of surplus, if the maths are right, and depending on the quality of the foreign holdings.

As to the need for the foreign investors – this boils down to whether they would be able to find suppliers willing to cover their food/fuel deficits for free or on credit (which may prove to be the same in the long run). It is a bit of a miracle how they have managed to make ends meet for so long given that their key competitive advantage – cost-effective industrial productivity – has been severely undercut by the Chinese.

[radon]

And now there seems to be an increased focus on the Japanese debt in the mainstream media. Just some titles from the past week.
Is Japan Doomed?Welcome to our next stop in the Sovereign Crisis World Tour‎

Interesting quote from this article:

Unfortunately, the BOJ is not known for its boldness. (In the 1990s, a professor named Ben Bernanke notably critiqued the BOJ for its "paralysis" in the wake of Japan's burst bubble). Just consider this mind-boggling fact: The total size of Japan's economy has fallen since 1992. That constitutes an epic, epic failure by the BOJ, which should aim to keep the total size of the economy growing steadily. And the BOJ hasn't seemed to learn much, either. It recently announced that it would target inflation at just 1 percent a year (as opposed to 2 percent most everywhere else). That's a simply flabbergasting decision considering Japan's depressed economy and titanic public debt load. Japan should have a higher inflation target than other advanced economies, not a lower one. A higher inflation target -- say 4 to 5 percent -- combined with a devalued yen would let Japan work off a decent chunk of its debt, and inflate away the rest over the period of a decade or so. A 1 percent target is planning for failure.

It's tempting to ignore the rock-bottom interest rates Japan pays and think that it simply has too much debt to not default. For nearly two decades, investors have been betting on a Japanese default. And for nearly two decades, investors have been losing money betting on a Japanese default.

Is it possible that, what the article calls "an epic failure", is not a sign of indecisiveness of the BOJ, but rather a conscious policy of a "managed downsizing"?

[dissident]

What you see here is the growth dogma. Such drivel can't be taken seriously. Note how they do not bring up GDP per capita. In that metric, a more useful one for evaluating the standard of living of Japanese, Japan's economy has not shrunk since 2000 and is at the 1985 level (http://en.wikipedia.org/wiki/Economy_of_Japan). The population has been falling and it seems they have reached some sort of steady state.

"The Atlantic" is basically a chauvinist rag (see their 2003 article on Russia, what a laugh riot). They think that investors' growth returns are the be all and end all of creation, but that is just their pinheaded opinion.

[smiley]

Debt held internally is not really a debt.

I beg to disagree. The problem is that the Japanese government cannot print money, only the BOJ can. They can monetize the debt but this does not change the amount of debt outstanding. Only the ownership of the debt changes as the BOJ uses freshly printed Yen to buy bonds.

Moreover since bank intervention is likely to create unaturally low interest rates against an inflationary environment the BOJ will quickly find itself to be the only buyer of bonds.

This all means that the amount of debt outstanding will maintain its parabolic increase, and the BOJ will become responsible for absorbing all this debt. Since the BOJ will need to create more and more Yen to service the debt and compound interest, they will cause runaway inflation.

[radon]

...Since the BOJ will need to create more and more Yen to service the debt and compound interest, they will cause runaway inflation.

Yes, this is what I wrote. Japanese think that they hold 9 trillion worth of assets, and that if they decide to redeem the bonds and take the money they will be able to purchase other assets whose current worth is 9 trillion. But they won't, because the runaway inflation will quickly reduce the purchasing power of their money to rubble. This is why this is fake debt.

Lots of Russians held their lifetime savings in the state-owned Sber bank at the time of the Soviet Union. This was internal debt, people thought they had assets. When the Soviet Union collapsed, their savings were gone as a matter of moments because of the inflation. Nevertheless, Russia continued servicing the external debt inherited from the SU.

http://www.zerohedge.com/news/japans-shocking-keynesian-slip-we-are-worse-greece

In a stunning turn of events, a Japanese Ministry of Finance official admits to Richard Koo's worst nightmare "Japan is fiscally worse than Greece".