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Japan: A New Currency War Front

With Special Expert: John Rubino

30 Minutes, 30 Slides

At 512% Total Debt to GDP and 226% Sovereign Debt to GDP Japan's Debt levels are alarming even compared to the EU 'GIIPS'. The IMF recently warned that Japanese debt was now "unstable". This is IMF code for unpayable and inextinguishable. So what is the solution? According to the new "ABE-nomics" policy it is to double-up.

Japanese Government Debt

Japan has replaced the Bank of Japan Governor and mandated a 2% inflation rate within 2 years. This defies logic at the current levels of debt since if they are successful, a mere 1% rise in borrowing costs (usually rises with inflation) would cost them 25% of their tax revenue. Japanese debt is presently24X central government revenue and Japan is already spending 25% of tax revenue on interest payments.

As incredulous as this seems it becomes particularly frightening when you consider that Japan has been able to finance its debt because:

  • Japan ran a trade surplus which generated lots of outside cash,
  • Japanese citizens had high savings rate and were willing to buy government bonds.

Both of these advantages are now ending.

  • Baby boomers are retiring, so savings rate is heading for zero,
  • Trade surplus has turned into deficit. $8 billion trade deficit in February.

Japan's Demographic Decline

Japanese Household Savers


What You Need To Know

  • Debts are 23X your tax revenues which means Insolvency,
  • Doubling Monetary in 2 years is extremely experimental with these existing debt levels,
  • "the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
  • What they are trying to do is devalue the currency to attempt to become more competitive while holding their rates market flat,
  • Japan will lose control of rates, since leaving the zone of insolvency is impossible now,
  • A 1% increase in interest rates would cost 2% of tax revenue = Insolvency,
  • How could Bond investors expect that they will get their money back at the value it is presently being placed at??

ABE-nomics has all the ingredients of igniting a global crisis but with the already 25% YTD devalued YEN, Japan has established a new front in the raging global Currency Wars.


Expect China To React

China is not going to tolerate the aggressive debasement of the Yen. With 20% of Japanese exports going to China they have the abilities to retaliate. Chine and Japan have a history of conflict as the recent escalation over two insignificant islands (rocks) clearly demonstrated.

 


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