Tuesday, November 3, 2009

Will Japan Default?

(please click to enlarge images)

Pictures are worth a lot more than words! The Telegraph in the U.K reports today that credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. This is a very bad sign. See our article on Japan, the Land of the Setting Sun, last Friday October 30, for other points.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), said last week that the debt was out of control and that there is a real risk that Japan could end up in a major default. Russia has defaulted twice not long ago, can Japan follow? The consequendes would be catastrophic.

The IMF expects Japan's gross public debt to reach 218% of GDP this year, 227% next year, and 246% by 2014. The savings rate has dropped from 15% in 1990 to near 2% today, even less than the U.S. Tokyo's price index fell 2.4% in October, the highest deflation in modern era.

Even worse is that there are similarities with China today.

"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 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. "

"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".

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