Japan Spirals into Bankruptcy?

[m22au]

but Gold in JPY continued to rise until its peak in February / April 2013, as a result of the depreciation of the JPY against the USD.

 

[Martinghoul]

Quote from m22au:
Thank you for your contribution Martinghoul.

Your post reminds me of this Zero Hedge article:
http://www.zerohedge.com/news/2013-...-hills-japan-central-bank-own-100-gdp-5-years

It also reminds me of some of the Modern Monetary Theory crowd who focus only on JGBs ("They won't have a bond market crash because they can print Yen") but ignore the potential for a currency crisis.

Also it's important to remember how useful gradual inflation can be for net borrowers. 10.5% inflation for 7 years will cause a doubling in the price level over that period.

So although it's useful, hyperinflation is not a necessary condition to lose substantial amounts of purchasing power.

I don't aspire to prophesy something grand and momentous, unlike HeroZedge, so I am not sure how I feel about the comparison .

And, indeed, like you point out, crises come in all shapes and sizes. Ignoring the possibility that a developed economy can have a traditionally EM-like balance of payments crisis is foolish.

BTW, that article is exactly why I dislike HeroZedge. I mean apart from the fact that he cherry picks his facts to make the conclusion appear more shocking and doesn't present the entirety of evidence. Modern Japan won't be the first "sovereign LBO by a central bank" by any means and to suggest this is naive.

 

[Martinghoul]

Quote from Swan Noir:
What makes the end game so interesting regarding Japan is that all the scenarios end up at extremes. Call it what we will, effectively, the way out involves jettisoning the debt and, in effect, is a bankruptcy.

We are seeing the effects of a xenophobic society that could not tolerate immigration to bring down the average age. Past a certain median age consumption drops and unlike in a recession it never comes back ... consumers simply age out and it results in less consumption. Coming at a time when other exporters are rapidly climbing the curve to more sophisticated manufacturing it means they are fighting a two front war. Nations forced to fight two "big" wars at the same time historically lose them both.

You reap what you sow, innit?

Modern Japan is a perfectly logical conclusion of a very particular set of policies. In fact, it's democracy in action.

 

[m22au]

Quote from Martinghoul:


BTW, that article is exactly why I dislike HeroZedge. I mean apart from the fact that he cherry picks his facts to make the conclusion appear more shocking and doesn't present the entirety of evidence. Modern Japan won't be the first "sovereign LBO by a central bank" by any means and to suggest this is naive.

If it occurs, it doesn't matter to me whether or not this is the first "sovereign LBO by a central bank".

Apart from that, did you notice any other flaws (or cherrypicked facts / incomplete evidence) in the article?

 

[Quiet1]

Quote from Martinghoul:

Let me suggest a possible crisis endgame for you. Suppose QE is infinite, like you mention, and the time comes when, eventually, the BoJ owns the entire outstanding stock of JGBs (which were paid for by printed JPY). At that point, the BoJ declares JGBs worthless and burns them. In this case, the private holders of JGBs never experience the worthlessness of their JGBs (only the ccy suffers).

The reason I bring this up is that Japan has done this already in the past. Takahashi Korekiyo during the 20s presided over policies that were somewhat similar.

Ok I had not considered wholesale bond cancellation.

I guess the point here is that something must crash - save the JGBs by ruining the currency or pull back from that (stopping QE) and crash the JGBs (when talking in these extreme scenarios).

For all our sakes though, I hope neither of these occur...

 

[Swan Noir]

History is a gallery of pictures in which there are few originals and many copies.
Alexis de Tocqueville

Quote from Martinghoul:

You reap what you sow, innit?

Modern Japan is a perfectly logical conclusion of a very particular set of policies. In fact, it's democracy in action.

 

[Martinghoul]

Quote from m22au:
If it occurs, it doesn't matter to me whether or not this is the first "sovereign LBO by a central bank".

Apart from that, did you notice any other flaws (or cherrypicked facts / incomplete evidence) in the article?

The main flaw in HZ's type of analysis is that it's just not right to focus on one side of the country's balance sheet. Japan has a LOT of domestic savings that have historically financed the government's deficit. That's been the "Grand Bargain" in Japan. The world, however, has changed and they're trying to engineer the transition away from a "model" that clearly hasn't worked. This is what we're observing now.

My point is simply that when you look at these things, you need to look at the country as a whole, rather than just the central bank. This is especially true in Japan, where all these issues are VERY political and the central bank's balance sheet is an instrument to be used.

If you want to read a very balanced piece about Japan that I really liked, here it is (I might have linked to it previously):
http://www.macrobusiness.com.au/2013/06/we-need-to-talk-about-japan/

 

[send_to_tony]

what is that very reason japan will default? assuming lack of inflation, it can always monetize its debts

 

[ammo]

http://news.sky.com/story/1160080/osborne-to-stop-short-of-full-rbs-break-up another call has been made to the ppt to send out a broom and sweep this under the carpet,how are the banks in japan doing,if you were trying to sell and move off the island, who would buy

 

[m22au]

Quote from send_to_tony:

what is that very reason japan will default? assuming lack of inflation, it can always monetize its debts

It depends on how you define "default".

It may be able to monetize all outstanding JGBs, but if it did this, it's unlikely inflation would remain low, and likely the JPY would depreciate against currencies where there wasn't as much money printing.