Tuesday, September 18, 2012

Senkaku Island Row May Turn into a Bond War as China Threatens to Dump Japanese Government Bond It Holds

Uh oh...now we're talking serious matters. Are Messrs Ishihara, Noda (not to mention Bank of Japan Governor Shirakawa) ready for this?

(Talk about fiscal cliff... See the chart near the bottom of the post.)

First, from Ambrose Evans-Pritchard at The Telegraph (9/18/2012):

Beijing hints at bond attack on Japan

A senior advisor to the Chinese government has called for an attack on the Japanese bond market to precipitate a funding crisis and bring the country to its knees, unless Tokyo reverses its decision to nationalise the disputed Senkaku/Diaoyu islands in the East China Sea.

Jin Baisong from the Chinese Academy of International Trade – a branch of the commerce ministry – said China should use its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s festering fiscal crisis to a head.

Writing in the Communist Party newspaper China Daily, Mr Jin called on China to invoke the “security exception” rule under the World Trade Organisation to punish Japan, rejecting arguments that a trade war between the two Pacific giants would be mutually destructive.

Separately, the Hong Kong Economic Journal reported that China is drawing up plans to cut off Japan’s supplies of rare earth metals needed for hi-tech industry.

The warnings came as anti-Japanese protests spread to 85 cities across China, forcing Japanese companies to shutter factories and suspend operations.

Mr Jin said China can afford to sacrifice its “low-value-added” exports to Japan at a small cost. By contrast, Japan relies on Chinese demand to keep its economy afloat and stave off “irreversible” decline.

It’s clear that China can deal a heavy blow to the Japanese economy without hurting itself too much,” he said. It is unclear whether he was speaking with the full backing of the Politburo or whether sales of Japanese debt would do much damage. The Bank of Japan could counter the move with bond purchases. Any weakening of the yen would be welcome.

(Full article at the link)

Mr. Evans-Pritchard, on-again-off-again Keynesian (currently "on"), seems to think Bank of Japan would be happy and willing to absorb the dumped JGB should it occur. But reality-based Tyler Durden at Zero Hedge has a different take:

Should this stunning recommendation be enacted, not only would it be the first time in world history that insurmountable credit is used as a weapon of retaliation, it would mark a clear phase transition in the evolution of modern warfare: from outright military incursions, to FX wars, to trade wars, culminating with "bond wars" which could in the span of minutes cripple the entire Japanese fiscal house of cards still standing solely due to the myth that unserviceable debt can be pushed off into perpetuity (as previously discussed here).

Not needing further explanation is the reality that should China commence a wholesale Japanese bond dump, it may well lead to that long anticipated Japanese bond market collapse, as creditor after creditor proceeds to sell into a market in which the BOJ is the buyer of only resort in the best case, and into a bidless market in the worst.

The immediate outcome would be soaring inflation as the BOJ is forced to monetize debt for dear life, buying up first hundreds of billions, then trillions in the secondary market to avoid a complete rout, matched by trillions of reserves created out of thin air which may or may not be halted by the Japanese deflationary gate, and which most certainly could waterfall into the economy especially if Japanese citizens take this as an all clear signal that the Japanese economy is about to be crippled in all out economic warfare with the most dangerous such opponent, and one which just defected from the "global insolvent creditor" game of Mutual Assured Destruction.

Further complicating things is that Japan has no clear means of retaliation: it owns no Chinese bonds of its own it can dump as a containment measure. Instead, Japan is at best left with the threat of damages incurred on the Chinese economy should Japan be lost as a trading parting.

Tyler's conclusion, to which I agree:

One thing here is certain: Japan picked on the wrong country when two weeks ago it "purchased" the disputed Senkaku Islands. If it thought that China would just forgive and forget with a wink, it was dead wrong.

It now has several two options: undo all that has happened in the past fortnight, in the process suffering tremendous diplomatic humiliation, leaving Senkaku in the "no man's land" where they belong, or push on, and suffer the consequences. And the consequences for the country represented by the question market in the chart below, would be tragically severe, as would they for the entire "developed", insolvent and daisy-chained world.

The world could literally collapse over some inconsequential pieces of rock in the South China Sea.


Maju said...

Japan could always declare unilateral bankruptcy (or even unilateral selective bankruptcy to all bonds owned by China and only those) and China would be unable to sell anything.

But yes, it is big words in any case.

Anyhow, I am quite impressed by the debt-to-revenue ratio of Japan of the graph: it's truly surreal - NOBODY owns 20x times their yearly income and survives unless they have a rich dad behind them.

Anonymous said...

They wanted a distraction, they got it.
Ishihara must be very pleased with himself, going out with a bang.

"If I'm going to go... I'm going to take you all with me!!"
^ Significant reason why we shouldn't have very old people in charge of everything.

Maju said...

^^ Agreed: in this time and age, in which experience is not that important and conservatism is almost always a defect, it's better to have young people leading, at least those have a future to strive for. The elder can still be advisors, I guess, but they should not run the show. IMO nobody older than 50 should be in command - I'm already approaching that age, so I think I know what I'm talking about.

Anonymous said...

$230 billion? Japan has foreign reserves that could absorb 4 or 5 times that.

Bring it on China.

Japanese multinationals will shift their focus to more reliable trading partners in FREE and DEMOCRACTIC countries. It's about time the world shut down China KK anyway.

Anonymous said...

Yeah, young people have something to lose. Old people are going to lose everything anyway, so they just don't care. Although, even if we had young people in charge, there's still plenty of room for human flaws like greed and ignorance.

Generally, nothing should be left to a single person or a few biased people. Personally, I try to be objective, I try to get information from multiple sources, and I don't take action unless I'm confident that I've covered as many angles as possible.

In contrast, the people running everything only consider what's good for them and their buddies, and as long as they don't get into trouble, it's all good. That's not the way things should be done.

arevamirpal::laprimavera said...

@anon 8:37PM, one of the points in the Zero Hedge article is that $230 billion that China may dump is fraction of what BOJ would have to buy, if the Japanese government does not want the collapse of the price of JGBs held by financial institutions and pension funds the world over. China's share is a big enough chunk to cause damage.

kintaman said...

Would such a move make the yen crash or go through the roof? A weak yen would help Japan exports while a super high yen would stifle any exports. I would think China would want the Yen to fly high.

arevamirpal::laprimavera said...

It won't be weak yen. It will be destroyed yen, which will destroy the population of savers. At that point, no amount of export gain will help. Besides, they don't make things inside Japan as much nowadays.

Anonymous said...

Yes, bring it on China. Better now than later. Let the world wake up to what it really means to do business with China.

Anonymous said...

And remember that "JAPAN" is not the same as "JAPAN INC." "JAPAN" can survive and rebuild from a financial collapse. JAPAN might not, however, be able to survive another nuclear disaster.

Anonymous said...

Yeah this Senkaku thing is a perfect distraction , everyone in Japan has suddenly forgotten about Fukushima and the burning of radioactive crap all over the place... and if China do that bond dump then Japan is fucked ...

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