Japanese Government Debt Passes One Quadrillion (1,000,000,000,000,000) Yen for the First Time, Says Ministry of Finance

1,008,628,100,000,000, to be exact, as of End of June 2013, but you may find it difficult to figure that out from the press release because the unit that Ministry of Finance of Japan uses in the English press release is "100 million yen".

1,008,628,100,000,000 yen is about 10 trillion US dollars now. (In November last year, it would have been more than 13 trillion US dollars, as yen was as high as 75 yen against dollar.)

In comparison, the US government debt is about $16 trillion, with the US GDP of about $15 trillion. Japan's GDP is $5.86 trillion.

There are many in Japan who say, "We owe it to ourselves. Not a problem."

Ministry of Finance press release, August 9, 2013:

(Click to enlarge.)

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Japan to Raise Sales Tax from 5% to 8% (then to 10%) in an Effort to "Boost Economy"

That is what the politicians in the Noda Administration have been saying. Does that make sense? I don't think so. But nothing Japan has done, particularly after March 11, 2011, makes much sense.

Their reasoning is that people will increase their purchase significantly before the increase goes into effect in 2014, therefore boosting the economy. (Amateurs...)

It was not just DPJ (Democratic Party of Japan, ruling party) but LDP (Liberal Democratic Party which is nothing liberal or democratic) and Komei Party voted in favor of raising the sales tax from the current 5% to 8%. About 50 DPJ politicians, many of whom are aligned with Mr. Ichiro Ozawa, voted no.

The ostensible reason given to the Japanese for the tax hike is to pay for increasing costs for welfare and medical benefits for the elderly as the government reform the welfare system and the tax system. But there are only vague words of "reform", and the benefit for the elderly will be further decreased. There is no corresponding decrease in personal income tax, and there is no exception (such as on food items). In fact, personal income tax will be RAISED for the next 25 years to pay for the great "recovery" from the earthquake and tsunami.

Big corporations, particularly large exporters, are very pleased with the sales tax being raised. It won't hurt them, as they will continue to get tax refunds for the overseas sales if the products are made in Japan.

From Bloomberg News (6/26/2012):

Japan Sales Tax Risks Growth Grinding to Halt in 2014: Economy

Japan’s Prime Minister Yoshihiko Noda risks stalling the economy by pushing through a higher sales-tax that may damp consumption even as it aids efforts to tame the world’s largest debt burden.

The nation’s recovery after last year’s earthquake and tsunami could grind to a halt in 2014 when the first increase will take effect, according to UBS AG and Itochu Corp.

Parliament’s lower house yesterday approved the bill to raise the tax to 8 percent and then 10 percent in 2015 from 5 percent now. A slump would be a repeat of 1997, when an increase in the same levy contributed to pushing the economy into a 20- month recession, costing then Prime Minister Ryutaro Hashimoto his job.

“If there are no economic stimulus measures along with a consumption tax hike we can see around zero percent growth in fiscal 2014,” said Takuji Aida, a Tokyo-based economist at UBS, who raised his growth forecast for the year ending March 2014 to 2.9 percent from 2.2 percent because he sees a 4 trillion yen ($50.4 billion) rise in consumption and investment ahead of the tax increase.

A 1 percentage point increase in the tax would cut growth in real gross domestic product by 0.32 percentage point in the year after implementation, according to the Cabinet Office’s Economic and Social Research Institute.

Growing Debt Burden

Even with the sales tax increase, the government said in January that it will probably miss its goal of achieving a primary balance surplus, which excludes debt servicing costs, by fiscal 2020. It forecast a primary deficit of between 1.9 percent and 3.1 percent of GDP in that year, compared with the fiscal 2011 deficit of 7.4 percent.

Gross public debt will be 223 percent of GDP next year, up from the projected 214 percent in 2012, “pushing Japan’s public finances further into uncharted territory,” the Paris-based Organization for Economic Co-operation and Development said in a report last month.

Japan’s benchmark 10-year yield was 0.805 percent at 12:50 p.m today. It reached 0.79 percent on June 4, the lowest since June 2003 and the least globally after Switzerland’s. Five-year credit-default swaps for Japan’s bonds were 94 basis points yesterday, having slid 12 basis points since Noda took office in September, data compiled by Bloomberg showed.

The yen was trading at 79.44 to the dollar at 12:45 p.m in Tokyo, having strengthened more than 5 percent since mid-March. The Nikkei 225 Stock Average was at 8,707.64, down about 14 percent over the same period.

“Higher taxes will automatically shore up tax revenues even though an accompanying economic slowdown will somewhat reduce the amount collected,” said Hiroshi Watanabe, a senior economist in Tokyo at SMBC Nikko Securities. “Even so, Japan must raise the consumption tax to 16-17 percent if it wants to eliminate the budget deficit with taxes alone,” he said, adding “the government simply has to slash spending.”

(Full article at the link)

Mr. Watanabe has apparently never heard of the "Laffer curve".

Sales tax of 15% is what Christine Madeleine Odette Lagarde, IMF chief who pays no income tax on her IMF salary, recommends for Japan.

Prime Minister Noda probably couldn't care less about the angry public protesting outside the Prime Minister's Official Residence against the restart of Ooi Nuclear Power Plant. He got this tax increase bill passed, with the overwhelming support from the major parties. Ooi Nuke Plant may have served as an excellent diversion.

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Former "Legendary Trader" of JP Morgan Warns Japan May Default By 2017

Mr. Takeshi Fujimaki, CEO of Fujimaki Japan, was one of the top traders at J.P. Morgan worldwide for over a decade, earning the moniker "legendary trader" from the chairman of J.P.Morgan (according to wiki). He was also an advisor to George Soros.

He has some extremely dire predictions for Japan, much more so than those by Kyle Bass.

In the Bloomberg News article, Fujimaki warns:

• Japan may default sooner than Europe, by 2017;

• Japanese yen may trade 400 to 500 yen per US dollar;

• 10-year bond yield may shoot up above 80%.

In other words, he says Japan may become "Greece". What is he doing to hedge the risk? He says he's buying US dollars.

From Bloomberg News (6/14/2012):

Ex-Soros Adviser Fujimaki Says Japan to Probably Default by 2017

Investors should buy assets in U.S. dollars and other currencies of strong developed nations because Japan may default within five years, said Takeshi Fujimaki, former adviser to billionaire investor George Soros.

“Japan is likely to default before Europe does, which could be in the next five years,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview yesterday. Japanese should hold foreign-currency products, such as those denominated in the greenback, Swiss franc, sterling, Australian and Canadian dollars, Fujimaki said.

Should the Japanese government default, the yen may weaken to 400-500 per dollar, and the yields on benchmark 10-year bonds could surge above 80 percent, according to Fujimaki. “I’m buying dollars in case of an emergency,” he said.

The yen fell 0.2 percent to 79.48 per dollar as of 9:14 a.m. in Tokyo from its close in New York yesterday. The currency touched the post war high of 75.35 per dollar on Oct. 31 and has averaged about 103 over the past decade. Japan’s 10-year yields were little changed yesterday at 0.86 percent. Rates on June 4 dropped to 0.79 percent, the lowest since June 2003.

Five-year credit-default swaps that insure Japan’s debt from nonpayment were at 90.9 basis points yesterday, up from a seven-month low of 90.1 on March 27, according to CME Group Inc.’s CMA. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Ballooning Debt

Japan’s public borrowings, the world’s biggest, will balloon to 245.6 percent of its annual economic output in 2014, up from 67.3 percent in 1984, an estimate by the International Monetary Fund shows. Japanese Prime Minister Yoshihiko Noda is struggling to gather support for his plan to double the 5 percent sales tax by 2015 to help reduce debt.

“The yen and the JGB market are in a bubble,” Fujimaki said. “With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this. Events in Europe can possibly trigger this to blow up.”

Greeks vote in a general election on June 17 after balloting in May failed to produce a coalition government. The result may determine whether Greece abides by spending reductions imposed upon it to receive two international bailouts and stay in the euro. The euro currency bloc may break up in the next 5 to 10 years, Fujimaki said.

“There’s no way out of Japan’s crisis,” Fujimaki said. “The only option left for Japan is either default or print money into hyper-inflation.”

(Entire article at the link)

There are many, both in Japan and outside, who say "Japanese sovereign debt is not like that of Greece, or the US, because the debt is almost all held in Japan by the Japanese". Well, that's precisely the problem.

Fujimaki says in a Nikkei Shinbun article (6/14/2012) that:

• Japan's financial institutions have been investing the deposit money in the Japanese government bonds (JGBs). In the case of Japan Post Bank, 80% of the deposit money is invested in JGBs.

• Life insurance companies used to lend out more than 50% of the money from the insurance premiums collected from the policy holders; now, it's only 13%, and the rest of the money goes to the JGBs.

• Ratio of loan to deposit at private banks was 98% 10 years ago; now it is only 73% and the difference has gone to the JGBs.

If the Japanese government defaults and the JGBs become worthless, there will be no deposits, no pensions, no insurance payout, he says.

He also cites the example of wartime bonds issued during the World War II in Japan. The ownership of the bonds was 100% Japanese, but that didn't prevent the bonds from becoming worthless in the post-war inflation.

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Japan's Sovereign Debt Situation in 4 Charts

Move over, Greece.

From Zero Hedge (5/15/2012):

Sovereign debt to GDP: Japan is the only country over 200%, and set to go higher after the March 11, 2011 triple disaster.

Sovereign debt interest payment to government revenues: Japan is the only country over 20%.

Japan's sovereign debt to GDP ratio, since 1980: 45-degree angle since early 1990s, after the real estate bubble burst.

Sovereign debt to government revenues: Japan looks to be about 1,900%. Greece comes in second, with about 400%.

Zero Hedge cites the source as: Harvard Business School, 9-212-091, Hayman Capital Management

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UK Telegraph: Japan Mulls Monetization of Debt, Yen Devaluation

The true believer of Keynesianism sallies forth to where no other developed country has gone before. (Not after the World War II, that is.)

UK Telegraph's Ambrose Evans-Pritchard reports that the Democratic Party of Japan (DPJ) has drafted a bill that will require the Bank of Japan to monetize the government debt, set the "inflation target" at 2%, and devalue Japanese yen by 30%. And they call it a radical thinking.

Japan mulls monetisation of public debt and yen devaluation
(Ambrose Evans-Pritchard, 4/14/2010 Telegraph)

"A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.

"Shizuka Kamei, financial affairs minister [and former policeman], said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

"The Bank of Japan’s governor, Masaaki Shirakawa, told lawmakers that it would illegal [sic] to fund state spending by printing money. “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,” he said." [The article continues.]

The BoJ governor is right. This is crazy.

Japan's industrial output is on the upswing, so is the housing market. Stronger economies in Asia are revaluing their currencies upward against the basket of major currencies (China, Singapore). And Japan wants to debase their currency to cause inflation.

As if inflation is the sign of strength. Japan may not have had a significant inflation in its lost two decades, but it hasn't really had a significant deflation either. Monetary base has been stable, and price of goods and services has been stable. However, since the government takes away more from its citizens - increased taxes, increased national health care insurance premiums that hit pensioners particularly hard, the average Japanese do not have a sense that they are enjoying extra purchasing power.

The so-called "structural reform" by the previous administration under Prime Minister Koizumi has all but destroyed the employment safety net. Japanese saving rate has plummeted from high teens to low single digits, not because of higher spending but because of lower income. Now the Hatoyama administration wants to further destroy the savings (or what's left of them) of the citizens by debauching the currency intentionally.

Ever patient and philosophical, the Japanese would probably say "Shoganai (nothing we can do about it)" and accept their lot.

I hope they are buying gold and silver while yen is still strong.

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M3 Contraction and Japanese Sovereign Bond Crisis?

I don't think so.

Amrose Evans-Pritchard of Telegraph UK is known for writing cheerful topics like global depression and deflation (he is a deflationist) and coming fiscal, economic, and social crises if not downright catastrophe. In this article from January 4, 2010, probably intended as his New Year prediction, he argues that the sovereign debt crisis will be triggered by Japan, and that will finally stop the bear market rally of the global stock markets.

I regularly follow and read his writings (as you see the box to the left that has the feeds). But I have some problems with this one.

Global bear rally will deflate as Japan leads world in sovereign bond crisis (Ambrose Evans-Pritchard, 1/4/2010 Telegraph)

"The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system. "

Right off the bat, I have a problem. He talks about M3 contraction in US and Europe. As you may know, the Federal Reserve stop publishing M3. But that's not my problem. Is M3 really contracting, as he says?

ECB (European Central Bank)'s definition of M3 is slightly different from the U.S. counterpart. It includes:

• Currency in circulation (M1, 2, 3)
• Overnight deposits (M1, 2, 3)
• Deposits with an agreed maturity up to 2 years (M2, 3)
• Deposits redeemable at a period of notice up to 3 months (M2, 3)
• Repurchase agreements (M3)
• Money market fund (MMF) shares/units (M3)
• Debt securities up to 2 years (M3)
  (Source: ECB's definition of Euro area monetary aggregate)

And here's the latest Euro area M3 numbers compiled by ECB. Do you see "contraction"? It was pretty much flat all year, but to call that a "contraction" is like calling a flat day in the stock market a rally because it didn't go down.

How about M3 in the U.S.? M3 is M2 plus large time deposits, institutional money market mutual fund balances, deposits of eurodollars and repurchase agreements (Wikipedia.org). Let's take a look at M2 chart at St. Louis Fed:

In both Europe and the U.S., monetary aggregates didn't contract in the last six months at all. The rate of change may have been decreased or gone slightly negative (in case of EU), but to call that a contraction is really stretching it.

My next problem is this:

"Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

"Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom..."

Too bad Fujii just resigned, and the post has gone to probably the worst possible person (in my opinion) in the administration: Naoto Kan. While Mr. Kan may be just the right person for Evans-Pritchard (extremely temperamental Mr. Kan wants weaker yen, more deficit spending), again that's not my problem. It's about Evans-Pritchard's contention that Japanese government cannot sell bonds at 1%.

Who buys Japanese sovereign bonds?

Unlike US Treasury notes and bonds, almost all Japanese sovereign bonds are purchased in Japan by Japanese financial institutions (banks, postal banks, insurance companies, pension funds). Overseas buyers make up less than 4%, compared to over 30% for the U.S. Treasuries. The Japanese government has been trying to push "Kokusai" (sovereign bonds) to the general public, but the reception has been cool mostly due to the super-low interest rate. The issuance of the bonds more than doubled in the past 10 years, but the rates hardly budged.

If indeed the government has to raise rates to attract more buyers, then the general public may finally start to buy. It may finally drive up the rates for bank CDs, and people may be able to save again. Inflation? What inflation? Japan's population is decreasing, and the rate of decrease will accelerate. I don't think much inflation can happen without population pressure.

In the past 20 years, much household wealth was destroyed in Japan not from ongoing recession and deflation but from super-low interest rates. In their effort to preserve and increase their wealth as best they could, ordinary people were forced to chase the high-yielding investments such as CDs in US dollar. That carry trade by numerous households has spectacularly backfired. They were also driven into mutual funds that invested in U.S. commercial real estate, as these funds were sold by neighborhood banks as "safe and high yielding".

They would welcome bonds and CDs that would yield 5%. That would absorb money in circulation, therefore non-inflationary.

For Japan to flip from deflation to hyperinflation, it would need some other disaster than the government issuing more debt or Mr. Kan becoming the finance minister.

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