Zero Hedge on Japan: Why "This Time Won't Be Different"

From Zero Hedge post titled "Why "This Time Won't Be Different" For Japan In Two Charts" (2/6/2013; emphasis is mine):

...The problem is what happens once said rotation [from JBG to shares and equities] and begins?

Well, the clock begins ticking. Because with a debt load of some 230% of GDP, and with debt that is 2000% of government revenue, about five times more than the second highest (Greece), a simple doubling of average interest rates means half of all government revenues goes to pay interest. Double rates again, and it's game over for the funding side of the Japanese P&L statement, as all inbound cash will have to pay down interest, pushing Japan into the long-delayed hyperinflationary spiral.

And, by the way, none of the above is new! In fact, everything said previously has been well-known to every Japanese PM, and central banker for the past 30 years. It is also the reason why nobody has attempted the kind of ultimately suicidal move that Abe is now trying.

The good news is that it will ultimately be the bond market which puts an end to this latest bout of insanity before it is too late. Unless of course, we get bad news, which in Japan will means 2% inflation... then 12%... then 22%.... then 222% and so on.

By that point every central bank will be openly monetizing not only its own but everyone else's debt too, as the full 1930s rerun, which most certainly included full-blown currency war just before full-blown trade war erupted, unfolds.

And as everyone knows from history, both of the above metaphoric wars in the 1930s culminated with a different war. A real one.

Yup. Kyle Bass has also said as much and more.

Japan's Prime Minister pork-cutlet-curry Abe said in the National Diet session on February 7 that his pride and confidence were shattered to pieces when he had to resign in one year the last time around. I guess the now-confident Abe wants something that he can claim as his lasting legacy. Good or bad is not the point.

One of my Japanese twitter followers said Mr. Abe may be thinking that 2% annual inflation　will be linear. Well, he's a poli-sci major. I'm guessing the rules of mathematics apply differently in politics.

The last time Japan's finance minister (Korekiyo Takahashi) inflated the hell out was right before the start of the second Sino-Japan war which was the effective start of World War II in the Far East.

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In Japan, Fear of Hyperinflation Now Joins Radioactive Cesium as "Baseless Rumor"

Stuck in Keynesianism and no way out anyway, Prime Minister Abe calls hyperinflation worries "unfounded".

(So, hyperinflation joins radioactive materials as "baseless rumor".)

From Dow Jones Business News, quoted at NASDAQ (2/5/2013; kind of fitting):

Japan PM Says Hyperinflation Worries 'Unfounded'

TOKYO--Japanese Prime Minister Shinzo Abe said Tuesday in parliament that worries of the central bank's inflation target triggering hyperinflation are unfortunate and unfounded.

"It's unfortunate that there are people who tout the mostly unfounded fears of hyperinflation," Mr. Abe said in a lower house plenary session.

"By building a sustainable fiscal framework we will dispel such worries," he said.

Mr. Abe also denied allegations by an opposition lawmaker that last month's accord between the government and Bank of Japan on the 2% inflation target threatened the central bank's independence, adding that the government will leave the methods of achieving the target up to the central bank.

The prime minister also fended off criticism about his government spending its way out of stagnation, saying that his economic policies will eventually pave the way for sustainable private sector growth in the mid- to long-term.

Write to Toko Sekiguchi at toko.sekiguchi@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Abe's time horizon must be really, really long and far out into the future. 20-plus years of mostly LDP administrations after another trying to spend its way out of stagnation haven't resulted in sustainable private sector growth.

Growth or no growth, Abe can do what the US government has been doing so that there is no inflation that is not 2%. All he has to do is to cheery-pick the data - eliminate prices of goods that are rising too fast, and prices of goods that are sinking. And use Ben Bernanke's and Obama administration's line that the rising stock market makes people feel happy and prosperous so that they spend money that they don't have.

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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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Ben 'Bernank' Is Ready to Go Beyond $600 Billion

on his way to outdo Rudolf E. A. von Havenstein .

Bloomberg reports that Ben 'Bernank' is ready and willing to go beyond $600 billion:

Federal Reserve Chairman Ben S. Bernanke defended the Fed’s decision to purchase $600 billion in Treasury securities and didn’t rule out expanding the program, in an interview for CBS television’s “60 Minutes,” the network said.

“He explains why the Fed announced its intention to buy $600 billion in Treasury securities, defending against charges the move will lead to inflation and not ruling out the purchase of more,” according to a press release today from CBS.

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The Day the Dollar Died

December 19, 2012. 8:00 AM, New York Stock Exchange. It's a cold breezy day on Wall Street, as markets await the Federal Reserve's announcement for QE4...

8:19 AM, Beijing. Chinese officials announce that they can no longer allow Washington to devalue their holdings. "China has no choice but to stop purchasing US Treasuries..."

A futuristic, depressingly realistic video by National Inflation Association.

(S&P500 Index should be 2530, instead of 1530... Gotcha.)

The most depressing scene in the video is Obama making a press conference as the President of the United States as of December 19, 2012. I hope NIA is wrong about this.

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Weekend Readings - Note to Self

Zero Hedge has two long articles that seem like "must reads":

Is The Fed TRYING To Force A Surge In Commodity Prices And Input Costs? Diapason Explains Why Hyperinflation Is Blackhawk Ben's End Goal

Why The Downside To The Fed's "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation)


Speaking of commodities and hyperinflation, Gonzalo Lira has a good one, a follow-up on his much commented article on hyperinflation in August:

Signs Hyperinflation Is Arriving

Inflation is coming alright, on things that we need (food and energy) and which are conveniently left out from the government calculation of the core CPI.

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Stock Market Down, Time for a Fed Speak or Two

to promise us that help from the Federal Reserve is on our way. Probably on November 3, to be exact.

First, Dennis Lockhart of Atlanta Fed, from Reuters:

WASHINGTON (Reuters) - Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday that further easing by the Fed has to be large enough to help boost demand, and purchases of $100 billion of securities a month would be a possibility.

"If we're going to pursue another round of quantitative easing, it has to be a large enough number to make a difference," Lockhart said in an interview on CNBC.

"As a monthly number ($100 billion) is fairly consistent with what we did before, and so I think it would certainly be in the range of numbers one might consider ... but if you were talking about $100 billion as simply the overall program, I think that's too small," he said.

..."I think the risks associated with it are acceptable," he said. "Quantitative easing will help improve a recovery that is going very slowly and improve the trajectory of the economy overall."

And here's Charles Evans of Chicago Fed, via Zero Hedge (they have the entire speech of Evans):

As if we needed any further confirmation that the Fed is now willing to risk an all out bout of hyperinflation, here it comes courtesy of Chicago Fed's Charles Evans, whose comments that inflation is "acceptable", and welcome, and is the only way to battle the "liquidity trap" the US finds itself in, mirror those of NY Fed's Dudley who earlier confirmed Zero Hedge expectations that $100 billion is too low a QE2 number. Which means that very soon the Fed will buy up every single Treasury in existence. It will also kill the dollar absent Europe continuing on its path from earlier today, and saying the stress test was, in fact, a lie.

Here are the highlights from the full speech presented below.

• Fed's Evans says temporarily boosting inflation may be hard pill to swallow, but potentially beneficial
• Fed's Evans says boosting inflation temporarily is an entirely appropriate strategy to escape liquidity trap
• Fed's Evans says it's likely the US in a liquidity trap, first time since Great Depression
• Fed's Evans says price-level targeting would call for series of large scale asset purchases by Fed
• Fed's Evans says sees US unemployment rate above 8% through 2012
• Fed's Evans says it would be desirable to increase monetary policy accommodation
• Fed's Evans sees US GDP growing 2%-2.5% in the second half of 2010, 3%-3.5% in 2011
• Fed's Evans says if currency forecasts hold, sees 1% inflation in 2012, and below 1.5% in 2013

Good luck with that "temporarily" thing. Also, this is where PIMCO got its 2.5% GDP leak it appears.

So rejoice, small people in America, hyperinflation is good for you. Why? Because the Federal Reserve says so. Creating demand is more important than saving and capital formation. Why? Because the Federal Reserve says so.

Who is the Federal Reserve? They are the ones who created the bubbles in the past, most recently the real estate bubble, by "accommodating" monetary policies to help us out of recessions. And they will be the ones who will control every aspect of our financial lives, thanks to the Dodd-Frank financial "reform" act.

Aren't we lucky?

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"Meltup" Video from National Inflation Association

1-hour video, a must see.

For more, visit the National Inflation Association website.

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Free-Market Capitalism at Work in Zimbabwe

Zimbabwe is a poster child for hyperinflation (the other one being Weimar Republic), always cited by inflationists as a warning of what could happen if the fiat money printing doesn't stop. But while the rest of the world keeps focusing on that aspect, the country has clearly moved on, to a debt-free, central-bank-free, free-market capitalism that provide jobs, feeds and clothes its citizens much better than the system they had had.

Zimbabwe gold production up 35% (1/11/2010 AFP)

"HARARE (AFP) – Zimbabwe's gold production surged 35 percent to 4.2 tonnes last year in a "remarkable recovery" for the mining sector despite erratic power supply, the Chamber of Mines said Monday.

"The 2009 figure was up from 3.1 tonnes the previous year, it said.

"It was a remarkable recovery for the gold and mining sector in general," Chamber of Mines chief economist David Matyanga told AFP.

""However the recovery process within the gold and mining sector in general was affected by the erratic power supply and the critical shortage of working capital," he said.

""The operating environment last year greatly improved when compared to the previous year," said a manager at foreign-owned mine who did not want to be identified.

""Last year we got a loan to revive some of our operations and expand operations which was something that could not be heard of in 2008 or 2007," the manager said." (The article continues.)

This encouraging story is made possible by the demise of the central bank in Zimbabwe.

The central bank effectively ceased to exist. No more lender of last resort. No more printing money at the behest of politicians. Zimbabwe allowed multiple currencies (U.S. dollar, Euro, British Pound, South African Rand) to circulate freely. Now, prices of money and goods are set by a free market. Price control and forex control are gone. Money flows freely into and out of the country. Shelves at markets are full again, people can feed and clothe themselves again. Zimbabweans who fled to neighboring countries to escape poverty and famine caused by astronomical inflation are returning.

Best of all, the country is debt-free, probably the one and only in the whole world. Government and private debt in old Zimbabwean dollar was repudiated. President Mugabe is still there, but it is hoped that he won't last very much longer (he is 85).

I read about the amazing transformation of Zimbabwe in this article posted at Kitco.com back in November last year:

Zimbabwe: A Fresh Start (Alf Field, 11/11/2009 Kitco.com)

Now the once-mighty gold mining industry in Zimbabwe is coming back, despite power shortage and shortage of working capital. All thanks to the death of their central bank, and return of a free-market capitalism.

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