{"id":33653,"date":"2012-11-21T10:51:22","date_gmt":"2012-11-21T15:51:22","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/11\/japan-is-the-next-shoe-to-drop\/"},"modified":"2012-11-21T10:51:22","modified_gmt":"2012-11-21T15:51:22","slug":"japan-is-the-next-shoe-to-drop","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/11\/21\/japan-is-the-next-shoe-to-drop\/","title":{"rendered":"Japan is the Next Shoe to Drop"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

The fiscal cliff has been getting most of the media attention these days.\u00a0 And when not fretting over U.S. political gridlock, investors have turned their attention to Europe.<\/p>\n

But the real crisis brewing\u2014and the one that no one seems to notice\u2014is in Japan.\u00a0 The land of the rising sun is a ticking time bomb, and when it finally blows up it will make all the talk of Eurozone disintegration seem petty by comparison.<\/p>\n

Japan is the most heavily-indebted nation in the world with government debts of over 220% of GDP and a gaping budget deficit of nearly 10% of GDP.<\/p>\n

To put that in perspective, Greece, Spain and Italy\u2014the European countries most viewed as being at risk of default\u2014have debts equivalent to 160%, 68% and 120% of their respective GDPs.\u00a0 The United States recently tripped over the 100% mark, but for all of the (completely justified) fretting about out-of-control debt in America, Japan\u2019s debts are more than twice as big.<\/p>\n

Once the statistics are released, we will most likely get confirmation that Japan spent a good part of 2012 in recession.\u00a0 And already, the Japanese government is planning a 1 trillion yen ($12.3 billion) stimulus package<\/a> to jolt the economy back into growth.<\/p>\n

Seriously?\u00a0 Japan has racked up the biggest debts in modern history trying to stimulate a dead economy, yet it has still been in and out of recession for the better part of the past two decades.\u00a0 It\u2019s hard to see that extra trillion yen making much of a difference at this point.<\/p>\n

I know, I know.\u00a0 Japan is different.\u00a0 Unlike America and Europe, most of its debts are held by its own population, so there is little risk of international bond vigilantes punishing the country the same way they\u2019ve punished Europe\u2019s problem children.\u00a0 Plus, you know the Japanese.\u00a0 They are conservative and save a high percentage of their income.<\/p>\n

If your money manager or financial advisor has told you this, pick up the phone right now and fire him.<\/p>\n

I say this in complete seriousness.\u00a0 Anyone who says something that phenomenally stupid should not be allowed to manage money professionally.\u00a0 Yet there appear to be plenty of them out there, because the Japanese yen has been pushed sharply higher in recent years by investors who are delusional enough to consider the country a safe haven.<\/p>\n

Think I\u2019m being too harsh?<\/p>\n

Let\u2019s look at some very simple demographic math.\u00a0 Those high savings rates we all heard so much about last decade were a product of Japan\u2019s high-income earners in their 40s, 50s and early 60s socking away money for a retirement they knew was quickly approaching.<\/p>\n

Well, it came.\u00a0 Japan is the oldest country in the world with the highest percentage of its population beyond retirement age (roughly a quarter of the population).\u00a0 And as Japan\u2019s Post-WWII generation drops out of the workforce, they are starting to dip into those savings they spent the last three decades accumulating.\u00a0 Japan\u2019s savings rate is now just 2% and falling\u2014a far cry from the 44% savings rate<\/a> it recorded in 1990.\u00a0 If it has not dipped into negative territory already, rest assured that it will soon. (The OECD estimates that Japan’s savings rate will be 1.9% next year; that may prove to be far too optimisitic.)<\/p>\n

Figure 1: Japan Household Savings Rate (2012 and 2013 Forecasted)<\/strong><\/p>\n\n\n\n\n
\n

2006<\/p>\n<\/td>\n

\n

2007<\/p>\n<\/td>\n

\n

2008<\/p>\n<\/td>\n

\n

2009<\/p>\n<\/td>\n

\n

2010<\/p>\n<\/td>\n

\n

2011<\/p>\n<\/td>\n

\n

2012<\/p>\n<\/td>\n

\n

2013<\/p>\n<\/td>\n<\/tr>\n

\n

1.1<\/p>\n<\/td>\n

\n

0.9<\/p>\n<\/td>\n

\n

0.4<\/p>\n<\/td>\n

\n

2.4<\/p>\n<\/td>\n

\n

2.1<\/p>\n<\/td>\n

\n

2.9<\/p>\n<\/td>\n

\n

1.9<\/p>\n<\/td>\n

\n

1.9<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: OECD<\/p>\n

The legions of Mrs. Watanabes that Japan has depended on to buy its government debt are no longer saving and investing.\u00a0 They are living off of their past savings and, given how low interest rates are, are probably going to be selling a good chunk of those bonds in the years ahead to make ends meet.<\/p>\n

What then? \u00a0What do you expect will happen to Japanese government yields when the Japanese have to turn to the international bond markets for the first time?<\/p>\n

They could turn to the Bank of Japan, of course.\u00a0 And in fact, that is exactly what Shinzo Abe, the probable winner of Japan\u2019s December election, is advocating.\u00a0 Abe has called for \u201cunlimited\u201d bond buying, and not just in the secondary markets.\u00a0 He wants the Bank to lend money to the government directly.<\/p>\n

We have the pieces in place for a hyperinflationary meltdown.\u00a0 This may sound impossible given that Japan has had on again \/ off again deflation for the past two decades, but it is hard to see any other outcome.\u00a0 As Japan\u2019s borrowing costs inevitably rise, it will have to fund more and more of its budget via the central bank.\u00a0 And from that point, the path to hyperinflation becomes a slippery slope.<\/p>\n

Investors will eventually lose their faith in the Japanese yen.\u00a0 It is a little shocking to me that they haven\u2019t already.\u00a0 And when they do, the value of the yen will plummet and the prices that Japan pays for imported products and materials will soar\u2026and will necessitate more money printing.<\/p>\n

In Endgame<\/a><\/strong>, John Mauldin called Japan a \u201cbug in search of a windshield,\u201d<\/strong> and it\u2019s an apt metaphor.\u00a0 It\u2019s just a question of when it will splat and what the particular windshield will be.<\/p>\n

For now, it\u2019s a waiting game.\u00a0 When investor sentiment finally turns on Japan, I see it creating an incredible short opportunity in Japanese assets.\u00a0 If you missed the opportunity in 2008 to short subprime lenders and banks, fear not.\u00a0 You\u2019ll almost certainly be able to make a bundle shorting the yen, Japanese bonds, and Japanese stocks.<\/p>\n

In the meantime, keep an eye on Japanese interest rates.\u00a0 When you see them starting to rise, you might want to start setting yourself up for the short opportunity of a lifetime.<\/p>\n

SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

The post Japan is the Next Shoe to Drop<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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