Monday, December 13, 2010

Japan Financial Situation is Past Critical

I pointed out the other day that Japan's debt to GDP ration had surpassed 200%. Now, Mish Shedlock spells out the doomsday scenario for Japan in no uncertain terms:

In spite of ever-expanding national debt, Japan's long-term interest rates are the lowest in the world. Yet, because of demographics and a rapidly aging population, Japan will soon have to draw down on its "savings", all of which went into treasury bonds at 1%, all of it already spent, and 200% more, in various nonsensical deflation-fighting efforts.

The problem for Japan is interest on the national debt will consume all revenues if Japan's long-term interest rates rise to a mere 3%. Yet, demographics show higher interest rates are nearly guaranteed unless Japan decides to default.

The interesting thing about default is that countries frequently default on external debt but seldom default on debt owed to its own citizens. Nearly all of Japan's debt is internal. Will Japan default on that debt or will Japan attempt to print its way out?

Should Japan try printing instead of defaulting, it faces a currency crash. If taken to extreme measures, Japan could conceivably see a complete loss of faith in the Yen (hyperinflation). At this juncture, hyperinflation is far more likely in Japan than the US.

The critical question for Japan is "How long can this imbalance continue before it blows up in one direction or the other?" Interestingly, Japan may blowup both ways, first in one direction then the other, so the order and timing of bets is important.

 When interest rates rise in Japan; which they must. Japan will have to default. But when most countries default, they default on monies owed to foreigners. Japan's debt is almost wholly owned domestically.

It is doubtful that the Japanese government will default on money owed to the people. So what to do? Print money, of course.

Could hyper-inflation be in the near future for Japan?

1 comment:

Anonymous said...

Inflation is a possibility. Maybe the country should default on money owed to the people. That way, Japanese will finally wake up and realize the stupidity they've been allowing all these years...

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