Why Japan may spark the next crisis, by Simon Black

Japan has the worst debt problem among developing nations…by far. From Simon Black at sovereignman.com:

In a world full of reckless and extreme monetary policy, Japan no doubt takes the cake.

The country has total debt of more than ONE QUADRILLION YEN (around $10 trillion) pushing its debt-to-GDP ratio to a whopping 224% – that puts it ahead of financial basket case Greece, whose debt-to-GDP is around 180%.

Japan spent 24.1% of its total revenue (appx. 23.5 trillion yen) last year servicing its debt – both paying down principal and interest. And that percentage has no doubt moved even higher this year.

And, keep in mind, this isn’t some banana republic. It’s the world’s third-largest economy.

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The country’s economy is so screwed up that the Bank of Japan (BOJ), the central bank, has been conjuring trillions of yen out of thin air to buy government debt.

The BOJ printed yen to buy basically all of the $9.5 trillion of government debt outstanding. When it ran out of bonds to buy, BOJ started buying stocks. Now it’s a top 10 shareholder in 40% of Japanese listed companies.

Most recently, the central bank has started “yield-curve control,” which basically means they’ll do whatever it takes to make sure the government doesn’t have to pay more than 0.1% interest.

But something interesting has happened over the past few weeks…

Despite the BOJ’s promise to hold rates and bond yields down, the other owners of Japanese government bonds (JGBs) have been getting nervous. And they’ve been selling.

The selling pressure pushed bond prices down (and, inversely, yields and rates up)… In just under two weeks, yields on 10-year JGBs soared from 0.03% to 0.11% – an 18-month high.

If you own an asset and you don’t think it will perform well, you sell it. And clearly that’s how people feel about Japanese debt. The bonds pay close to zero, after all.

Japan has been fighting deflation for a long time. And with deflation, when the purchasing power of your money increases every year, you may consider holding a bond that pays close to zero… because you’re still maintaining your purchasing power.

To continue reading: Why Japan may spark the next crisis

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