Japan Opposition Plans for “X-day” Bond Crash

Japan’s opposition Liberal Democratic Party (LDP)  says the government’s spending plans increase the risk of a collapse in the country’s bond market.   Bloomberg reports,

“We’re approaching a danger zone where bond prices could plunge,” Yoshimasa Hayashi, the Liberal Democratic Party’s shadow finance minister said in a Dec. 20 interview at his office in Tokyo. “It’s very important to be implementing a fiscal rehabilitation plan by 2012,” when baby boomers born after the war will start receiving state pensions, he said…

The opposition is working on what it calls the “X-Day” project, to fend off a potential bond market rout, said Hayashi, 49, a former Economy Minister…

Bank of Japan Governor Masaaki Shirakawa yesterday warned about risks to the economy from rising bond yield. Benchmark 10- year yields rose more than 40 basis points in the past two months to as high as 1.279 percent. The 10-year, 1.2 percent Japanese government bond was recently trading at 1.145.

Japan finances more than 90 percent of its deficits with domestic savings, the highest of any OECD country.  The problem, however, is Japan’s aging population is beginning consume its stock of savings and will eventually reduce the pool of savings for the bond market, including their appetite for U.S. Treasuries.  In addition,  social expenditures on an aging population are going to increase.

Japan’s 2011 financing needs are almost 60 percent of GDP and we believe the central bank will be forced to monetize a portion of these obligations.   Being long the dollar against the yen is one of our favorite trades for 2011. The risk to the trade is Japan’s strong net international investment position, which could provide a source of funding and as the assets are brought home, the yen would strengthen.

This entry was posted in Black Swan Watch, Bonds, Sovereign Debt, Sovereign Risk and tagged , , , . Bookmark the permalink.

5 Responses to Japan Opposition Plans for “X-day” Bond Crash

  1. Great article …

    Ok, in a nutshell

    “The problem, however, is Japan’s aging population is beginning consume its stock of savings and will eventually reduce the pool of savings for the bond market, including their appetite for U.S. Treasuries.”

    Close, but not exactly.The stock of Japanese savings is still increasing slightly (mainly due to retained earnings by corporates. Consumers are dissaving!) The KEY is that the flow of domestic savings is way too small to cover the flow of government financing needed and this produces a very rapid shift in the domestic stock of government bonds as a share to total domestic savings (i.e. it is going up, fast!!!) When this share hits “100%” it is game over …

    which brings me to this

    “The risk to the trade is Japan’s strong net international investment position, which could provide a source of funding and as the assets are brought home, the yen would strengthen”

    Very good point. But remember that this strong investment position is also the single only source of growth in Japan at the moment as it leads to a handsomely positive income balance. So running down its external assets would defeat the purpose of getting back to growth (this is the dilemma Japan faces and why ageing leads to export dependency).

    Claus

  2. macromon says:

    Great comments, Claus. I need to be more specific and distinguish household savings from corporate savings. I think the banks have been huge buyers of JGBs and are have relatively large exposure to duration. I will dig up that research and post. Stay in touch. Thanks for tuning in and covet any comments you may have to improve the blog.

  3. Hi,

    I will definitely stay in touch … just got a hat tip on this blog yesterday. I will read it carefully from now on. As for data try this on Japanese corporates (full balance sheet data with quarterly data back to the 1960s). It is a great database. Look at sheet 39 on the liability side (earned surplus) which is basically Japanese corporate earnings. It is almost parabolic … 🙂

    One of the most important charts on Japan I think.

    Claus

  4. Pingback: European Commission: The U.S. is Worse | The Big Picture

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