Global Macro Monitor

In the context of S&P’s recent sovereign downgrade of Japan we thought you’d be interested in this IMF piece published in October.  The basic thesis is that Japanese commercial banks have been the main buyers of JGBs over past few years and are at risk of sovereign rate shock.

Our sense it may be only a matter of months before Japan comes under intense scrutiny and pressure from the markets.  The government’s massive funding needs suck up almost all the country’s savings and explains why the Nikkei is still down over 70 percent lower than its December 1989 peak.

The “crowding out” of the equity market shows, at least to us, that the country’s stock market cannot rally unless:  1) foreign capital inflows increase;  2)  Japanese funds invested abroad are repatriated;  or 3)  massive quantitative easing and direct purchases of equities by the Bank of Japan.  The recent pop in the equity market began after the BoJ’s announcement that it would directly purchase Nikkei ETFs.

When the sovereign debt crisis spreads to Japan the U.S will be viewed as “on-deck” and the tremors of the coming of the next crisis will be felt in the bond, currency, and commodity markets,  in our opinion.   Is Washington listening?

Related Articles
Hedge Funds Face `Sputnik Moment’ in Japan: Commentary by William Pesek – BB
U.S., Japan warned by IMF, rating agencies on debt – Reuters
Japan Rating But Heralds Spread of Sovereign Debt Crisis – Midas Letter
Japan downgraded over debt – CNN
Japan’s Savings Crisis – Martin Feldstein,  Project Syndicate
Moody’s says U.S. credit rating risks are rising – Reuters

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