How Japan Could Precipitate a Global Funding Crisis

This is from Ambrose Evans Pritchard’s “A Global Fiasco is Brewing in Japan”

Japan has a funding problem already but due to demographics and rising interest on the debt, who is going to buy JGB’s at these bloated levels?

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

“This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said.

Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

Remember that Japan is about 10 years ahead of the US, in terms of its economic crisis. The deflationary forces that have plagued Japan are now plaguing the US. Because of its domestic savings, Japan was able to finance its deficits internally. The US doesn’t have that luxury. This time around, the break in the Japanese bond market could be immediately followed by a break in the US Bond Market. All positive for Gold & Silver.

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