Bill Bonner

Not much action in the markets.

So, how’s our “trade of the decade” doing?

We haven’t checked. But we think we’re onto something. Remember the trade? Buy Japanese small cap stocks and sell Japanese government bonds.

Okay… So it’s not that easy to do. It’s just an idea…a concept… It’s meant to get us thinking about how things work.

In the present case, the Japanese have the biggest public debt in the world – at 200% of GDP. Already, they’re using almost 60% of their tax revenues just to pay the interest on the debt. How do they pay government expenses? They borrow more money!

This is not a healthy situation for the holders of Japanese Government Bonds (JGBs). They’ve got to expect that sometime in the next ten years the government is going to run out of money…or investors will run out of confidence…and interest rates will rise. When they do, bond prices will fall…probably collapse…and JGB holders will lose beaucoup yen.

There is no way that this crazy system of government finance can continue. The only reason it has come this far is that Japanese savers have no idea of what is going on. They’ve been saving for their retirements. And now, they are retiring in record numbers. Japan went over the demographic hump in 2002. Now, its population is falling. And there are more people retiring than there are entering the workforce. These retirees don’t realize that the government has taken their retirement savings and spent the money. They think it is waiting for them, ready to finance their golden years.

They’re in for a shock. And so are investors, when they finally realize that those JGBs are worthless.

Here’s Bloomberg with more on the story:

Japan’s top government spokesman said the country’s fiscal situation is “approaching the edge of a cliff,” underscoring Prime Minister Naoto Kan’s call for a national debate on raising the 5 percent sales tax.

Kan is “expressing his deep sense of crisis and resolution about the sustainability of social security as the aging population increases under a low birth rate,” Chief Cabinet Secretary Yoshito Sengoku told reporters today in Tokyo. “The supporting fiscal conditions don’t allow for any delays, it’s finally approaching the edge of a cliff.”

The prime minister last night said in an interview with TV Asahi that he would “stake [his] political life” on addressing Japan’s rising social welfare costs and increasing public debt. The day before he said “now is the time” to face these problems.

Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, both estimates the highest among countries tracked by the Organization for Economic Cooperation and Development, according to the group’s forecasts.

Now, let’s imagine that we’re right about this. Let’s imagine that governments can’t really run deficits forever…no matter how cooperative the population. They reach a point when the go “over the cliff,” as Japan is about to do.

If that’s so…

…well…where is the US in this story?

Stay tuned…

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • steverino

    hard 2 believe, indeed.

    remember pre-’08? when the yen was north of 120 and everybody was using it in the “carry trade” to buy “ass-ettes” and casino chips? it was sooooo cheap!

    now, it’s in the lo 80’s and the interest rate in the land of the rising sun is (drum roll)…0.1%!!!! (rim shot?)

    what is not the same as when

    we can go broke waiting for the other shoe to fall

    when fascists teach faith-based economics, people learn!

  • DRUNK AND DISORDERLY

    I don’t know where the US is going with their debt problem, but personally I’m going to avoid standing near the edge of any cliffs…

  • http://www.investorsfriend.com The InvestorsFriend

    Bill saiz:

    This is not a healthy situation for the holders of Japanese Government Bonds (JGBs). They’ve got to expect that sometime in the next ten years the government is going to run out of money…or investors will run out of confidence…and interest rates will

    But clearly the holders and buyers of Japanese government long-term debt expect no problems at all. That is why they are prepared to invest in 10-year Japanese bonds at the current yield of a paltry 1.2%.

    Now you may say that market is manipulated. But people are buying those bonds at 1.2% and holding them for 1.2% for 10 years. Not all buyers and holders are part of a manipulation. No one forces them.

    They vote with their wallets and their vote is that Japanese debt is solid like Gold.

    That is not my opinion but it is the opinion of the market.

  • TC

    InvestersFriend:

    They buyer of JGBs is not so dumb as to have trust on the government. What they are waiting for is to cash their bonds on prized Japanese industrial assets once the government ‘default’.

  • David Bushnell

    The bank of Japan needs only to electronically create an ever-growing
    fictional army of bond investors.

  • Ray Damani

    Re. Bonner’s “trade of the decade” and JGBs – here is a must see story from the BBC –

    Japanese shoplifters getting older

    http://www.bbc.co.uk/news/world-asia-pacific-12157786

  • http://www.realbench.net Real Estate Investment Software

    This blog has broadened my horizon about how japanese government can sometimes change the whole perspective on things. Great information and reference! Nice work Bill.

  • mmtForever

    Japan is going to “run out of money”?!? Explain to me just how that can happen.

  • Tommi

    What a dumb commentary. Japanese debt is the safest in the world, and the market knows it. The government spends money and it winds up in Japanese bank accounts. Those bank accounts are used to purchase JGBs. On top of that the Bank of Japan is able to buy JGBs directly from the Ministry of Finance. All of the interest is returned to the MOF. So, continually rolling interest free loans are the equivalent of using fiat money printing to target interest rates. The Japanese government will never run out of money and their debt can be as large as they want it to be.

    What the author of this commentary doesn’t seem to realize is that ALL money comes from debt. We live in a debt-based monetary world. The governments that have the ability to issue their own currency (i.e. not Eurozone nations) can have an unlimited amount of debt and always find a willing buyer so long as people are willing to save their money.

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