New PM Warns Japan At “Risk Of Collapse” Under Massive Debt Load

Published on 06-11-2010
Source: Zero Hedge

A week ago Hungary had the unfortunate mishap of telling the truth when it compared itself to Greece, resulting in a massive selloff of the Forint and leading to fresh lows for the euro. Today, it is Japan which is using the very same strategy in an attempt to devalue its own currency. So far it’s working. The BBC reports that Naoto Kan has been a little truthier than the G-20 plenary sessions generally allow. We now look for the PM’s reign of truth to be even shorter than that of his thousands of predecessors during the past couple of years: “Naoto Kan, in his first major speech since taking over, said Japan needed a financial restructuring to avert a Greece-style crisis.”Our country’s outstanding public debt is huge… our public finances have become the worst of any developed country,” he said.” Obviously, none of this is news. However, the market certainly does not appreciate when it is told that what it sees day after day in the non-mainstream media is actually the truth and nothing but the truth. What next – Tim Geithner coming out to say that a downgrade of the US is actually long overdue?

More from BBC:

After years of borrowing, Japan’s debt is twice its gross domestic product.

“It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds,” said Mr Kan, Japan’s former finance minister.

“Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets,” he said.

Yet, just like with the SNB’s CHF intervention, the market did not respond at all to this, at least so far. Do the HFT algos need a realism translator when they are not focusing on ephemeral data such as consumer confidence (the US consumer is confident that after once again cutting spending, they may eventually buy that 5th iPad at some point in the future). Or does nobody even care about any fundamentals anymore? Is the entire market a bubble chamber where one bout of buying or selling is all that’s needed to set off the appropriate algo engines?

“Fiscal austerity measures are long overdue,” said Chris Scicluna, deputy head of economics at Daiwa Capital Markets in London.

He forecasts that the government’s budget deficit will be 8% of GDP this year, a number that Mr Kan has promised to reduce to zero by the end of the decade.

However, Mr Scicluna said the government does not face any immediate fiscal crisis, unlike some European countries, and probably will not start tackling its budget deficit for at least another year or two.

Unlike Greece or Spain, Japan is a net lender to the rest of the world, to the tune of 2.5% of its GDP last year.

Yet just as Albert Edwards has been pointing out for months now, grey clouds may be forming over Japan’s so far glitchless selling of trillions in bonds, courtesy of the relentless demographic shift:

Some 95% of the government’s debts are held by Japanese investors, and the government can currently borrow for 30 years at a mere 2% interest rate.

But Mr Scicluna says Japan does have serious medium-term problems related to its ageing population.

As more and more Japanese citizens retire in the next few years, they are likely to start selling their government bonds to pay for their retirements.

This means that Japan will need to start borrowing from the rest of the world, and the government may have a hard time convincing foreign lenders to let it borrow at such a low interest rate.

That’s ok Japan, we are confident that the ECB will be happy to buy up all your bonds as well. Just look at how well they performed in the past week when they were the bidder of first and last resort for all sorts of toxic Italian, Spanish and Portuguese paper. Better yet, you will soon be able to pledge your JGBs to J-C Trichet, whose balance sheet is increasingly starting to look like a used Charmin’ store.