To Help Japan- Sell The Yen
By Prieur du Plessis, Seeking Alpha
Although the debt malaise in Greece has (temporarily) been addressed through an EU/IMF agreement of sorts, sovereign debt concerns will remain on center stage for quite a while.
Besides the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), the debt situation of Japan is a lingering worry and not without reason as it is the G8 country with the highest debt-to-GDP ratio – clocking in at more than 200%. Needless to say, twelve consecutive months of deflation are compounding the problem.
Commenting on the difficulty Japan may be facing to fund debt issues in future, Niels Jensen (Absolute Return Partners) said:
The first country to really feel the pinch could very well be Japan; in the bigger context, Greece is just the appetizer. Japan’s debt-to-GDP ratio has grown from 65% in the early 1990s when their crisis began in earnest to over 200% now. Fortunately for Japan, the high savings rate has allowed shifting governments to finance the deficit internally with about 93% of all JGBs held domestically. This is the key reason why Japan gets away with paying only 1.3% on their 10-year bonds when other large OECD countries must pay 3-4% to attract investors.
I often hear the argument from the bulls that the Japanese situation is sustainable because they, unlike us, are a nation of savers. Wrong. They were a nation of savers. Looking at the chart below, it is evident that the demographic tsunami has finally hit Japan. The savings rate is in a structural decline and the Ministry of Finance in Tokyo may soon be forced to go to international capital markets to fund their deficits. I very much doubt that non-Japanese investors will be as forgiving as the Japanese, and that could force bond yields in Japan in line with U.S. and German yields. Herein lies the challenge. Japan already spends 35% of its pre-bond issuance revenues on servicing its debt. If the Japanese were forced to fund themselves at 3.5% instead of 1.3%, the game would soon be up.