“The following is taken largely from the newletter of John Mauldin”
After the collapse of what might still be the largest economic bubble in history, in 1989, Japan is still mired in a 24-year non-recovery. Nominal GDP in 2011 was almost exactly what it was 20 years earlier, in 1991. You can find other ways to measure nominal GDP which indicate limited growth; but compared to the US and China, nominal growth in Japan has been virtually non existent.
Japan’s gross debt to GDP ratio is expected to top 245 per cent this year, according to estimates by the International Monetary Fund – which is considered to be “ridiculously high”.
They cannot continue to grow their debt at the current rate. There is a limit. No one knows for sure what that is, but it is getting closer. And they know it. So they have to get their fiscal deficit below the growth rate of nominal GDP.
If JGB (Japanese Government Bonds) interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt. Even a 1% rise would be fiscally devastating.
The Abe government plans to raise taxes. Japan’s current sales tax is 5%, due to increase to 8% next year and 10% by 2015 with hopes of generating further revenues , but this will also hurt consumer spending. So round and round it goes.
The government of Japan has no choice. Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it may just bankrupt the financial system and quite possibly trigger hyper-inflation, and at this point – there is no turning back.
I’m watching this closely as my theory that the “EU Zone” would be our catalyst for “global fireworks ahead” may very well be replaced by Japan as this is developing extremely quickly.
I believe the “easy money” short JPY is now gone, and am currently positioned “long JPY”.
Nice call Kong! The Nikkei is down a wopping -2,500 points since your post : https://forexkong.com/2013/05/25/nikkei-20-year-chart-rejection/