[J_]

A lot of hedge funds (e.g. Kyle Bass and George Soros) think that we've reached a tipping point in Japan. Their government already spends 1/4 of all revenue on debt service because their debt is monstrously huge. If inflation happens, their debt bomb is going to go off because no one will want their money in low yield bonds in an inflationary environment. If JGBs (I've never heard them referred to by the JTB abbreviation before) move 200 basis points (which is what the government is targeting for inflation), the government's debt service will exceed revenues. Yields spiked 25 points in 3 days last week.

A debt crisis looks imminent. Kyle Bass is asserting that they're going to have to default and the value of the yen is going to plummet to something like 200 to the dollar. This is just the beginning of the end. Get your money out of yen.

[ddeck]

Bass' thesis is basically sound. Japan is well beyond the tipping point and as he notes, JGB yields will eventually become untenable for the government. Unlike the European nations facing similar issues though, Japan prints it's own currency. As such, it will never default. Given a choice between default and monetization, monetization is always the lesser evil.

So the central bank ends up just buying all the debt that can't be sold at sustainable yields. Net result is extremely high inflation and massive Yen devaluation (i.e. >200).

Impact on the population: - poor stay poor - rich stay rich as their wealth is in real assets - middle-class get wiped out.

This is the end game and is likely a few years away yet, but there seems little chance of any other outcome.

[hudibras]

"there seems little chance of any other outcome"

Except for Japan's economy to grow faster than its debt burden, causing its debt ratio to decrease. There's a denominator in that ratio, don't forget.

[rluhar]

I think there are real structural problems that need to be overcome for the economy to grow. Debt monetization is OK - but what about a shrinking population, stagnant productivity and very low immigration levels?

Japan's economy has got a nice jump-start due to the unprecedent monetary stimulus. But, as others have commented, there are also issues are energy prices and the negative effects of inflation. Japan still remains an expensive place to do business. I wonder where the economic growth will come from without further reforms.

[pyre]

  | very low immigration levels

It doesn't help that (politically at least), Japan treats immigrants/foreign workers with distrust (even though the terrorist attacks that have happened in Japan were by Japanese nationals).

[w1ntermute]

Abe's strategy does not end with quantitative easing. The whole idea is to use it to gain legitimacy in the short term that he can then leverage to force through structural reforms.

[ddeck]

Yes, it is possible. Which is why I wrote little chance rather than no chance. Given the magnitude of the debt however, it is a very unlikely outcome.

Consider that just to achieve close to zero GDP growth over the last nearly 20 years, the government has been borrowing and spending ~10% of GDP every year. It will require an enormous amount of growth to offset even that spending, and you're still at 0%.

[rluhar]

I have heard and read similar analysis. I reckon the Government could force the mega-banks and pension funds to just take the pain and keep hoarding JGBs. Not having to deal with external yield hungry investors has it's advantages.

I can imagine the government making an appeal to patriotism, which may be more successful in Japan than in other places.

[hudibras]

"If inflation happens...": that's a huge caveat you've got buried there.

Let me guess: You think I should buy either gold or bitcoins, right?

[J_]

I shouldn't even say if because it's happening now. The yen's fallen more than 20% in the past 6 months. Their government is printing 7 TRILLION yen every month for two years to force inflation. That's almost as much as the Fed is doing in an economy that's a third our size. I'd put my money in US stocks. I tend to think Buffet's right about gold being a lousy investment and really don't have any idea how bitcoins will do.

[hudibras]

The yen falling in value is a good thing. The targeted inflation rate is 2%, not exactly Weimar Germany.

I guess we're going to have to agree to disagree.

[J_]

It's not if you're Japanese and it causes a bond crisis. Their debt equals over 20 times their government's revenues. Even 2% inflation will cause yields to move and debt service to exceed government revenues. They will be forced to default or inflate. Either will cause the value of the yen to nosedive.

[daliusd]

What's is government's revenues? Isn't GDP we should worry about or that's what you have in mind?