Japan Will Follow Europe With a Debt Crisis: Kyle Bass

By Jeff Cox

May 10 (CNBC) — Japan is about to join Europe in the debt crisis ranks, with the two regions offering the best opportunities for investors to bet against, hedge fund manager Kyle Bass said.

While the world’s attention has been focused on sovereign debt issues in Greece and elsewhere, Japan will emerge as a problem area as well as the European developments accelerate, Bass told attendees at the Skybridge Alternatives, or SALT, conference.

“Greece will circle the drain and be ungovernable in the next 30 to 60 days,” said Bass, founder of Heyman Capital and famous for presciently shorting subprime mortgage bonds before the industry collapsed. “Japan is in the crosshairs of the market…I’ve never seen more mispriced optionality in my entire life.”

The Bank of Japan, the nation’s equivalent of the U.S. Federal Reserve, is effectively monetizing the national debt by buying up 50 trillion yen-worth of Japanese Government Bonds, commonly referred to as JGBs in the marketplace, Bass said.

There are a number of perils commonly associated with the strategy of a central bank trying to print its way out of a debt crisis, not the least of which is inflation and lack of confidence in stability of debt, though Bass did not mention specific threats.

However, he said it’s easy to see a crisis coming.

“The fact of the matter is this is no longer an exercise in quantitative analysis,” he said. “It’s a question of when, not if.”

An aging Japanese population and entitlement culture are primary factors contributing to the national debt problem. Bass used disgraced money manager Bernie Madoff to make a point.

“Madoff taught us something,” Bass said. “You can make promises for a long time as long as you don’t have to live up to them.”

Ed Rombach on US vs Japan

Click here for larger version

Main message: A policy deal may be brewing. The possibility may emerge that PM Noda would offer a BoJ Law change in return for LDP support for the tax hike bills.

The main opposition party, the LDP, has already drafted and begun deliberations on a bill to revise the BoJ Law. Meanwhile, the ruling DPJ’s committee on countermeasures for the strong yen has also discussed the same topic. These deliberations suggest that a deal may be possible between the two parties.

The content of both proposals is reportedly very close to that of the bill submitted in 2010 by Your Party – i.e. setting an inflation target and making the tenure of BoJ leadership dependent on not deviating too much from the target.

The outcome of Friday’s BoJ meeting will be important. If BoJ disappoints markets and the Diet, the forces in all parties that favor such a law change may accelerate their efforts.

Once the potential for a deal is clear, PM Noda may propose the deal to the LDP: “Pass my tax hikes, and I’ll support your BoJ Law revision.” If PM Noda were to make this proposal, I believe that the LDP would accept.

Should such a deal pass, the impact on the equity market would likely be highly positive. In my talks with clients, they put far more weight on the BoJ than on the tax hike.

And it’s moving the euro zone closer to the waterfall.

OECD Head Urges Japan To Fix Finances, Hike Consumption Tax

By Kelly Olsen

April 25 (Bloomberg) — The head of the Organization for Economic Cooperation and Development said Wednesday that Japan must get its fiscal house in order, and he supports the government’s plan to raise the consumption tax to help achieve that.

Doubling the consumption tax to 10% by 2015 “is an important step,” Angel Gurria, head of the Paris-based organization, said in a speech.

The government of Prime Minister Yoshihiko Noda submitted legislation to parliament in March that would raise the consumption tax from the current 5% in two stages. But the plan has come under fierce criticism from opposition parties and members of Noda’s own ruling Democratic Party of Japan who fear it may damage the fragile economic recovery.

Gurria said the fiscal situation requires action, pointing out that while Japan’s public debt, at more than 200% of gross domestic product, has so far been manageable given relatively low interest rates, that may not always be the case.

“Japan is vulnerable to a run-up in interest rates,” Gurria said. He said the debt situation is in “uncharted territory.”

During a question-and-answer session, Gurria was asked if he would favor raising the consumption tax before 2014 by one percentage point a year.

“I think it makes sense,” he said, noting it would start generating revenue faster, could be combined with adjustments to other taxes, and suits the gradual nature of Japan’s politics. “I think it has less risks than the present formulation,” he said.

Obama

By Paul Panckhurst

April 22 (Bloomberg) — Japan’s absence of “concrete reform plans” for the nation’s finances may be contributing to deflation and sluggish economic growth by discouraging spending by the public, central bank Governor Masaaki Shirakawa said.

Consumers may be limiting spending “on concerns over future fiscal developments,” Shirakawa said in remarks prepared for an event in Washington yesterday. This may be “one factor behind sluggish economic growth and mild deflation,” he said.

The Bank of Japan is under pressure from lawmakers to step up its attack on more than decade-long deflation as the government seeks to sustain a recovery from last year’s earthquake and economic contraction. Shirakawa has pledged to extend “powerful” easing until a 1 percent price goal is in sight and his policy board next meets on April 27.

The nation’s borrowings will exceed 1,000 trillion yen ($12.4 trillion) for the first time in this fiscal year, the Finance Ministry projects, while the Organization for Economic Cooperation and Development predicts Japan’s public debt will reach 219 percent of gross domestic product.

Shirakawa said yesterday that stability in Japanese government bond yields shows investors’ expectations that “fiscal soundness will be restored through structural reforms in both the economic and fiscal areas.”

“At the moment, such expectations are not firmly backed by concrete reform plans,” he said.

BOJ’s Shirakawa: Fully Committed To Asset Purchases To Meet 1% Inflation Target

By Chana R. Schoenbergrand and Stephen L. Bernard

April 18 (Dow Jones) — The Bank of Japan remains determined to purchase more assets to meet its 1% inflation target, the central bank’s governor, Masaaki Shirakawa, said Wednesday night in New York.
“The Bank of Japan is fully committed to continuing powerful monetary easing through various measures, including maintaining the policy interest rate at practically zero and purchasing financial assets, until the current goal of year on year CPI inflation at 1% is deemed to be achievable,” Shirakawa said in his speech to the Foreign Policy Association.

But Shirakawa warned of the potential mismatch between what markets expect and what central banking policies can deliver.

BOJ Easing Would Trump Intervention in Weakening Yen, Okubo Says

By Mayumi Otsuma and Kyoko Shimodoi

April 11 (Bloomberg) — Further stimulus by the Bank of Japan would be more effective in weakening the yen than currency intervention, a ruling party lawmaker said, a sign politicians will continue to press the BOJ to do more.

“It’s obvious that the central bank’s policies have more influence over the currency than intervention,” Tsutomu Okubo, a Democratic Party of Japan lawmaker, said in an interview in Tokyo yesterday, citing the yen’s depreciation of more than 4 percent against the dollar since the BOJ added stimulus Feb. 14.

The BOJ refrained from easing policy at a meeting on April 10, spurring calls from DPJ lawmakers including Takeshi Miyazaki for them to undertake “bold and large-scale” action when they gather on April 27. The BOJ’s February decision to increase its asset-purchase fund helped weaken the yen close to an 11-month low against the dollar on March 15.

“Interventions are effective in correcting extraordinary and speculative currency moves, but they aren’t very good at addressing structural and long-term problems,” said Okubo, who’s the deputy head of the DPJ’s policy research council and a former managing director at Morgan Stanley. “It’s obvious what kind of actions the Bank of Japan (8301) should be taking.”

Japan Must Overhaul Taxes to Avoid Bond Rout, Bank Lobby Says

By Shigeru Sato and Takako Taniguchi

April 1 (Bloomberg) — Japan must avoid delaying an overhaul of the tax system to prevent government borrowing costs from spiraling in the next decade, the new chief of the country’s banking lobby said.

“The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years,” said Yasuhiro Sato, president of Mizuho Financial Group Inc. (8411), whose tenure as chairman of the Japanese Bankers Association began today. “The country’s financial assets are dwindling with the aging population dipping into savings.”

Japanese banks hold a record amount of the nation’s bonds, prompting central bank Governor Masaaki Shirakawa to warn in February that lenders risk incurring trillions of yen in losses if yields rise. Prime Minister Yoshihiko Noda faces opposition to his plan to double the sales tax by 2015 to pay for swelling welfare costs and contain the world’s biggest public debt.

“Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022,” Sato said in an interview last month. “But there are no signs of a JGB price plunge in the near term.”

Japan’s 10-year bonds yielded 0.985 percent late on March 30. The cost to insure Japan’s debt against nonpayment has been falling, with CMA data showing five-year credit default swaps declined to 98.6 basis points on March 29 from a record 154.8 on Oct. 4, indicating perceptions of creditworthiness are improving.

Hoarding Cash

Shirakawa said in February that a 1 percentage-point increase in benchmark yields would cause losses of about 3.5 trillion yen ($43 billion) on notes held by major banks. With households and companies hoarding cash rather than borrowing, lenders have been buying bonds, holding a record 167.8 trillion of sovereign debt in February, according to central bank data.

The International Monetary Fund dispatched a mission to Tokyo last month as part of a regular review it’s conducting this year into the stability of Japan’s financial sector. While the IMF’s Financial Sector Assessment Program contains a stress test for banks, brokerages and insurers, it’s unclear whether it will examine risks from their government bond holdings.

“Japan’s financial system is strong and stable,” Sato said. “It’s hard to imagine that the IMF would make any kinds of requirements for Japan” based on any examination of bonds held by financial institutions, he said.

Bond Profits

The nation’s three biggest lenders — Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Sato’s Mizuho — earned a combined 231 billion yen from trading bonds and other securities in the quarter ended December, almost double from a year earlier, according to Bloomberg calculations based on their latest earnings figures.

Japan’s government bond sales have largely been absorbed by the domestic market, with about 92 percent of the debt owned by investors at home, central bank data show. The capacity of households to fund public spending may decline in coming years as the growing ranks of pensioners withdraw assets.

Households had 1,483 trillion yen of financial assets at the end of December, down 0.3 percent from a year earlier, according to the Bank of Japan. Government borrowings will climb to 1,086 trillion yen in the year ending March 2013, the Finance Ministry forecast in January.

Prime Minister Noda is seeking parliament’s approval of his tax bill in the current Diet session, while opposition Liberal Democratic Party leader Sadakazu Tanigaki has suggested elections should be called first. Noda’s Cabinet on March 30 approved the proposal to raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015.

“Japanese banks conduct their own simulations and assessments of various risks such as those arising from bonds and stocks,” Sato said. “We are now far from the situation where a bomb may explode in the near future.”

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.