Evans-Pritchard Telegraph article

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There is no operational support for this scenario. Comments below:

Global bear rally will deflate as Japan leads world in sovereign bond crisis

By Ambrose Evans-Pritchard

Jan. 5 (Telegraph) —

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

With non convertible currency this makes no sense. If deficit spending does generate excess demand and inflation short rates will rise if markets anticipate BOJ rate hikes as a BOJ reaction function to inflation.

Once the dam breaks, debt service costs will tear the budget to pieces.

That statement has no operational meaning. All payments in yen, dollars, sterling, etc. Are met in one way only- changing numbers upward in member bank reserve accounts. Operationally there is no ‘financial stress’ associated with this process.

Yes, excess deficit spending can cause the currency to fall and inflation, but to get out of a hole first you have to stop digging, and right now the currency is strong and deflation continues as the main concern.

The Bank of Japan will pull the emergency lever on QE.

A non event, apart from somewhat lower term rates.

The country will flip from deflation to incipient hyperinflation.

Not from QE. There is no channel from QE to the real economy, lending, or anything of consequence apart from (modestly) lower term rates.

The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom.

Yes, excess deficit spending can cause the yen to fall and inflation to increase via the import/export channels.

By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

China will also reach political limits only when inflation becomes a political problem.


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