Why is Japan not in a crisis?

once their exporters (EU) go, they too will go.

The world is looking at a huge equity correction in my books. The numbers have to go back to levels before everyone andhis dog had a credit card.

once their exporters (EU) go, they too will go.

The world is looking at a huge equity correction in my books. The numbers have to go back to levels before everyone andhis dog had a credit card.

While I would agree Japan is in a rough patch, I don't think it will last that long. A combination of cheap debt and a strong yen is fueling a government supported cross-border acquisition feeding frenzy. Things around town are very active, unless your Nomura.

Japan's aging population is not the elephant in the room, that badge belongs to China.

Don't forget that they are also the world's largest creditor nation.

An amusing consequence of their aging population is that Japan technically had the largest per capita GDP growth among developed nations in recent years.

Kyle Bass, is that you?

The Euro crisis is causing a massive flight to safety that is giving both Japan and the US a little bit more road for us to kick the can down. Eventually people are going to wake up to this con. Untill then, enjoy the show.

Don't forget that while Debt ratio to GDP is at 200%, most of their debt is internal debt which completely changes the perspective...

Their 200% debt is far more sustainable than a 90% foreign debt.

Bro, I'm not rubbing salt in the wound here because believe me, I feel your pain. Just remember that the market can remain irrational much longer than you can remain solvent.

It isn't enough to be right about something. The rest of the market has to be willing to be right as well.

What's your trade? "Short exposure to the Japanese economy" is not a well-formed investment thesis.

Short JP equities with EU exposure

Legally you can't buy CDS on JP government bonds

Yeah echoing what HorBust said-there are some different trading laws concerning asians currencies and cds so you need to take that into consideration when investing.

This was a question at my D.e shaw interview when we were talking about this-how would I trade considering their regulations.

The thesis is the same it has always been for the last twenty years:

Japan has the highest gov't debt to gdp ratio with the lowest cost of borrowing in the world, 95% of the bonds are held domestically and the population is rapidly aging so the elderly / pension funds will need to draw down and savings and will not be able to repurchase the gov't bonds as they come due. Once the gov't is forced to place JGB's abroad, foreign investors will demand a higher interest rate and the cost of servicing the debt will exceed tax revenues.

I do think it's an inevitability but it may take longer than everyone expects because (1) the accumulated savings from 20+ years of current account surpluses are enough to sustain them for a while and (2) there is a lot of room for the tax rate (and gov't revenues) to increase, most likely through a consumption VAT, but there hasn't been the political will to do so up to this point.

You could also make an argument this scenario will play out sooner than later b/c sovereign debt is now in focus and the savings rate and current account is approaching negative.

If this is your same thesis, I would not recommend going short Japanese equities through some kind of inverse leveraged ETF. The immediate affect of increased JGB yields will be a depreciating currency and since Japan's economy is so weighted towards exports, a rising yen would support their largest industries. Also, the Nikkei has been in a multi-decade bear market and p/e ratios are among the lowest in the world.

Full disclosure: I'm short the yen.

I'm still not sure if I'd rather be in EWV or YCS

coordinated global CB action to get key politicians through this election year. all equities are going to pop in nominal terms while losing ground when priced in commodities.

This is something I have analyze couple years ago when I was heavy in currency trading. Here is why Japan is not exploding and will not: 1) Japan can borrow at the cheapest cost in the world. Why? - Japan doesn't have any inflation, actually they have had sustained deflation the past 3 years. - Basically, it makes better sense to put money on Japan's debt (with 0.1% return) than letting it work in the real world (not stock market), with an average of -1% 2) Because the cost of borrowing is closed to zero, the currency strengthens 3) Currency strengthens also because of net export (generally for Japan)

In a nutshell Japan, can keep moving forward with debt because it's return is higher than inflation.

US Debt to GDP is around 100%...so, it's pretty much a worthless metric. Japan's problem is demographics...the beautiful women of Japan don't want offspring

You're missing the point... 95% of outstanding debt is kept by domestic (Japanese) debt holders. The probability of a selloff is therefore relatively limited. You have to look at it from a cultural perspective, don't underestimate that. Japanese investors won't dump their sovereign debt holdings on the markets as it's the case for the European periphery.

The strong yen despite constant QE by BOJ will really kill the Japanese economy imo. The first trade surplus since 2 decades is a worrisome sign. Methinks the day of reckoning is coming soon.

Printing money won't squeeze the Japanese conumsers, because demand isnt strong enough to fuel inflation. Rather, They've been constantly experiencing a deflation, and money easing has been affecting their income, and not prices of goods, because of financial repression.

A few things. First, that is just about the worst way to be short Japan. Not only do you get the decay from a 2x levered ETF, but I highly disagree with the view that shorting the Nikkei is the optimal exposure for a Japan bear.

Second, as others have said, the Japan bear thesis has been around forever, and as the cliche goes, trading floors are littered with the bodies of those that tried to short Japan. If you do real work around the fundamentals in Japan, you will come to see that it is a bizarre place where the normal rules don't apply. This is exhibited from the micro level (look at the leverage and cash flow profiles of many Japanese Corporations) and builds all the way up to the incredible imbalances in the government. Of course, I do believe that anything that is inherently unsustainable will not be sustained, but the problem here is that it has been going on for so long, the system has built itself around it and there is a great amount of inertia, thus it will take a truly massive catalyst to get things moving in the right direction. Once the move does start, it should be pretty juicy, so that is why it feels okay to miss some of it.

Third, my opinion is that this is a move where it is better to let the party get started first and hop on the trend. I'm all for trying to call tops and bottoms, it is exhilarating when you can get in just early enough that you don't get your face ripped off and can ride most of the move, but I believe that trying to call the turn here is not a good risk-reward.

Fourth, I think that either shorting the yen or shorting JGBs are the optimal expression of a Japan bear. The Yen bear thesis has a few ways to win, including i) massive monetization of JGBs as domestic absorption capacity slowly declines and the balance tips ii) massive intervention to weaken the Yen iii) massive money printing to stimulate the economy and create inflation, amazingly the BoJ has considered buying assets such as corporate paper, REITs and even ETFs iv) hollowing out of Japanese manufacturing.

Here is some quick math around Japanese manufacturing that I just dreamed up, it is raw so I'd love to hear other's thoughts on this. All numbers are USD to make it simple. Imagine a Japanese factory. It costs 100mm to build, does 50mm in annual revenue and 10mm in annual EBITDA. The products that it produces are exported to the US. There are no external raw materials needed (for the sake of simplicity). Thus, it generates 50mm of export revenue in USD per year, while incurring 40mm of costs in Yen. As a result, there is a 50mm recurring bid on Yen every year, and it adds 50mm to Japan's trade surplus. Because everything in Japan is so uncompetitive, the factory shuts down. Its owners use saved up capital to purchase an identical factory abroad. It is purchased at cost, so there is a one-time transaction of 100mm worth of Yen offered against USD. Let's say this factory has a slightly better margin profile (to be generous). It does 50mm in annual revenue and 15mm in annual EBITDA. Now, this factory generates 50mm in USD revenue and 35mm in USD costs. Thus, there is only a 15mm recurring bid on Yen every year. This 15mm in profit that is repatriated to Japan goes into the income account. All in all, the impact is i) 35mm of recurring bid on Yen is vaporized ii) one-time transaction of 100mm worth of Yen offered against USD and iii) current account surplus declines by 35mm.

Of course, this example is unrealistic in some ways, but I just wanted to demonstrate the mechanics of Japan's manufacturing base getting hollowed out. This is not something that will happen overnight, Japanese companies care greatly about social stability and creating employment (at the expense of shareholders), but at some point there is a limit to how much pain they can endure. At the same time, Korean companies are moving up the value chain, threatening markets that had once been very safe (LCDs are the obvious example, but also high value ships like LNG carriers and FPSOs, lithium-ion battery separators, etc). The KRW is much weaker and Japanese companies do not fare well when in direct competition. The hollowing out will happen slowly and gradually, and as a double whammy, this will hurt the domestic economy, which will create the need for monetary stimulus.

When the Yen finally goes down, equities are likely to get a bid. In addition, it is scary to short something that has pretty much been in a bear market for 20 years, at some point, generational change will create more enthusiasm for equities in Japan. I haven't really addressed the JGB market, but that is a whole new can of worms, and this post is long enough.

I read whatever I can find on any opportunities for asymmetric trades, so the following may be helpful. I'm not as knowledgeable as Macro, or a lot of people on this forum, but I've looked for what the institutional players are doing along with how us retail investors (man I hate that term) can get involved.

From my understanding, one of the main instruments Kyle Bass is using to short JGB's are Swaptions pegged at 3%. I believe he got these through one of the larger banks, at approx. 11 basis points. The great risk reward perspective stems from the built in pricing absurdity of the Black-Scholes model. David Einhorn also bought long dated options on higher interest rates back in 2009.

I found options on futures for JGB's on the Singapore exchange, the problem is that these are very short duration. As discussed above, the timing on this one is tricky since catalysts could include Euro sovereign debt issues, unforeseen aftereffects of the earthquake/tsunami, or something slower like liquidation of savings by the aging population. Let alone any Black Swan events such as wars in the neighborhood.

Anyone else have ideas on how we could play this while preserving the asymmetric potential??

Keep shorting Japan, and you won't be making any money. Not that you would make money going long Japan (who knows...?) , but the Japanese debt crisis is nonsense, and shorting Japan because of it is a terrible idea. Perhaps because of demographics, manufacturing or whatever other reason, but don't do it because of "debt".

It's funny that for a board filled with Ivy League econ majors, nobody seems to know anything about economics. The monetary systems under which EU nations such as the PIIGS operate, are completely different to the USA's, Japans, UK's, Australia's, etc. Japan is sovereign in its own currency, which is a non-convertible fiat with a floating exchange rate. Japan will not, and can not, ever go broke. (Afterall, how can a currency issuer run out of that which it issues?). The debt-GDP figure does not suggest anything about solvency, but rather about non government sector savings relative to GDP. And if you guys really understood economics, you'd know that the issue of government securities does NOT fund government spending, and nor does taxes for that matter. This last statement is true for currency issuers such as Japan, but not for users such as Greece.

This is why Euro nations, which have significantly lower debt-GDP ratio's than the likes of Japan, have higher bond yields.

And no, Japan will not experience inflation from "money printing". Again, if you understood economics you'd know that all government spending is by definition "money printing" or "button pressing" or "debiting and crediting", and that quantitative easing does not exert an inflationary bias as it does not alter the total net financial assets of the non government sector, nor the ability of banks to lend. It merely swaps longer duration financial assets for shorter duration financial assets.

Im thinking of going Long CAD/JPY and Short EU/JPY (as a hedge) any thoughts?

When exactly did finance turn into fortune telling?

Here is some interesting commentary from seeking alpha on this developing situation:

The problem of Japan

But a much bigger problem may be Japan, and I am surprised that no one seems to be discussing the very adverse Japanese impact on the future development of global trade balances. Japan, as everyone knows, has an enormous debt burden that is only made manageable because it is financed domestically at extremely low rates. Here is Peter Tasker of the Financial Times on the subject:

When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 per cent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt has swollen to a sumo-sized 200 per cent of GDP.

How did it get from there to here? Not by lavish public spending, as is sometimes assumed. Japan’s experiment with Keynesian-style public works programmes ended in 1997. True, they had failed to trigger durable economic recovery. But the alternative hypothesis – that fiscal and monetary virtue would be enough – proved woefully mistaken. Economic growth had been positive in the first half of the “lost decade”, but after the government raised consumption tax in 1998 any momentum vanished. Today Japan’s nominal GDP is lower than in 1992.

Tokyo is clearly worried that it is running out of time to manage the debt, and the indications are that it has finally become serious about reducing its debt burden. What’s more, Japan’s current account surplus has already contracted substantially in the past two years, and in January it ran the biggest monthly trade deficit it has ever run – $5.4 billion, although the early Spring Festival this year may have distorted the number.

This January deficit comes on the back of Japan’s 2011 overall trade deficit, the first time Japan has had an annual trade deficit in many decades. If Japan runs a current account deficit, of course, it means that Japan must turn to foreign sources to finance government debt – a very unwelcome prospect.

How can Japan reduce its debt? I am no expert on Japanese policies, but according to much of what I am hearing Tokyo is planning to raise taxes further, especially consumption taxes, and to use the proceeds to pay down the debt. According to an article in the Financial Times that appeared two months ago;

The government and the ruling Democratic party of Japan agreed on Friday on a draft plan to raise the country’s controversial sales tax from 2014, taking a key step towards improving the country’s stretched finances.

Prime minister Yoshihiko Noda has faced an uphill struggle to convince some members of his own party, the opposition and the public that the tax is needed to help restore Japan’s fiscal health at a time of global fears over sovereign debt. The tax has been opposed on the grounds that it could damage an already weak economy. The consumption tax, which is the government’s most stable income stream at about a fifth of total revenues, has long been an obvious candidate for reform.

In addition, Tokyo and the business community are putting downward pressure on wages in order to increase the competitiveness of the tradable goods sector. Here is another article from the Financial Times:

Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes. And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth.

The National Tax Agency says average annual salaries, including bonuses, fell in nominal terms every year but one in the decade to 2010, sliding from Y4.61m to Y4.12m. The Japanese Trade Union Confederation (Rengo) says the average size of workers’ bonuses has fallen from a peak of 4.27 times monthly salaries in 1992 to just 2.83 times in 2010.

More recently, a faltering of Japan’s recovery from its deep 2008-2009 slump is threatening to further tighten the screws. Total cash earnings for Japanese salaried workers were down 0.2 per cent in December compared with the previous year, while special payments, which are mainly winter bonuses, fell 0.3 per cent.

Japan reverses course

Yikes! This could turn out to be a huge problem for China and the world. Why? Because raising consumption taxes and reducing wages will push up the Japanese savings rate substantially. Either action pushes the growth rate of disposable income down relative to GDP growth, and lower disposable income usually means lower consumption – which is the same as higher savings.

These policies will probably also reduce the investment rate. Lower Japanese consumption, after all, should reduce business profits and so reduce the incentive for expanding domestic production, while pressure for austerity should restrain or even reduce government investment.

By definition, more savings and less investment mean that Japan’s trade surplus must rise. Japan, in other words, is planning to move backwards in terms of rebalancing. Remember that until 1990, Japan had the same problem that China did: its rapid growth was largely a function of policies that transferred wealth from the household sector to subsidize growth.

These policies – an undervalued currency, repressed interest rates and low wage growth, which of course are the same as China’s – restrained consumption and encouraged debt-fueled investment. This investment, we now realize, was wasted on a massive scale and the eventual government absorption of all the bad debt caused government debt to rise.

After 1990, Japan began the slow rebalancing process, but rather than privatize assets and transfer wealth directly to the household sector, the Japanese did it by having the government assume private sector debt. This was politically much easier than privatizing and removing interest rate and capital allocation distortions, but it also meant much slower growth and burgeoning debt.

Now Japan is faced with the same difficult options that it faced twenty years ago and that China faces today. It can privatize government assets, or it can revert to the bad old days of consumption constraining policies. But if it constrains consumption growth and does not replace consumption with a surge in investment, how can it possibly grow except with explosive growth in the trade surplus? Domestic consumption, domestic investment, and the trade surplus are, after all, the only sources of demand growth for any economy.

Your thesis is shit and short sighted at best.

A word of advice, never repeat what you just said above. It makes you come across as someone who reads but doesn't understand.

At least I've expressed a thesis (although the above post was just something I came across from seeking alpha) in some form to be discussed and critiqued by others on this board.

A word of advice, stop acting like a complete pussy flexing your internet muscles. Why don't you get some brave balls and state your thesis and add some value to the forum.

Muppet

http://finance.yahoo.com/blogs/daily-ticker/gary-shilling-japan-train-w…

This another interesting video with Gary Shilling

Maybe YCS is the place to be for now.

OP might be trolling... EWV is the biggest POS i could find w/r/t Japanese exposure. Forget the fact that you have to deal with decay since its a leveraged ETF, but the exposure (synthetic) is horribly wrong most days, as the stock is super illiquid and most days only trades a single 100-200 shares - and thats just to be able to have a print go off!

Anyway i realize post is from 2 months ago but someone bumped this so just had to respond here..

I actually think we are on the verge of a massive Nikkei bull market. Sell it at your own peril, but the yen and jgbs should be a fun time to get rid of. If you want to bet on policy induced inflation, buying equities is a good idea because capital appreciation is politically acceptable unlike commodities or rising rates. In the long run they are boned but we have to get there first.

Good point Cash4gold.

Macro I agree with most of what you said but it's japanese politicians-not the BOJ who desperately want inflation. BOJ follows suit largely because they agree too-but also because they don't want to be stripped of their status within Japan.

BOJ did make some statements recently about not pursuing a QE policy. Don't believe it-though for now they are sitting tight (supposedly).