Any experts on Japan?

[Phoenix01]

Kyle Bass seems to have done his homework and has a high conviction that Japan is with 2 yrs of a debt default.  I know that FFH is also really concerned about Japan (informal discussions during the 2013 FFH AGM).

 

Do you have any other sources that can provide further clarification on the current Japanese situation?

[Guest]

I'm not an expert on Japan (or really much of anything for that matter!)

 

This is just conjecture on my part. But if Buffet is right and we work on roughly 16 or 17 year cycles, a Japanese default (within 2 years), China real estate bust, massive debt of the US (and other developed countries) would all fit quite nicely with that framework. A bear market from 2000-2016/2017. That would give us two or three years of a brutal bear market to get us down to super low valuations. Perhaps will get another "death of equities scare" after 16+ years of negative returns, defaulting major economies, broken real estate market, etc. Probably not gonna happen...but if it does, well, even a blind squirrel finds a nut once in a while!

[Mephistopheles]

I don't know much about Japan, but can't they just print money like the U.S. and therefore never default?

[Guest]

I don't know much about Japan, but can't they just print money like the U.S. and therefore never default?

 

Russia defaulted back in 1998 and they printed their own currency.

[ERICOPOLY]

I don't know much about Japan, but can't they just print money like the U.S. and therefore never default?

 

Russia defaulted back in 1998 and they printed their own currency.

 

However, Russia inherited most of that debt from the Soviet Union -- and it was owned by foreigners.  Compare that to Japan where most of the debt is owned by Japanese.  Default on yourselves? 

 

That would start a banking crisis because the Japanese banks own a lot of it.  So in a sense the government debt is assets in the private sector -- default and you have a sudden vanishing of assets, and then maybe the deflation comes back again?

 

So when you default on a foreigner, you get debt service relief.  But when you default on your private bondholders, you might get a collapse... or at least it would seem a bigger one (since no/few foreigners are sharing the pain).

 

[Packer16]

If its owed to its citizens couldn't the gov't just tax them to get the money, print more yen or alternatively reduce the services provided?  I think owing debt to your citizens is better than to foreigners.

 

Packer 

[oddballstocks]

Kyle Bass has a great story, I believe he's been pumping this one for a few years now, at least two already.

 

Here's the question I'd have.  How does he explain what has already happened there?  No one predicted what would happen when it did, why haven't they defaulted already?  Why are conditions the way they are?  What did people miss when they made macro predictions about Japan 5/10/15/20 years ago?

 

Kyle Bass is a master marketer.  He has his mortgage in Yen and has a tiny short position on Japan.  I wouldn't be surprised if he didn't even care if the position paid off.  The publicity he's received, and the publicity his fund has received is priceless. 

 

What's always bugged me about Bass is how he's rooting for default and unrest in Japan.  I never liked people who were cheering for bad things to happen.  It's like wishing a terrible car crash or horrific death on someone.  Yes people make mistakes, companies make mistakes, and countries make mistakes.  I'd rather hope for a solution rather than wishing ill on anyone..

[Kiltacular]

The last three posts on this matter are an important reason why I think this board is good. 

 

Together, the three posts cover the gamut of what the story for Japan on this matter actually amounts to.  In shorthand:  1) It doesn't make sense / (2) It doesn't make sense for this additional reason and / (3) here is a reason that someone who should understand #'s 1 & 2 might still say what Bass is saying.

 

I'd add a minor corollary on the "why would Japan default on itself?/It wouldn't" idea.  This idea seems so obviously correct on its face but others seem not so sure). 

 

In any case, if true, the corollary is that: it is unwise to loan money in your own currency directly to countries that can print their own to pay you off unless the reason for doing so is entirely political.  It is easier to come up with more reasons why a business might want to lend to another business across currencies where the debtor resides a in country that can print.

However, the list is short and all the good reasons find borrowers with similar qualities in economically similar countries.

[frommi]

I am not an expert, but isn`t it obvious that Japan is trying to inflate its debt away?

Inflation is picking up in Japan, so this seems to work. We can argue now if that will lead to hyperinflation in the end, but at the moment this is pure speculation without facts.

Wages rise -> tax incomes rises -> debt can be reduced, but this takes decades to play out. I don`t see a reason why they should default.

[frommi]

And btw. when looking for the next country to default you should probably look closer at europe. Ukraine, italy and greece are in my opinion close to one, the EZB has lost most of its weapons and politicians here are more and more thinking about not bailing out anyone anymore.

[Guest]

Eric, Packer, and Nate, I think you guys are right. Thanks for (still) keeping me out of trouble! :)

[rogermunibond]

http://blog.mpettis.com/2013/11/will-debt-derail-abenomics/

 

Highly recommend Michael Pettis on this subject as well as China matters.

 

Abenomics success creates problems with debt and interest servicing.  Either cuts, new taxes, or asset sales would balance Tokyo's books. This is a medium term situation.

[Phoenix01]

Rogermunibond,

 

Thank you for the link.  I will need to re-read it a few times to full understand all the ideas that are discussed.

 

Regards

[randomep]

I don't know much about Japan, but can't they just print money like the U.S. and therefore never default?

 

Russia defaulted back in 1998 and they printed their own currency.

 

 

Big difference between Japan and Russia. Japan has a monster foreign reserve so no one can cause a run on the Yen.  The Japanese can buy whatever they want in the world markets at reasonable Yen prices, eg. oil. So long as there is no run on the Yen, the Japanese money printing is not a problem. Also the world wants Japanese products so there is Yen demand. So long as the Japanese are productive people will want their products and pay yen. Thinking of debts too long term is not useful when looking at Japan and US. Ultimately it is a big ponzi scheme looking out 30yrs.  People price Yen based what they can exchange for it today, the Yen is very liquid, it is productive etc. Maybe if Japan stagnates and becomes unproductive (big if) then the yen 30yrs from now will be almost worthless.

 

Now the Russia situation is very different. Here is a country that is just out of communism and they need foreign capital, and what do they have to offer? not much, esp. when you remember the price of oil back then in the late 90's. So the Roble collapsed because nobody wanted it. Russia was offering huge interest rates to attract foreign capital, which causes inflation. If they kept borrowing and raising interest rates and printing money eventually Roble will be like the Zimbabwae currency.

 

 

[Green King]

nice thx for the note.

 

:D

[PJM]

Its game over for Japan in pretty much all scenarios. The debt levels are too high that neither money printing nor inflation can save it. Currently almost 1/4th of govt revenues are spent only on servicing the debt. The issue is Japan is more structural rather than just fiscal or monetary.

 

Tax: There are more people consuming social/pension benefits than contributing to taxes. Japanese people dont want to get married or have children. Firms like Toyota are running campaigns to push employees to go home early and create children (yes, they call it creating children), Japanese government gives monthly cash allowance for each child until 15 years old, but in vain. Japanese people dont invest their own savings into Japanese assets because they don't have any faith in its economy. A future hike in sales tax will surely bring down consumption further

 

Debt: As someone rightly mentioned that most of the debt is held domestically in Japan. However there are no takers for new debt that Japan wants to raise every year just to service its old debt. Japanese government has been running campaigns trying to promote individuals to buy these debt but in vain (http://punitmittal.blogspot.com/2011/12/japanese-women-are-super-attracted-to.html). Japanese corporations and pension doesn't have surplus funds to invest further in Japanese bonds. Foreigners are not interested given the low yields and massive debt size. The BOJ has already exhausted interest rate weapon as rates are almost zero and 3% increase in rates would mean that all tax revenues are used just to service the debt.

 

Yen: Trade deficit and current account deficit is on a rise. This is because Japan is increasingly becoming an importing nation rather than exporting. Its a myth that there is high demand of Japanese products and in turn the yen. Most Japanese companies such are now manufacturing the products outside Japan (and in the countries where the products are consumed) so only a certain portion of funds are repatriated back and as such tax paid on them. Labor laws, corporate cross holdings and rigid policies are making them incompetent and benefiting taiwanese, Chinese and korean companies. Rising energy costs is putting increasing burden on the yen, which should continue going forward.

 

Inflation: Government's inflation target is only going to back fire because it will result in negative real returns, thereby investors asking higher returns on the bonds. In the past BOJ has even tried printing money and just handing it over to individuals which all disappears under the mattress or in foreign assets because the Japanese people have no confidence in its own government and/or monetary situation.

 

To top all this, the Japanese society is very rigid and does not want to make any structural changes, just like the Japanese corporates making them extremely incompetent in this ever changing world.

 

My two cents from my 12 years life in Japan.

 

 

 

 

[Packer16]

You bring up interesting points but somebody is buying the bonds or the price would plummet, no?  I think alot of the money in the banks is being invested in bonds, no? Do you think the Japanese will withdraw money from the banks and put it somewhere else?  If you look at the one historical example is the US/UK after WWII.  How was that debt removed? via inflation.  So why can't Japan inflate its way out of its debt problems?

 

Packer 

[oddballstocks]

Its game over for Japan in pretty much all scenarios. The debt levels are too high that neither money printing nor inflation can save it. Currently almost 1/4th of govt revenues are spent only on servicing the debt. The issue is Japan is more structural rather than just fiscal or monetary.

 

Tax: There are more people consuming social/pension benefits than contributing to taxes. Japanese people dont want to get married or have children. Firms like Toyota are running campaigns to push employees to go home early and create children (yes, they call it creating children), Japanese government gives monthly cash allowance for each child until 15 years old, but in vain. Japanese people dont invest their own savings into Japanese assets because they don't have any faith in its economy. A future hike in sales tax will surely bring down consumption further

 

Debt: As someone rightly mentioned that most of the debt is held domestically in Japan. However there are no takers for new debt that Japan wants to raise every year just to service its old debt. Japanese government has been running campaigns trying to promote individuals to buy these debt but in vain (http://punitmittal.blogspot.com/2011/12/japanese-women-are-super-attracted-to.html). Japanese corporations and pension doesn't have surplus funds to invest further in Japanese bonds. Foreigners are not interested given the low yields and massive debt size. The BOJ has already exhausted interest rate weapon as rates are almost zero and 3% increase in rates would mean that all tax revenues are used just to service the debt.

 

Yen: Trade deficit and current account deficit is on a rise. This is because Japan is increasingly becoming an importing nation rather than exporting. Its a myth that there is high demand of Japanese products and in turn the yen. Most Japanese companies such are now manufacturing the products outside Japan (and in the countries where the products are consumed) so only a certain portion of funds are repatriated back and as such tax paid on them. Labor laws, corporate cross holdings and rigid policies are making them incompetent and benefiting taiwanese, Chinese and korean companies. Rising energy costs is putting increasing burden on the yen, which should continue going forward.

 

Inflation: Government's inflation target is only going to back fire because it will result in negative real returns, thereby investors asking higher returns on the bonds. In the past BOJ has even tried printing money and just handing it over to individuals which all disappears under the mattress or in foreign assets because the Japanese people have no confidence in its own government and/or monetary situation.

 

To top all this, the Japanese society is very rigid and does not want to make any structural changes, just like the Japanese corporates making them extremely incompetent in this ever changing world.

 

My two cents from my 12 years life in Japan.

 

Yet your actions speak louder than your words.  If this is truly at Japan's doorstep why are you still living there?  If their collapse is as bad as everyone predicts I would be moving now to secure a job somewhere else to beat the wave of Japanese emigrants.

 

Or do you think some sort of debt restricting will happen but it won't be that bad?  I'm curious at the disconnect.

[PJM]

You bring up interesting points but somebody is buying the bonds or the price would plummet, no?  I think alot of the money in the banks is being invested in bonds, no? Do you think the Japanese will withdraw money from the banks and put it somewhere else?  If you look at the one historical example is the US/UK after WWII.  How was that debt removed? via inflation.  So why can't Japan inflate its way out of its debt problems?

 

Packer

 

Very good point Packer. It may sound ridiculous but Japanese society works like a fraternity. You watch out my back and I watch out yours, so 75% of the debt is held by Japanese banks and pension fund and 8% by central bank. Most Japanese don't even trust banks, so almost more than 50% of savings is held as cash under the mattress (literally).

 

Inflation is a double-edged sword for Japanese society. If you break down the components of eroding debt by inflation, you have to look at budget surplus/deficit, real/nominal interest rates, debt composition and GDP growth. Out of these, the Japanese are facing slow/no GDP growth and budget deficit because of structural problems such as aging population, incompetent corporates, lack of confidence in the economy etc. If the real rates become negative, then investors (especially Pension fund that invests almost all its money in debt) will demand higher returns on the bond which will again hit the Japanese debt. Of course the government will be cushioned for a while as inflation erodes debt, but with average debt maturity of 6 years, the Japanese government will have to continuously fund the budget deficit and maturing debt until increasing tax revenues can fill the deficit. If they default the biggest loser will be Japanese people as all their pension money is invested in Japanese debt.

 

One of the biggest reason of deflation in Japan is not falling prices but contracting wages because there is no growth for companies. If you take the regional banks that are not allowed to invest overseas, the loan to deposit ratio is below 50% because there are no takers. Most of the money that is printed is finding its way out of Japan as carry trades mostly by the large Japanese banks such as MUFJ, SMBC, Mizuho etc. That is the reason they are snapping up all sort of loan/lease portfolios overseas.

 

Abe has been pushing Japanese pension and insisting Japanese individuals to invest more in Japanese equity market but there are no takers. Abe naturally wants to inflate asset prices which should stir consumption, growth and more tax revenues, but again a failed attempt.

 

 

[PJM]

Its game over for Japan in pretty much all scenarios. The debt levels are too high that neither money printing nor inflation can save it. Currently almost 1/4th of govt revenues are spent only on servicing the debt. The issue is Japan is more structural rather than just fiscal or monetary.

 

Tax: There are more people consuming social/pension benefits than contributing to taxes. Japanese people dont want to get married or have children. Firms like Toyota are running campaigns to push employees to go home early and create children (yes, they call it creating children), Japanese government gives monthly cash allowance for each child until 15 years old, but in vain. Japanese people dont invest their own savings into Japanese assets because they don't have any faith in its economy. A future hike in sales tax will surely bring down consumption further

 

Debt: As someone rightly mentioned that most of the debt is held domestically in Japan. However there are no takers for new debt that Japan wants to raise every year just to service its old debt. Japanese government has been running campaigns trying to promote individuals to buy these debt but in vain (http://punitmittal.blogspot.com/2011/12/japanese-women-are-super-attracted-to.html). Japanese corporations and pension doesn't have surplus funds to invest further in Japanese bonds. Foreigners are not interested given the low yields and massive debt size. The BOJ has already exhausted interest rate weapon as rates are almost zero and 3% increase in rates would mean that all tax revenues are used just to service the debt.

 

Yen: Trade deficit and current account deficit is on a rise. This is because Japan is increasingly becoming an importing nation rather than exporting. Its a myth that there is high demand of Japanese products and in turn the yen. Most Japanese companies such are now manufacturing the products outside Japan (and in the countries where the products are consumed) so only a certain portion of funds are repatriated back and as such tax paid on them. Labor laws, corporate cross holdings and rigid policies are making them incompetent and benefiting taiwanese, Chinese and korean companies. Rising energy costs is putting increasing burden on the yen, which should continue going forward.

 

Inflation: Government's inflation target is only going to back fire because it will result in negative real returns, thereby investors asking higher returns on the bonds. In the past BOJ has even tried printing money and just handing it over to individuals which all disappears under the mattress or in foreign assets because the Japanese people have no confidence in its own government and/or monetary situation.

 

To top all this, the Japanese society is very rigid and does not want to make any structural changes, just like the Japanese corporates making them extremely incompetent in this ever changing world.

 

My two cents from my 12 years life in Japan.

 

Yet your actions speak louder than your words.  If this is truly at Japan's doorstep why are you still living there?  If their collapse is as bad as everyone predicts I would be moving now to secure a job somewhere else to beat the wave of Japanese emigrants.

 

Or do you think some sort of debt restricting will happen but it won't be that bad?  I'm curious at the disconnect.

 

Who said I'm living in Japan now? :)

My brain knows that it will all collapse but my heart wants to believe otherwise.

 

Of course they can still work their way out of the problem. That needs large structural changes but the biggest problem of Japanese society is rigidity and they just don't want to change.

[ERICOPOLY]

The BOJ has already exhausted interest rate weapon as rates are almost zero and 3% increase in rates would mean that all tax revenues are used just to service the debt.

 

The bonds being mostly held by Japanese, then most of the interest paid goes back to their tax base.

 

So while it's true that all (current level of) tax revenues would be used just to service the debt, the private sector would see a massive surge in govt bond interest income cash flow.

 

The government could tax this increase of interest income, and put it back into the programs it currently spends money on.  So the private sector would in theory see no change in cash flow.  Bond holders would get the same as they get today, as would the beneficiaries of government programs.

 

So it would in effect be defaulting on interest payments to it's domestic bond holders, but foreign bond holders wouldn't get hurt (there are so few of them). 

 

And it's private bondholders would just keep on seeing the same level of bond income that they see today.  Net of tax.

 

I'm not convinced this wouldn't lead to some sort of dumping of bonds by the Japanese.  It's just that it appears if you are increasing payments to your own people, that seems to open a door to raising taxes.

 

Just brainstorming.

 

In short, if you pay too much interest to your own people, take it back!  Otherwise, it would be somewhat like an economy without taxation if all the money taken in taxes were given right back again.

[Guest ajc]

"The Coming Crisis In Japan"

 

Kyle Bass presenting the fundamentals of his Japan thesis at the University of Chicago Booth School of Business in March 2013.

Followed by a Q&A session.

 

 

 

[APG12]

What's always bugged me about Bass is how he's rooting for default and unrest in Japan.  I never liked people who were cheering for bad things to happen.  It's like wishing a terrible car crash or horrific death on someone.  Yes people make mistakes, companies make mistakes, and countries make mistakes.  I'd rather hope for a solution rather than wishing ill on anyone..

 

This is the same thing that's said about every short seller. When I short a company I believe to be fraudulent I don't think to myself, 'I can't wait until all of the workers get fired and lose their source of income.' What I hope for is the market to recognize the facts of reality. Every day that it doesn't is a day that capital is misallocated.

 

I imagine the same is true of Mr. Bass. Do you really think he's sitting there thinking, 'I hope that millions of people lose their jobs and are starving in the street'? Unless he's psychotic, I doubt it. When the market does not reflect economic reality, that is categorically bad. Assuming the Japanese economy is on the brink of collapse (I don't have an opinion), think of all of the capital invested every day on the assumption that it is not going to collapse. Keeping a charade going isn't good for anyone if you're thinking beyond the immediate moment.

[oddballstocks]

What's always bugged me about Bass is how he's rooting for default and unrest in Japan.  I never liked people who were cheering for bad things to happen.  It's like wishing a terrible car crash or horrific death on someone.  Yes people make mistakes, companies make mistakes, and countries make mistakes.  I'd rather hope for a solution rather than wishing ill on anyone..

 

This is the same thing that's said about every short seller. When I short a company I believe to be fraudulent I don't think to myself, 'I can't wait until all of the workers get fired and lose their source of income.' What I hope for is the market to recognize the facts of reality. Every day that it doesn't is a day that capital is misallocated.

 

I imagine the same is true of Mr. Bass. Do you really think he's sitting there thinking, 'I hope that millions of people lose their jobs and are starving in the street'? Unless he's psychotic, I doubt it. When the market does not reflect economic reality, that is categorically bad. Assuming the Japanese economy is on the brink of collapse (I don't have an opinion), think of all of the capital invested every day on the assumption that it is not going to collapse. Keeping a charade going isn't good for anyone if you're thinking beyond the immediate moment.

 

I think you have a healthy point of view.  My experience is that most who short don't have that same view.  I have used Salesforce.com, I've seen it change businesses.  The stock is overvalued, when I talk to short sellers about it they are hoping doom and gloom and that the company crashes and burns.  They can't separate the stock valuation from the actual company.  In theory the stock could go to zero and the company continue to hum along like nothing happened. 

 

Bass clearly benefits from the Japan gloom and doom trade.  If Japan fails his mortgage is paid off with cheap Yen, his fund makes a mint and he can go on TV again and say he was right and attract even more assets.

 

I don't short anything, I don't think there's anything wrong with shorting, but I'd rather be optimistically biased.  I'd rather things turnaround and do well than fail.  In the end I want everyone to do well. 

[randomep]

What's always bugged me about Bass is how he's rooting for default and unrest in Japan.  I never liked people who were cheering for bad things to happen.  It's like wishing a terrible car crash or horrific death on someone.  Yes people make mistakes, companies make mistakes, and countries make mistakes.  I'd rather hope for a solution rather than wishing ill on anyone..

 

This is the same thing that's said about every short seller. When I short a company I believe to be fraudulent I don't think to myself, 'I can't wait until all of the workers get fired and lose their source of income.' What I hope for is the market to recognize the facts of reality. Every day that it doesn't is a day that capital is misallocated.

 

I imagine the same is true of Mr. Bass. Do you really think he's sitting there thinking, 'I hope that millions of people lose their jobs and are starving in the street'? Unless he's psychotic, I doubt it. When the market does not reflect economic reality, that is categorically bad. Assuming the Japanese economy is on the brink of collapse (I don't have an opinion), think of all of the capital invested every day on the assumption that it is not going to collapse. Keeping a charade going isn't good for anyone if you're thinking beyond the immediate moment.

 

I think you have a healthy point of view.  My experience is that most who short don't have that same view.  I have used Salesforce.com, I've seen it change businesses.  The stock is overvalued, when I talk to short sellers about it they are hoping doom and gloom and that the company crashes and burns.  They can't separate the stock valuation from the actual company.  In theory the stock could go to zero and the company continue to hum along like nothing happened. 

 

Bass clearly benefits from the Japan gloom and doom trade.  If Japan fails his mortgage is paid off with cheap Yen, his fund makes a mint and he can go on TV again and say he was right and attract even more assets.

 

I don't short anything, I don't think there's anything wrong with shorting, but I'd rather be optimistically biased.  I'd rather things turnaround and do well than fail.  In the end I want everyone to do well.

 

 

I actually don't understand why Bass is always on the road promoting Japan collapse. Does he actually think he can affect the value of the Yen? It is one thing to promote a short position on an individual company, but to promote the collapse of a currency backed by $1.3 trillion USD is like spitting in the wind.

 

Analyzing a company is well within his capability. But looking at a whole nation 30yrs out is beyond him, or warren buffett or any nobel prize winner. We just don't know how it will play out. Japan is a country that was a feudal society in the 1860's. By 1940 they had one of the biggest navies in the world, a few years later they were annihlated, and a few decades after that the world thought they were a economic superpower. Now Bass is saying that eventually the average Japanese will lose 30-40% of his retirement savings. I say big deal! They've gone through much worse, losing a fraction of your retirement is not a reason for you to hoard gold bars and weapons and canned food.

 

The undeniable fact is that he has lost tons (like hundreds of millions) on his Japan trade. And he says collapse is coming in 2yrs? But he has been saying that for more than 2yrs already!