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Land of the Rising Sum: Japan's Toxic Mountain of Debt


Parsad
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Article on Japan and its debt load. 

 

http://www.theglobeandmail.com/globe-investor/land-of-the-rising-sum-japans-toxic-mountain-of-debt/article2372141/

 

Unfortunately, the Japanese population's psychology to any investment other than Japanese bonds is preventing the repricing referred to in the article, but at some point, you will get an unwinding and it will not be pretty.  I would guess that at some point Japan is going to go through a massive devaluation of their currency and the population will be hit hard by inflation.  Cheers!

 

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Another conundrum that is tough to explain.  One good thing about value investing is that we can sometimes forget about the conundrums and just buy cheap stocks which Japan still has an abundance of.  If the Yen ever gets back to 100, then equities may have a very strong run whether inflation or not.

 

Cheers

JEast

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Another conundrum that is tough to explain.  One good thing about value investing is that we can sometimes forget about the conundrums and just buy cheap stocks which Japan still has an abundance of.  If the Yen ever gets back to 100, then equities may have a very strong run whether inflation or not.

 

Cheers

JEast

 

Agreed, Japanese companies were fine with the Yen at 120-150 not too long back.  There's a lot of fear over a drop, but I'm in year camp in that with a drop some of these companies are going finally have a run. 

 

Do you hedge your Yen exposure?  I started to hedge a portion of it, still can't commit to a 100% hedge yet.

 

Nate

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  • 1 month later...

Vitaliy Katsenelson said this since 2010 or longer

http://contrarianedge.com/2010/07/30/japan-land-of-the-rising-debt/

The strong Yen hurts exporting if this is reverse it might be better for export.

 

Most of Sovereign debt of Japan owned by Japanese.Only 5% held by foreign. I am not sure how this will end. 25% of Japanese are over 65 year old. But Japanese Corporations has a very conservative balance sheet.They are good at doing business and they have footprints almost everywhere in Asia and the world.  Japaneses are very good on what they do. They are hard-working,smart and creative. My most usage iPhone's app today is "Line" which is from Japanese Company.It becomes very popular in the recent months. It should be bought out at higher price than Instagram.

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Seems like the only thing keeping Japan going is its population, which puts all its savings into Japanese government bonds.  As Prem has noted, this investment psychology dates back to the bursting of the Japanese stock market in 1990 -- everyone who got burned in stocks went into bonds and they haven't looked back.  Its cultural -- everyone there just buys bonds now.

 

This investment psychology isn't linked with the bursting of the Japanese bubble.. first off I'd say it was really a real estate bubble and equities only got caught up as a result that they stood ontop of all that real estate. However the investment pysch actually goes back much much farther. There is an amazingly complex cultural norm towards not taking risk that permeates that average person in Japan. I'd say that it has always been a part of the culture. I lived there a while and married somebody from the country and met many of these domestic people who were culturally adverse to anything "risky".

 

Bonds at minimal yield are acceptable because they risk is more important than return. High yielding currency deposits were acceptable for a while (with a certain subset of the population) because they were packaged up by banks/securities firms and resold as currency bonds yielding certain percent returns. The FX risk of the underlying was conveniently mentioned in very small print and many people believed what they were told. Equities have always been risky and will always be risky to Japanese. Originally their stock market was modeled after their history trading rice futures. That element of futures trading has permeated their cultural reckoning so that equities is akin to gambling. It's OK with a little bit of money of course, but you wouldn't put your future at stake over it, now would you?

 

Don't get me wrong, I have read lots about the short Japan trade. I don't have a really good sense of confidence around the country's future either. (One of the reasons we recently moved away). However, Japan has a way of surprising the world. I wouldn't be surprised if they can hold on for 10 more years at the status-quo regardless of what happens in Greece/Europe at the moment. I'd have a hard time holding my positions for 10 years... besides the fact that 10 years is a long time for anything at all to happen.

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Careful with the macro tourists. There is a right side of the balance sheet too.

 

Japan has been running a current account superavit for decades so it has accumulated trillions of USD in a very large net positive international asset position. $4 trillion USD, around 70% of GDP, AFTER ALL THEIR LIABILITIES. In percentage one of the largest among developed nations, I think only Switzerland beats it.

 

http://www.boj.or.jp/en/research/brp/ron_2010/ron1009a.htm/

http://www.boj.or.jp/en/research/brp/ron_2010/data/ron1009a.pdf

 

1.3 trillion USD, larger that TARP and around 20% of Japan's GDP, just in international liquid reserves. Second only to China.

 

http://en.wikipedia.org/wiki/Foreign-exchange_reserves

 

 

 

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  • 10 months later...

Another conundrum that is tough to explain.  One good thing about value investing is that we can sometimes forget about the conundrums and just buy cheap stocks which Japan still has an abundance of.  If the Yen ever gets back to 100, then equities may have a very strong run whether inflation or not.

 

Cheers

JEast

 

Good call.

 

Also this video sums up Japan's unsolvable problem rather nicely.

 

 

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I wrote that? Someone must have hacked my account!

 

Of course after I wrote that, the Yen continued to strengthen and the bonds continued to rally.  Irrespective, the values were just too compelling not to put some capital into play for some select exporters.

 

Still have some exposure to one exporter, but have since closed all other positions and the Yen short.  It may still be in the early innings for the equity market and have a couple of exporters 'on deck.'  Let's see what happens as we enter the summer.

 

 

Cheers

JEast

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Careful with the macro tourists. There is a right side of the balance sheet too.

 

Japan has been running a current account superavit for decades so it has accumulated trillions of USD in a very large net positive international asset position. $4 trillion USD, around 70% of GDP, AFTER ALL THEIR LIABILITIES. In percentage one of the largest among developed nations, I think only Switzerland beats it.

 

 

Indeed. I don't see the debt being a concern. Rather, I see devaluation reducing their debt load. This is awesome. I might buy a position in Japan Small caps.

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I wrote that? Someone must have hacked my account!

 

Of course after I wrote that, the Yen continued to strengthen and the bonds continued to rally.  Irrespective, the values were just too compelling not to put some capital into play for some select exporters.

 

Still have some exposure to one exporter, but have since closed all other positions and the Yen short.  It may still be in the early innings for the equity market and have a couple of exporters 'on deck.'  Let's see what happens as we enter the summer.

 

 

Cheers

JEast

 

I might misunderstand your phrasing, but the yen isn't really strengthening right? USDJPY went from 80 to 100 in a couple of months so the yen has actually depreciated 20% or something. The current Japan rally is a lot less impressive in USD terms. But I guess you ment exactly that.

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