Japan's In For A Hard Landing

Includes: DFJ, DXJ, EWJ, FXY
by: Jason Kelly

Here in Japan, people are dour as the Bank of Japan cut its growth outlook for fiscal 2012 to +2.0 pct from its October estimate of +2.2 pct. It cited heightened concern about the eurozone crisis crimping the global economy, and the strong yen.

Shortly after that, the government said it’s likely to fail in its goal of balancing the budget by 2020 even if it proceeds with the wildly unpopular plan of doubling the national sales tax. Societe Generale’s chief Japan economist quipped, “To balance the budget, the [sales tax] rate needs to rise further. We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

Pretty hard by the looks of it. Finance Minister Jun Azumi told lawmakers at this year’s first Diet session that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.” Very convincing — except that it’s what they say every year.

Is this finally the year that Japanese government bonds (JGBs) give up the ghost and Japan solves the world’s worries over Europe by cratering so spectacularly that Greece and the Merkozy show become an annoying gnat to swat? Possibly, though predicting the appearance of the JGB reaper has been the best provider of egg on financial faces for more than a decade now.

Consider, though: Japan is only walking dead rather than buried dead because its borrowing costs are about 1 pct. If yields on JGBs rise to 3 pct — as many analysts predict they’d do if sold on global markets instead of to clueless Japanese workers willing to earn nothing on their savings — the nation is instantly bust. While the clueless are no more clued in now than they were in decades past, they are simply older and more interested in selling JGBs than buying. Thus, the domestic money tree is about shaken out as Japan’s debt aims at 230 pct of GDP next year. No, not in 2020, but next year.