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Japan Close to the Edge

"There is no money. There is no one else’s pocket left to pick. You can’t borrow anymore, you can’t print anymore, and you can’t steal anymore from anyone else....You object to the bond market, but the bond market is just the voice of reality calling. It’s telling you that 2 plus 2 is still 4, no matter what your union bosses would have you believe. Your bosses tell you that ‘the people’ didn’t spend the money, but it’s not true. That’s exactly who has wasted the money, and now the bill is coming due....You’ve thrown your bottles, burned your flags, waved your signs and had your fun. Now it’s time for you to learn the lessons of history and abandon this idiocy before we finally lose our patience with you. Grow up – and get back to work."
rant directed towards the recent Greek Protesters

It may be all Greek to you, but the effects of the bond bubble is here for all to view. There has been so much talk about the Greek crisis that an article on Greece triggers a yawn. Obviously the market thinks otherwise and it plummetted and swooped 800 points in 20 minutes due to contagion fears. Now, to add salt to injury and digress from mundane EU fears,
Make no mistake, Japan is next’.

Japan is thousands of miles away from both Ireland and Zimbabwe, but when it comes to mapping the possible outcome of its fiscal deterioration, one Tokyo economist sees Japan's place as somewhere in the middle of the two. So just how bad are things at the moment?

Its level of debt is the worst among industrialized nations. Government expenditures are rising because of pump-priming outlays and increased spending on social welfare to cope with a rapidly graying population. But tax revenues have fallen sharply amid the economic downturn.

In the general account budget for fiscal 2010, tax revenues are projected to reach just 37 trillion yen ($410 billion), against expenditures totaling 92 trillion yen. To make up for this lack of tax revenue due to the economic downturn, the government will issue new bonds worth 44 trillion yen--piling on more government debt. It is the first time that has happened in an initial budget since the end of World War II. A Finance Ministry estimate showed a tax shortfall of more than 50 trillion yen is expected annually for fiscal 2011 to 2013, if the same budget framework is used.

At the end of 2010, the outstanding public debt of the central and local governments combined will total 949 trillion yen. That will make it 1.97 times the size of Japan's gross domestic product, a ratio far higher than that of any other developed nation. The debt translates to 7.5 million yen for each citizen.
Their consumers have tightened their belts for 20 years to pay back for the collapse in the '80s but that belt is out of notches and Japan can no longer borrow money internally as their people are tapped out. S&P indicated that a fiscal plan scheduled for next month by Prime Minister Yukio Hatoyama’s government may be key to whether it will cut the nation’s sovereign credit rating.

At stake for Japan is keeping the AA grade after S&P lowered its outlook for the rating in January, and shoring up confidence that it will avoid contagion from a Greek crisis threatening to engulf other sovereign borrowers. Finance Minister Naoto Kan said this week that Greece has shown the need for Japan to take a “very firm” stance toward reducing debt, which is approaching twice the size of Japan’s economy. “

Japan’s government has an election in July but needs a budget next month that reduces the deficit from 9.4% of GDP to 3% of GDP. But the whole thing is a joke as Japan is still borrowing money by selling 10-year notes at 1.29% because the Japanese people are offered 0% by their own banks and tend to be long-term savers. Also, 20 years of deflation has given the people a false sense of security so 1.29% seems pretty good when things get cheaper every year. The rest of Asia is fighting inflation and if prices go up OR if rates go up OR if Japan is forced to sell 10-year notes "outside the family" - that 9.4% deficit could jump to a 20% deficit overnight if Japan is forced to pay the same 3.72% the US does. Of course, if Japan has to compete on the open market for loans - EVERYONE’s rates will be going up!

Disclosure: None