Fitch Warns Japan About Debt Rating

Includes: EWJ, EWV, EZJ
by: David M. Gordon

I mentioned in my post, A Tipping Point for European Debt, that Europe is not alone; England, Japan, and the US could suffer similar dire financial circumstances.

Well, Friday, Fitch warned Japan to get its financial house in order or suffer a downgrade in the quality of its debt. This is no idle threat; a lower rating means higher interest rates on its sovereign debt. And higher interest rates means increased costs to service that debt. And increased costs could spiral quickly out of control.

This all smacks of (is similar to) a maintenance call; if you have ever invested on margin you know what I mean. The first rule of maintenance calls is never pay them, always liquidate. The problem with paying them is that the problem(s) that caused the maintenance call has not gone away, so new maintenance calls are likely... and you have only so much cash. Sadly, if you instead liquidate, you must sell many more times the amount of the call just to meet the call, which effort rapidly becomes asymptotic; the two data points only seem to converge.

Which returns us, and Japan, to the beginning: Get your house in order, stat, or suffer the consequences. Problem is the consequences of Japan getting its house in order have negative ramifications for its international trade, for its domestic economy... but also for us all.

Not a pretty picture.