The Government Debt Situation Japan: A Catastrophe Waiting To Happen

In what we consider a magnificent speech, not because of the type of message but rather in terms of the quality and depth of the insights, Kyle Bass explains at the University of Chicago Booth School of Business why he believes the Japanese government debt bubble is explosive in nature. He is convinced this bubble will burst, although he reiterates that it is impossible to know when exactly this will happen. His presentation contains a lot of quotes that are worth sharing and reflecting. This article contains what we consider the most important insights.

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First, Kyle Bass talks about the magnitude of the government debt. Japan crossed one quadrillion Yen of government debt. That is 1,000 trillion yen. If you try to count that figure by seconds, it equals 31 million years. Related to this is the debt servicing cost which is unsustainable even with artificially low interest rates.

Their expenditure for interest has moved up to almost 11 trillion yen, given the central governement tax revenues of 43 trillion yen. So they spend a quarter of their revenues on interest alone when it is almost free (17 to 20 basis points). They have passed the zone of insolvency.

Japanese debt stock is 24 times government tax revenue. If Abe and Kuroda achieve an inflationary outcome, and the swaps move, they are finished. Every 100 basis point of cost of capital to the country, costs them another 11 trillion yen. A 200 basis point move has their debt service exceed their central government tax revenue. Those people wishing for inflation in Japan, know not what they wish for in my opinion.

They are spending more twice than they make for five years in a row.

Next, he points to the deteriorating demographics and the consequences on the bond market. Important to know, Japanese bonds are  primarily held by the Japanese themselves.

Madoff taught us that you can make promises in the future ad infinitum as long as you have more dummies entering than exiting the scheme. […] You will have a mass problem with the finances of the country when more people are exiting the work force than entering it. That is exactly what is happening right now. 25% of the population is over the age of 65 while in the developed world it is 8%. With 95% of bonds held by the internal population, and with declining demographics, what you are seeing right now is a central bank expanding balance sheet at an accelerated rate.

Although Japanese have a strong cultural tie with their own bonds, Kyle Bass expects that it could change in a dime.

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We conducted a study among 1,009 institutional investors in Japan. We asked them: “In the event that Japan would have a bond crisis (i.e. rates would move up 100 basis points) would be apt to invest more (because of a higher nominal yield) or would you be apt to go somewhere else with your money?” Only 8% said they would invest more, 83% said they would run (not walk). You need to know that human nature trumps cultural norms 100% of the time.

He explains how he is preparing himself, which sources he relies on, and (very interestingly) what his expectations are for the yen and interest rates.

The move in the yen so far is pretty small when looking at the chart since the 70’s. If I’m right about what is going to happen, the yen really moves north of 250 and rates go into the teens in a full bond crisis.

My personal plan is to stay rational about all this. Don’t believe anything that these people that run central banks are telling you. They will never tell you the truth until it’s too late. Remember when Juncker was interviewed in May 2012 just before Greece restructured their bonds. He told the press there was no meeting about the Greece restructuring although his colleagues admitted Juncker was the meeting. Afterwards he admitted by saying “When things become too serious you have to lie.” The Mexican government [in 1995] told that they would not default and they would not devalue … exactly one day after they devalued the Mexican currency with 60%. They will never tell you it is coming; you have to make these determinations on your own. Protect yourself. You need to own physical assets. That is the only way you can save yourself from the stupidity of these people.

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  • Yes Japanese debt has been too high fro far too long.
    And they have exported much of their production off shore.
    And when corporations like Sharp and Panasonic are in trouble, then Japan is in trouble.
    You cant make money on $50 DVD players.

  • InsanelySane

    “Their expenditure for interest has moved up to almost 11 trillion yen, given the central governement tax revenues of 43 trillion yen. So they spend a quarter of their revenues on interest alone when it is almost free (1720 basis points). They have passed the zone of insolvency.”

    I do enjoy your cool article on Kyle Bass about Japan as “Japan is a Bug Searching for a Windshield”.

    I beg your pardon, isn’t it a basis point = 0.01 percent, thus above figure, 1720 basis points, equals to 17.2 percent? I think it’s a typo here.

  • True, this is my mistake, thanks for noticing! And sorry for the late reply, was traveling today (no, not to Japan, neither to Cyprus 😉 )

    PS: I did correct it in the text.