Who Will Buy the Bonds Japan Needs to Sell? By Bill Bonner | March 16, 2011
The world seemed to hold its breath yesterday. People watched
videos of the tsunami…of the earthquake…of the
nuclear reactors. Japan’s nuclear reactors were on
the verge of a meltdown.
Here at The Daily Reckoning, we predicted a meltdown in
Japan – but not that kind of meltdown!
In January, seers and forecasters turned in their predictions
for the year ahead. Now, we are in March, and we have already
run into two major events that no one predicted.
First, the Arab world exploded. Now, the blow-ups are happening
in the least-explosive part of the world, Japan.
Japanese stocks sold off yesterday. If they were a bargain
when we recommended them a couple weeks ago, they are an
even bigger bargain today. US stocks didn’t do much
of anything.
Perhaps some kind of turning point has been reached.
Japan has been suffering from a manmade disaster for the
last 20 years. It is a long, slow, painful form of national
economic suicide. Now it is time to pick up the pace. This
from Bloomberg:
The Bank of Japan poured a record amount
of cash into the financial system and doubled the size of
its asset-purchase program to shield the economy from the
effects of the nation’s strongest earthquake on record.
The central bank pumped 15 trillion yen ($183 billion)
into money markets to assure financial stability amid
a plunge in stocks and surge in credit risk. Governor
Masaaki Shirakawa and his board also increased their facility
that buys assets from government bonds to exchange-traded
funds to 10 trillion yen.
“We are providing as much funds as needed to dispel
anxiety in financial markets,” Kazushige Kamiyama,
an official in charge of the central bank’s money
market operations, said before the policy announcement.
“We will continue to add ample funds to stabilize
financial markets.”
It used to be that central banks were charged
with maintaining the integrity of the people’s money.
Then, mission creep set in. Maintaining full employment was
added to the job description. And then, Ben Bernanke took
it upon himself to boost stock prices. Higher stock prices
would encourage people to spend and invest, he thought.
And now, the Bank of Japan takes another step. It is playing
a leading role in earthquake remediation – like the
Red Cross or the National Guard.
The Bank of Japan is going all out. Not only is it putting
emergency funds into the economy, it’s also stepping
up its own QE program.
What else can it do? It was already doing all it could.
The BOJ has been “zero bound” for the last 15
years – meaning, it has been lending money as cheaply
as it possibly could. If monetary
policy were a pair of pants it would be around Japan’s
ankles. And fiscal policy? The country already has $20 of
debt for every dollar of tax receipts. What’s left?
Thirty dollars, surely – or bankruptcy.
There’s unconventional stimulus too. That’s
right…the old printing press…is getting a good
workout.
Onward!
The Japanese camel has a remarkably strong back. He’s
held up to more than two decades of counter-cyclical stimulus
programs…and central government debt that now measures
200% of GDP.
The poor long-suffering beast has seen everything. The
Japanese trusted the government with their retirement money.
The government spent the money. And yet, bond buyers seem
none the wiser. They still lend to the Japanese government
at less than 2% yield.
And now the old-timers are beginning to dis-save. That
is, after saving so much for their retirements, now they
are retired. And now they are drawing down their savings.
This puts the Japanese government is in a real fix. Net
savings in Japan are now negative. So, who will buy the
bonds Japan needs to sell in order to rebuild its economy?
Who will buy the bonds Japan needs to sell in order to rebuild
its infrastructure? Who will buy the bonds Japan needs to
sell in order to fund its government? Who will buy the bonds
Japan needs to sell in order to pay back the people who
bought bonds last year…and the year before…and
all the way back to 1990?
The answer is likely to be: no one.
Instead, Japan will be forced into more QE, forced to print
money to make up for the money she can no longer borrow.
This will have a couple knock-on effects. First, the Japanese
famously helped Europe and America finance their deficits
and bailouts. Recently, Japan funded a major part of Europe’s
bond sales – helping to hold down rates. Also, the
last time we looked, Japan had the largest stash of US bonds
in the world.
Under pressure to bring money back to the home island,
you can expect Japan to be doing some selling – which
might be the final straw.
Second, the Japanese are making such an obvious mess of
their finances that they are bound to attract attention.
Investors might notice that the Japanese aren’t the
only ones. As we’ve pointed out several times, the
developed economies all now count on low interest rates,
huge deficits, and printing press money. Even with these
massive in-puts of cash and credit grease, the economy still
barely creaks forward. Without the extra grease, they will
probably slip backward.