The Japanese Debt Bomb

Written By Christian DeHaemer

Posted November 27, 2012

Gold is having a pretty good month.

Japanese Debt BombThe constant fretting over the fiscal cliff and a minor missile war in the Middle East had pushed gold up to $1,748/oz yesterday.

The big catalyst was the 1.4% drop in the U.S. Dollar Index on Friday. This was due to yet another Euro deal that was going to save Greece.

A falling dollar is good for the gold price as it makes gold less expensive on global markets, but higher in dollar terms.

We remain long and strong on gold here at Wealth Daily — and we will remain so until real interest rates turn positive (see my article from last week).

I Think I’m Turning Japanese

There are many reasons to believe gold will continue to move up and even break out above $2,000 over the next quarter.

The world’s financial systems face serious debt problems and a slowing global economy.

Japan, the world’s third largest economy, has a debt ratio of 260% of GDP — by far the largest in the world.

Those of us who are over forty remember the great Japanese invasion in the 1980s. This was a time when the Japanese were buying up Columbia Pictures and Rockefeller Center. Having a Sony sound system and a Toyota Supra meant you were rad.

Japanese management books were moving faster than leveraged buyouts, and four square blocks in Tokyo were worth more than all the real estate in California.

In 1989, the Nikkei 225 hit 39,000 and change. Then the losses came…

Many people lost everything. Investments turned to expenses. Investors dumped their stocks and bought government bonds (JGBs).

This trade was on for the next 22 years.

Now Japan has issued one quadrillion yen worth of JGBs. That’s equal to 260% of their gross domestic product.

The Japanese are $14 trillion in debt. That’s almost as much debt as the United States has — with an economy that is one-third the size.

They also hold $1.03 trillion in U.S. Treasuries.

Game Over, Man

Recently Japan reported a negative current account deficit for the first time in 30 years. Japan was built on exports. If they can’t export, then they can’t borrow.

And for those who say it’s the Japanese people themselves who save and fund government bonds, think again…

Due to the average age of the average Japanese, there will be net withdrawals starting in 2014.

The world has never seen such debt. No one is quite sure what the endgame will be, but it won’t be pretty…

If interest rates on Japanese government bonds climb above 3%, all of its tax revenue would go to servicing the nation’s debt.

Two percent interest would be enough to cause havoc; the ten-year is now at 0.74%.

Debt Just Goes Up japan debt

Lenders Don’t Care… lenders

Sooner or later, reality will hit.

Why would you lend money to the Japanese government knowing there is a massive risk of default or deflation — and only a 0.74% return over 10 years?

People do, lots of people… but this may change in just over three weeks.

Playing with Fire

Shinzo Abe, the former Japanese Prime Minister, is running for the job again as a member of the opposition Liberal Democratic Party. And Shinzo has a bold new plan. He has called on Japan’s Central Bank to provide unlimited easing and increase the inflation target from 1% to 2%-3%.

He also wants zero or negative interest rates to force money out of savings and into stocks and real estate.

Japanese voters head to the polls on December 16. As of now, it looks like Shinzo Abe’s LDP will win.

Money printing is the action plan. The Nikkei 225 has jumped about 800 points to 9,388 since November 15.

My contacts are telling me that major Japanese investment houses are buying gold in advance of this central bank action…

Buy gold. Short the yen.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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