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.