Over a year ago, in "Japan’sWTFChart" we showed where Japan lies on the sovereigndebt-to-taxrevenuecontinuum. The "where", with a WTF-inducing 1900% sovereign debt/revenue, was essentially off the chart as it was nearly 5 times greater than the first runner up: Greece, with 400%. Naturally, that ratio is absolutely unsustainable and the second rates begin creeping higher, all bets are off, however the day of reckoning could be delayed if as we said two years before Japan’s berserko QE was unveiled, the BOJ entered "hyprintspeed" and started monetizing debt at a pace that would make Hyman Minsky andRudy von Havenstein both break out in a lunatic cackle.
One look at the chart below, which shows JPM’s estimate for various central bank holdings as a percent of host nation GDP, is enough to explain why that distant giggling is Hyman Minsky warming up… and he is running for the hills.
The reason: while as a result of its recent decision to double its monetary base in (every) two years Japan’s central bank now holds about 40% of local GDP on its books, it has precommited to seeing this percentage hit 60% over the next two years. But that’s jst the beginning.
As JPM’s Mike Cembalest points out, the "contingent" line is where the BOJ’s asset holdings as a % of GDP will rise to should Japan’s 2% inflation goal prove elusive. Did we say "contingent" – we meant definite. And as the line shows, the Bank of Japan will, for the first time in history, "own" all of Japan’s GDP on its balance sheet some time in 2018 when its "assets" as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down.
What is most ironic here is that we still have assorted carnival barkers and trolling nobel prize winning op-ed writers working for cash burning media outlets, bitching and moaning about the 90% "unsustainable threshold" level of sovereign debt to GDP. Um, standalone sovereign debt in a world with central banks means nothing.
A far more important question is what happens in a world in which the first official sovereign LBO by a central bank of a sovereign nation (remember those fringe bloggers who said in 2009 the
Fed will keep failing up in its central-planning attempts to "fix" the
economy, and whose ridiculed opinions are now mainstream views?… We
do) is not just a mere conspiracy theory but just the lastest conspiracy fact.
So just what do Reinhort and Rogoff, or anyone else for that matter with 2 functioning neurons to rub together, think about a world in which a nation’s central bank owns more assets, and has thus created more cash and reserves, than all the good and services for its host nation, which it has then effectively LBOed… with debt created out of thin air and collateralized by what can only be defined as funny money.
We can’t wait to find out, and neither can the aforementioned Mr. Minsky, who if not running for the hills, is certainly spinning in his grave.
* * *
Some more thoughts on that absolute, circus-like clusterfuck with zero regard for the future that is happening in a very irradiated Japan, which at this point knows quite well it’s game over.
I saw the chart above on Japan’s balance sheet compared to the Fed and ECB in a research report from J.P. Morgan Securities last week (their October 11th Global Data Watch). One segment of the line on the chart shows what Japan has already committed to, and another segment showing where its balance sheet might go (“contingent”) if inflation expectations do not rise to the government’s 2% target in time. Japan’s planned massive increase in Central Bank holdings of government bonds looked huge and almost unnatural, like a picture I saw this week of a giant 20-foot oarfish discovered off Catalina Island. But this is exactly what Japan plans to do: liquefy the Japanese economy to the point where inflation expectations rise, and where owners of Japanese government bonds decide that real yields are so low that they either (a) buy riskier domestic assets, or (b) any foreign asset, which would weaken the Yen and presumably contribute to an export-led recovery. To propel more of (a), Japan is considering the creation of new investment accounts which allow citizens to contribute money whose subsequent gains are untaxed, but only if they are invested in equities (not bonds, cash or gold). Amazing.
Yup: the proverbial Bernanke chopper warming up now, somewhere in Tokyo.
Such a strategy is not riskless, of course. One I can think of: if the Yen collapses and oil/natural gas prices remain high, Japanese energy import costs may become intolerably high and threaten any recovery. All the more reason that Japan is going to be under increasing pressure to re-commission nuclear power, even as the situation in Fukushima deteriorates further. For a couple of decades, being underweight Japanese equities was a very reliable thing to do. For now, owning a normal allocation seems like the best course of action, as long as the Yen exposure can be hedged. Another rise in Japanese equities is going to be easier to engineer than a durable, consistent increase in Japanese growth and inflation; these are two very different things.
Since we’ve said all of this before, and frankly are tired of repeating ourselves, the only thing that needs clarification is what a 20-foot oarfish looks like. Here is the answer.
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