Friday, November 13, 2009

The Debts of the Lenders: JGB Yield Spikes Draws Bond Bears

Japan's finances have traditionally been the closed purview of the all powerful zaibatsu corporate industrial complex. But as Japan's failed experiment in quantitative easing draws the nation down into 200% debt to GDP indebtedness, foreign observers have been sounding the alarm. Nearly 25% of Japan's budget goes towards servicing its debt obligations alone.

Doubt was cast on Japan's finances earlier this week by David Einhorn, macro hedge fund chief of Greenlight, who famously predicted the insolvency of Lehman Brothers. Although Einhorn obviously was talking his book (he is shorting JGBs), his concerns echo the voice of other (mostly foreign) critics. Fundamental factors are the reason behind Japan's indebtedness. Hostile attitudes towards foreign immigration (even among other Asian countries), declining birth rates, the rise of China as a competing export center, and persistent unemployment are all factors edging into the equation.

His comments cast a sharp divide between the foreigner and native view of the bond market. Traditionally, the Japanese government has been able to rely on a captive market of fund managers, retail investors, and corporate honchos to soak up its debt. But that is changing.

A senior UFJ Bank of Tokyo Mistubishi portfolio manager claimed that JGB yields are going to hit 2% in 2010. Now, that may not sound like a lot compared to other markets. But when you consider that nearly every other nation in the world is also pursuing a quantitative easing program - not to mention the already mentioned 25% debt servicing component of the budget - a few points move will make a big difference.

On the other hand, the sanguine Japanese government can also move to buy up its own debt. That would depress the value of the yen and provide much needed relief to its export sector. However, that is only a shorter term solution.

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