Japan's Debt Woes Sound Much Like the United States

[Constitutional Paulicy]

Japan slowly wakes up to doomsday debt risk

TOKYO (Reuters) - Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.

Not long ago such doomsday scenarios would be dismissed in Tokyo as fantasies of ill-informed foreigners sitting on loss-making bets "shorting Japan".

Today this is what is on bureaucrats' minds in Japan's centre of political and economic power.

"It's scary when you think what could happen if there's triple-selling of bonds, stocks and the yen. The chance of this happening is bigger than markets think," says a senior official.

Leaning back in a leather sofa in his office, the official appears relaxed, but the way he wastes no time answering questions about a debt meltdown suggests it is an all too familiar topic.

The official, like many others interviewed by Reuters, declined to be named because of the sensitivity of the subject and his alarm over Japan's $10 trillion-plus debt overhang has yet to be reflected in public debate or action. But these officials would be the ones pulling the levers in the command center if Japan were to be hit by a debt crisis.

For interactive graphic, click http://link.reuters.com/kar66s

The government borrows more than it raises in taxes, and its debt pile amounts to two years' worth of Japan's economic output, the highest debt-to-GDP ratio in the world.

It costs Japan half of the country's tax income just to service its debt. Each year, Japan's debt level increases by more than the combined gross domestic product of Greece and Portugal.

Yet Prime Minister Yoshihiko Noda's plan to double the 5 percent sales tax to 10 percent over the next three years is seen as far too timid to stop debts from piling up.

Furthermore, he has yet to win over many in his own party and half of the public while the opposition threatens to scupper the plan, which it supports in principle, to force snap elections.

Technocrats who might have once dismissed worst-case scenarios are now beginning to take them seriously as doubts grow over whether Japan is ready to act and as Greece's budget meltdown stokes the euro zone's debt crisis.

Conventional wisdom is that Japan is safe as long as it keeps covering about 95 percent of its borrowing needs at home. What emerges from a dozen or so interviews with fund managers and officials versed in monetary and fiscal policy is that a risk of domestic investors going on a strike is what makes them particularly nervous.

Much more here........ http://news.yahoo.com/japan-slowly-w...061219869.html

[furface]

Japan is using debt to finance their retirement system. It's supposed to be the other way around. You use debt to finance population growth, and by the time those people retire it's supposed to have been paid off.

Interestingly Yen based debt is likely one reason Japan has refused to stop buying Iranian oil. Doing so could crash the Yen at this point. Japan's debt is mainly internal, but they need to buy oil on the international market. If they all of a sudden had to start buying oil in dollars, it would devalue the Yen.

[Guzabuza]

Long Nikkei and long put YEN would be a very appropriate now. USDJPY broke to the upside a decade long falling wedge. Long AUDJPY also setting up for a nice long term trade

Or even better, look at NOKJPY, holly cow, long of the decade????? Decade long basing pattern, 10 % downside risk 100 % upside risk. Awesome risk/reward.

Will probably make a Long Nikkes, long NOKJPY trade

[cubical]

Their debt is mostly all internal, large portion of our debt is external. They are net exporters, we are net importers. They own almost a trillion in US assets. With all that said, yes there will be a currency problem in Japan, but ours will be bigger/worse.

[Guzabuza]

they have also turned net importers

[Knighted]

The best predictor I have found to identify a country's solvency is a combination of the country's budget deficit as a % of GDP and its NIIP as a % of GDP (Net international investment position), which is the difference between a country's external financial assets and its liabilities. Debt isn't as big of a concern if you have an enormous collection of assets that can be liquidated to pay it off, so assets need to be a part of the picture. Here is a partial list that shows the NIIP as a % of GDP for many countries around the world:

http://en.wikipedia.org/wiki/Net_int...tment_position

If a country has a significant deficit as % of GDP and a significantly negative NIIP as % of GDP, the odds of a crisis appear to be very high. This method accurately predicts the imminent collapse of the PIIGS and also explains why Japan isn't having an immediate crisis with its enormous debt/deficit. FWIW, Hong Kong, Singapore, China, and Switzerland have the most stable NIIP from the list above.