Friday, February 13, 2015

Japan's Ponzi Scheme Cracking?

Japanese Government Bonds (JGBs) are inching up higher in yield. Problem?

This chart shows the bps expansion, or the increase in yield, since the ECB announced QE. As you can see, yields have increase across the board for all durations.

Check out the JGB 10-year. The yield has push up about 0.227%. Pfffft, that's nothing, right?

Well, maybe not really.

The JGB 10-year tagged it's all-time lowest yield of 0.201% when it closed on the 19th of Jan.

Today it is 0.396%. That's an increase in yield of 97%.

I have written about Japan before, I believe they are crazy.
Basically, as I've said it before, Japanese policymakers are crazy. Japan as a country doesn't have the ability to repay back it's debt. Japan's interest rate can never go up meaningfully back to a "normal" environment because interest rate expense would kill it. The only thing that they can do is to inflate out of their debt. However, this charade doesn't last long, because once investors look at real returns, they will know that something isn't right. Once faith in the Japanese system is gone, that's when we're going to get a financial Fukushima event on our hands where everyone will be exiting Japan. How long will it take for people to realize Japan's insolvency? I don't know, but I would never, ever, buy a Japanese Government Bond (JGB). It would literally have to be over my dead body. - GMGH, 4 Jan 2015

Either someone somewhere in Japan does something, or this Ponzi scheme is going to come unraveling pretty soon.

As of last year 2014, Japan was using 18.5% of their tax revenue to pay for interest expenses. Is that a lot? I think if 20% of my salary was use to service the interest on my outstanding debt, that would pretty much mean I would probably never be able to pay back my debts.

Is this the start of something new? I don't know, but I know that if I really had to be invested in Japan, I'd only want to invest in companies with hard assets, ideally with fixed interest rate debt since it would all become free money if hyperinflation hits.


  1. GMGH,

    Scary isn't it?

    Now imagine if the 10 year JGB goes to 1% yield?

    Now imagine if I am a 20 year old in Japan and I can think for myself.

    No wonder I have no interest in sex.

    I would know that my grandparents and parents have screwed my generation many times over...

    1. Hi SMOL,

      Whoa, if the JGB 10 year goes over 1%, then the BOJ has totally lost it. First warning sign to grab your stuff and get out!

      I am not sure if 20 year olds think about their national debt! Singapore has a big sovereign wealth fund, but why isn't everyone thinking about sex? Haha! :P


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