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November 02, 2009 – Comments (9)

Japan continues to be an economy that investors ought to watch, as I have stated in the past...

One thing that I had not looked at that closely about Japan is the level of debt, which is discused in this post.  I would tend to thing they have been past the point of no return for a while.  To me this article indicates that a country is able to carry on much longer then is reasonably purdent.  It will be most interesting to see what happens when Japan can no longer borrow to pay the interest on its debt, which I assume has to be happening with the increases in debt.

9 Comments – Post Your Own

#1) On November 02, 2009 at 5:41 PM, dwot (71.79) wrote:

All common sense gone...

When I worked in banking one of the most important rules when a borrower got in trouble was they were not to be financed to be able to pay interest on debt.  It simply hid the degree of trouble the client had.

So we let whole countries do this...

It is more then insane, and when it breaks, who's holding the bag I wonder...

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#2) On November 02, 2009 at 6:06 PM, selfdestruct2 (43.99) wrote:

Very interesting. + 1

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#3) On November 02, 2009 at 6:40 PM, davejh23 (< 20) wrote:

"Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan,"

"The IMF expects Japan's gross public debt to reach 218pc of gross domestic product...The yield on 10-year government bonds has been around 1.30pc this year..."

The US is going to require much more borrowing than Japan, and our creditors aren't going to accept 1% yields.  Including unfunded entitlement obligations (that are going to be tapped hard within the next 10 years), US debt to GDP is more than double Japan's.  The CBO is estimating that we'll double the national debt in the next 10 years...I'd guess that this is a conservative estimate and that it will actually be much worse.  Interest payments could easily be the #1 budget item within 20 years...I'd say that's a sure sign of bankruptcy.  Japan might be in more danger for now, but markets should be worried that the US is going to hit a brick wall.

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#4) On November 02, 2009 at 6:49 PM, starbucks4ever (97.31) wrote:

" It will be most interesting to see what happens when Japan can no longer borrow to pay the interest on its debt"

If the debt is denominated in yen, then it will simply "pay" this debt by printing. If it is in dollars, then Japan's loans to US will get called, and it will be Bernanke's turn to "pay" them by printing. But either way, the debts will be "paid" by printing :) 

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#5) On November 02, 2009 at 7:28 PM, Tutom (< 20) wrote:

It's no doubt that Japan will continue to have problems. But, at least, its debt is to its own people. Please print more money Japan. I want to pay back the loan on my home (in Japan) with Canadian dollars. Rats, I should have done that in 2007!

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#6) On November 02, 2009 at 8:20 PM, Varchild2008 (85.23) wrote:

"It will be most interesting to see what happens when Japan can no longer borrow to pay the interest on its debt, "

Actually it will be most interesting to see that happen on the same day AMERICA falls prey to her own debt.....

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#7) On November 02, 2009 at 8:48 PM, starbucks4ever (97.31) wrote:

"Actually it will be most interesting to see that happen on the same day AMERICA falls prey to her own debt....."

And it WILL happen on the same day, because when America defaults/devalues its debt, Japanese central bank will find that its foreign reserves (all parked in US govt bonds) have turned into dust and that its own debts can no longer be honored.

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#8) On November 02, 2009 at 9:05 PM, ChrisGraley (29.80) wrote:

I have no idea how things will play out macro-economically, but I do see some different scenarios. Japan's biggest problem is that they have already borrowed as much as they can from their own people at obscenely reduced rates.

In Japan, the family money is controlled by the housewives in the family. All you have to do is to search "Japanese housewives" in the search box above to find plenty of info posted on MF about it. As you can see, housewives are getting both desperate and creative.

As the family savings rates in Japan are now half of the pitiful savings rates here in the US. They are going to be looking for more bang for their buck and speculating anywhere that they can outside of the country.  Even if they didn't, the declining population alone will make the well run dry for the Japanese government.

So how does Japan cope? Well they've already given clues. Newly elected Prime Minister Yukio Hatoyama has heavily campaigned on 2 main issues. First, spending a lot more money and creating more debt, and second, distancing Japan from US debt. The US should be concerned about both things as Japan will be facing a situation where they will spend more than they can borrow. They will be forced to sell collateral to keep up the pace and that collateral will be their US debt.

The US will be competing with Japan when they sell more debt and Japan is in a more desperate situation. The list of nations reluctant to buy more US debt is growing and they will be competing in a smaller market.

I think the key to how everything will play out will come down to the commodity rich nations.  

Do they allow the world crisis to play out or do they intervene by buying debt? Either way that they decide, they should come out as the winners globally.

The US debt will be the hot potato for a while and the only hope for the US is that somebody is willing to hold it for a while. I don't think that there is any hope for Japan.

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#9) On November 03, 2009 at 9:39 AM, dwot (71.79) wrote:

Really interesting comments.

It will be interesting to see the degree that the two debt markets are tied as this mess comes rolling to a head.

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