It’s been a busy week for the Bank of Japan…
The market believed Japan’s central bank would back off its massive bond-buying program and negative interest-rate policy with yesterday’s policy decision (it didn’t), so investors were dumping bonds in advance of the meeting. That sent yields on 10-year Japanese government bonds (JGBs) soaring from 0.03% to 0.11% in just under two weeks.
So the BOJ stepped in, for the third time in one week, saying it would buy unlimited government bonds to keep yields down. That’s the strategy behind Japan’s latest form of quantitative easing called “yield-curve control.” Essentially, it’s stepping in to buy bonds any time yields rise above 0.1%.
So, when yields hit 0.11%, an 18-month high, the bank bought another $14.4 billion in bonds.
But this is just the latest iteration of Japan’s aggressive and unprecedented QE. Since 2012, Japan has been hell bent on keeping its interest rates near zero.
The BOJ printed yen to buy basically all of the $9.5 trillion of JGBs outstanding. When it ran out of bonds, BOJ started buying stocks. Now it’s a top 10 shareholder in 40% of Japanese listed companies. And today, it’s vowed to spend unlimited money to keep yields below 0.1%.
Never mind what the planned exit strategy is (which will no doubt be catastrophic), let’s take a quick look at Japan’s debt situation – which is growing by the day.
Japan, the world’s third-largest economy, has total debt of more than ONE QUADRILLION YEN. And government debt currently sits at a whopping 224% of GDP, making it more leveraged than even Greece, whose debt-to-GDP is around 180%.
Japan spent 24.1% of TOTAL REVENUE (appx. 23.5 trillion yen) last year on servicing its debt – that includes interest and paying down principal. Those figures are right off the government’s website. And that percentage has no doubt gone higher this year.
Think about that…
Japan’s debt service eats up one-quarter of the entire budget with interest rates around 0.1%.
They cannot afford higher interest rates by even a fraction of a percent.
If interest rates in Japan went to just, say, 1%, debt service would literally exceed all of government tax revenue.
For the longest time, Japan has experienced deflation. So ultra-low rates have been palatable… if the purchasing power of your money increases every year, you’re probably willing to buy an investment that only returns 0.05% – you’re still maintaining purchasing power.
But Japan is currently seeing inflation of around 1% a year, and the BOJ’s target is 2% – given their complete commitment to the program, I’d say they achieve it eventually.
If inflation is running at 2% a year, who wants to own something paying out less than 0.1%? No rational person would take that trade because you’re guaranteed to lose money.
So you sell those bonds. Then interest rates rise (which Japan absolutely cannot afford). So the BOJ intervenes. That stokes inflation.
I think you see the cycle here…
Now the BOJ has waged war against rising interest rates three times in the past week. That’s a HUGE deal. Remember, the government already owns the majority of JGBs and TONS of Japanese equities.
But it continues to prop up the market by conjuring money out of thin air.
This is the third-largest economy in the world… and it is a complete disaster in the making.
The BOJ’s latest actions give you a sense of how close to the end we may be.
But what is the end game if Japan goes bust?
In June, I wrote about the mini-meltdown we experienced after the President of Italy opposed the nomination of a finance minister named Paolo Savona.
If that sounds boring and worthless, that’s because it is.
Still, the market freaked out because a tiny, economically inconsequential country had a small blip in its electoral process.
What do you think would happen if the world’s third-largest economy collapsed under the weight of its own debt?
Imagine the chaos and panic that would ensue.
The Japanese government is fighting for its life right now (with absolutely ZERO concern for its other financial obligations). And it’s continuing to add unlimited debt into the future.
This won’t end well.
And it’s time to start loading up on the safest assets you can find.
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