i happen to think the super committee's lack of progress as telling, and
what shall be tee-up as the next fiscal moves and monetary gyrations should be more telling
my wager says biz as usual, because if i were 'them' i cannot think of anything else to do
all the bad news scripts are more known than not, and we are just waiting for the play-out
should anything unexpected happen, cannot be good news so must be bad news
of course given my allocations, good news is bad news and the other way around for bad news
;0)
in the mean nasty time we have not heard about japan lately as its currency reigns over all
just in in-tray, oops
IMF Sustainability Report
(p. 139-162)
imf.org
Fiscal imbalances are projected to remain large going forward.
Following the global financial crisis and the March 2011 earthquake, staff projects
that a near-term decline in GDP and reconstruction efforts will push the net
public debt ratio to 160 percent by 2015.
17. Should JGB yields rise from current levels, Japanese debt could
quickly become unsustainable. Recent events in other advanced economies have
underscored how quickly market sentiment toward sovereigns with
unsustainable fiscal imbalances can shift.
In Japan, two scenarios are possible. In one, private demand would pick up, which
would lead the BOJ to increase policy rates, in which case the interest rate growth
differential may not change much.
The other is more worrisome. Market concerns about fiscal sustainability could
result in a sudden spike in the risk premium on JGBs, without a
contemporaneous increase in private demand. An increase in yields could be
triggered by delayed fiscal reforms; a decline in private savings (e.g., if corporate
profits decline); a protracted slump in growth (e.g., related to the March
earthquake); or unexpected shifts in the portfolio preferences of Japanese
investors. Once confidence in sustainability erodes, authorities could
face an adverse feedback loop between rising yields, falling market confidence, a
more vulnerable financial system, diminishing fiscal policy space and a
contracting real economy.
Public Balance Sheets: With exceptionally low nominal yields on
JGBs, interest payments in 2010 were still 2 percent of GDP. An increase of
just 100 basis points in average yields would raise the interest bill by an
additional 2 percent of GDP, or more if there were a contemporaneous
increase in debt. Absent an offsetting effect from more rapid growth, debt
dynamics could deteriorate precariously.
Private Balance Sheets: A JGB bond shock, particularly if accompanied by
an equity price drop, would imply large capital losses for the principal
creditors, which are Japanese banks and pension funds. Capital losses
could raise counterparty risks and force banks into abrupt deleveraging.
Staff’s analysis suggests that if the shock is sufficiently large, bank credit
would contract as well.25 Moreover, should banks’ deleveraging extend to
their positions abroad, exchange rate appreciation could follow, further
squeezing aggregate demand.
18. A spike in JGB yields could result in an abrupt withdrawal of liquidity
from global capital markets and possibly disruptive adjustments in
exchange rates. Japan’s private net international investment position is
significant, about $1½ trillion, consisting primarily of the outward investments of
banks, life insurers, and corporate pension funds. Capital losses following a spike in
JGB yields could trigger rapid deleveraging from positions abroad.
In the event of a rise in JGB yields, Japanese banks may need to cut their
foreign credit lines. For example, analysis in the IMF Spillover Report for
Japan indicates that in an extreme shock (e.g., a 450 basis point increase)
would cut Japan’s credit to foreign borrowers by close to 50 percent,
assuming that foreign loans are cut first. G-20 economies, notably the U.K.
and Korea, would be among the most exposed to the loss in funding.
Given evidence from past bouts of global turmoil, abrupt adjustments in
exchange rates of major economies are likely to follow.
The rise in JGB yields could put upward pressure on sovereign yields
elsewhere. The risk of transmission of sovereign debt shocks has increased
considerably since the 2008 crisis, including from Japan to other sovereigns.
Contagion could thus translate a rise in JGB yields into higher interest rates
elsewhere. Staff’s analysis suggests that sovereign bond yields in economies where
public debt is already high would be most vulnerable. |
