Translated with Google translate from Dutch -> English.
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I know it is hard to read but please do it is very interesting!!
Investment bank Lombard Odier fears within five years of bankruptcy Japan
The recent revival of the Japanese stock exchanges is misleading, find Paul Marson, chief investment officer (CIO) of the Swiss private bank Lombard Odier. The country is according to him within five years - with serious consequences for the world economy.
The Japanese Nikkei index rose in three months with 25%. Although the weakening yen spoils some of the fun outside Japan, it is clear that investors expect much from the policies of the new Prime Minister Shinzo Abe. Who wants a combination of government incentives and a very loose monetary policy ('Abenomics'), aimed at fueling inflation, stagnant state economy out of the doldrums pull. Within this Abenomics is reducing the hefty debt, now about 220% of gross domestic product (GDP), the background repressed.
The ten-year interest rate in Japan is only 0.8%. Investors seem so still no need to worry about the eligibility of the Japanese state. But Marson thinks that a financial crisis is inevitable.
You are concerned about the financial sustainability of Japan. But the Japanese still solve their problem with a considerable savings surplus?
"From the current Japanese government debt is indeed 91% owned by domestic investors. For example, public pension funds three quarters of their own assets in government bonds. And of the assets of banks is 23% of national debt. Only comparable with Italy.
The core of the story is that the Japanese debt could increase so much, because the state could always sell their bonds to domestic investors. The government now has a budget deficit amounting to 7% of GDP. The households save 5% of GDP, the companies 3%. So on balance, there is still a savings surplus of 1%. But a few years ago it was 5%. As Japan's population is shrinking and aging, savings are declining at a pace that has surprised us. Within a year, there will be a savings deficit. "
Then Japan needs to borrow more from abroad?
"By that time (within a year) the debt is 230% of GDP, even now Japan is the most guilt-ridden country in the western world. Almost half of the tax revenues, which decrease by aging, will go to the interest payments on the national debt. And they pay an interest rate of about 1% now. What will the market say: "No, thank you. Unless there is a rate of 20% is paid. "But alreadt at a rate of 3%, Japan will be bankrupt, because at that level, all tax revenue will go to the interest on the national debt and so remains nothing for health, education and social security. And at that rate (3%), foreign investors are not even interested. Certainly not by a falling yen."
Can Japan still find a way out of this dilemma?
"There is no turning back for Japan. To significantly reduce the national debt, taxes would have to be increased so sharply, or reduced government spending, the economy too much pinched. The Bank of Japan will soon be forced to buy every Japanese government bond to prevent interest rates from rising and the debt is priceless. The balance sheet of the central bank is now 30% of GDP, similar to the Bank of England and the European Central Bank. But the balance will explode. There will be a Japan unparalleled monetary expansion, resulting in a collapse of the yen. What we have seen recently is just the beginning. It does not stop at 300 yen per dollar. The Bank of Japan has no choice, given the vulnerability of the government and the banking sector who are heavily intertwined. "
An expansionary monetary policy is not free: it leads, partly through a lower yen, to higher inflation.
"Double-digit inflation in Japan is possible. The new target of the Bank of Japan is now an inflation rate of 2%. I think they should hope they never make it, because if they do a new problem entails. Japanese are accustomed to deflation. Their bonds are low, but thanks to an annual deflation of 1% to 2%, the real return since 1990 is above 2.5%. A luxury. Japanese savers have done well. But that's about to change.
Japanese investors will also have to deal with negative real yields. I wonder if they will still be interested. The Japanese Ministry of Finance has launched a campaign under the title "Real men buy bonds". Then you see a picture in which businessmen are surrounded by young ladies. Apparently you are more attractive when you invest in national debt. This type of action gives food for thought. I think that within twelve to eighteen months a severe financial crisis in Japan will take place. "
If the Bank of Japan also can not save the case, there is little else than a debt
"Eventually a "haircut" will indeed be unavoidable. The debt is simply too large. People who bought Japanese government bonds, will suffer losses. Within five years, I foresee a negotiated restructuring, in a forum like the Paris Club (a consultation of lenders and governments that no longer meet their obligations, ed) for example. "
How severe is that for the rest of the world?
"Just a small part of the debt is in the hands of foreigners, but because of the absolute size of the debt it still amounts to $ 900 billion. That is only $ 100 billion less than the size of the U.S. subprime mortgages at the start of the credit crisis. European banks have a total of more than $ 400 billion lent to Japan, the United States is sitting around $ 360 billion. It's a bomb ticking in the background. The U.S. banks have adequate buffers, but European banks are not ready for this. "
Can other countries help Japan to avoid this scenario?
"Who is going to save Japan then? The economy is comparable in size to half the eurozone, Germany or twice. The rescue of Greece was hard. The U.S. also busy enough to solve their own problems. China then? I do not think the money is there. The Japanese national debt is almost four times of China's foreign reserves. The IMF has also nothing available. "
The market is certainly not your pricing in your scenario.
"These things are always sudden. Prior to the credit crisis almost nobody worried about the U.S. housing market. As a private investor, you should definitely go short in yen. In time, the same applies to Japanese bonds and shares that are currently benefiting from the low yen. The ultimate defensive strategy, which some of our customers follow is short yen, and long Norwegian krone. "
Dream Career
Paul Marson
Paul Marson (46) studied economics in London and Cambridge and began his career at Bank of England. In 1995 began his tour of the major U.S. investment banks JP Morgan and Goldman Sachs. Meanwhile the British as CIOs (chief investment officer or chief investment) for the Swiss private bank Lombard Odier, founded in 1796. |
