The Land Of The Rising Debt

Ambrose Evans-Pritchard is sounding the alarm on Japan's sovereign debt.

I have felt rather lonely after suggesting in my New Year Predictions that Japan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

My intended point — overly condensed  — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again.

His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

The numbers aren't good and they more than back up his warning.  Japan has been running budget deficits of 30-40% of the country's GDP for about 15 years now.  They owe more than twice of their country's entire GDP, approaching two and a half times.  That was fine when the world economy wasn't staggering around like a man just clocked in the head with a baseball bat and heading for the edge of a cliff.

It's not a question of if Japan's economy explodes, but when.  And we're headed down the same path, only maybe 10 years behind them in the cycle.