Japan, not Syria, is still the number one macro risk!

japan macro risk

We are concerned. The Fukushima farce continues with another TEPCO confession of misinformation today as the Nikkei revisits 2 month lows. But there’s more….

Japan in non-nuclear mode is a huge importer of energy and it faces a double whammy of reduced Yen purchasing power plus year-high crude oil prices. WealthiFi has highlighted both the expected currency boost to exports but the less-expected and larger boost to import prices and then we came across a fantastic analogy in a guest post contribution from Capitalist Exploits on Zero Hedge. The writer used the analogy of “cash burn” at a company and used the same metrics for Japan as a sovereign entity…

  • Net cash in treasury: ¥0 (Note: I said cash, not IOUs)
  • Total debt stack: ¥1 Quadrillion. (1,000 Trillion)
  • Revenues: ¥43 Trillion
  • Ratio: Debt stack is 24 times Revenue
  • Debt servicing costs or expenditure: ¥11 Trillion (at roughly 17-20 basis points)
  • Burn rate: – ¥ 60.2 Trillion (based on their 10.3% of GDP budget deficit)

That 10.3% budget deficit is not going to be helped by a shock spike to energy costs nor the plunge in currency values in many of its EM export markets. The debt servicing costs have already been topical this week as Reuters revealed a Ministry of Finance document requesting a budget of $257 billion (and 13% higher than previous year) for debt servicing costs alone. For context, that exceeds the GDP of Hong Kong!

Everybody acknowledges the need for Japan to grow out of its debt noose but growth must mean net income growth to pay down debt, not a cash burn equivalent to 10% of GDP adding to the debt pile.

Oh, and for those that think Japan’s world leading creditor status neutralises its debt, think again. The government debtor does not control private domestic creditors, unless we think Cyprus was a great success. The timing of potential energy and emerging market crises is doubly unfortunate for the Abenomics experiment and will require huge efforts to retain market confidence if upcoming economic data disappoints.  Because, confidence is the only card Japan has left.


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