US and Japan: economic superpower debt bombs

[CEJ]

Most people outside Japan are unaware of the high levels of debt the
country's national government incurs. One, it's a myth that this debt
crisis goes back to the so-called 'lost decade' of no growth.
Actually, much of the debt goes way back before this, when the
national development state was in full steam in the 1970s and 1980s
but got expensively unhinged by oil shocks and US trade protectionism.
Two, what has kept it from being a crisis is that at least up until
recently Japan's government has always been able to peddle ever more
bonds domestically. Individual households and investment funds would
snap up government yen bonds as safe investments.

What could be different this time around is Japanese households have
less and less savings to put into 'money market accounts' (indirect
bond investing) or directly into bonds (which you can buy at post
offices and banks the last time I looked). That is because what the
'lost decade' has meant is very low interest and/or return on all
types of savings and securities while households have seen income go
flat or decline. What's more, they have been asked to pay for more and
more of their health insurance costs--either by spending savings on
uncovered costs or by spending savings on supplemental coverage
(offered, how convenient, by foreign insurers like AIG).

If Japan has to go overseas to find people willing to hold long-term
Japanese government bonds, watch out. That means a debt bomb super-
crisis in the making because both the US and Japan have a lot of
government debt that has to be papered over. Right now one US
strategy, cheapen the dollar against the yen, doesn't have a yen-
denominated counterpart. Financial and fiscal policy bureaucrats here
must really love this 'equal partnership' with the USA now.

http://www.bloomberg.com/apps/news?pid=20601101&sid=aJNPntLz_prY

Japan’s Bond Sales May Trigger ‘Market Backlash,’ Fujimaki Says
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By Shigeki Nozawa and Junko Kikkawa

Nov. 18 (Bloomberg) -- Japan’s rising debt sales are causing concern
about a loss of fiscal discipline and may lead to a sell-off in bonds,
stocks and the yen, said Takeshi Fujimaki, a former adviser to
billionaire investor George Soros.

Japan’s fiscal situation “has been stretched to the limit,” and that
may cause a “market backlash” at the end of the year, said Fujimaki,
president of Fujimaki Japan, an investment advising company. Tax
revenue of less than 40 trillion yen ($448 billion) and planned
expenditure of more than 90 trillion yen on top of the large deficits
are “beyond belief,” he said.

Japan’s bonds may slump in December when investors find out how much
the government will increase debt sales for the following fiscal year,
Fujimaki said. “Yields on 10-year government bonds may surge to 5
percent,” he said.

Yields on 10-year bonds rose to as high as 1.485 percent on Nov. 10,
the most since June. They were little changed today at 1.31 percent as
of the 11:05 a.m. morning close at Japan Bond Trading Co., the
nation’s largest interdealer debt broker.

Ten-year yields jumped from the 2.5 percent level to 6 percent in
1987, and “I wouldn’t be surprised if a similar increase occurred this
time,” Fujimaki said.

A increase of 3 percentage points in three months is tantamount to
“Japan selling” fueled by concern the nation may default, which would
also drag down stocks and the yen, he said.

Outstanding government loans and bonds totaled a record 864.5 trillion
yen on Sept. 30, making Japan the world’s most indebted nation,
according to Ministry of Finance data.