Monday, January 10, 2011

Exploding Japanese

“I see Japan as a nuclear bomb strapped onto the chest of the global economy.”
That's the ebullient Hugh Henry explaining why he's bearish on Japan. You'd never have guessed. For a more considered exegesis of his exploding Japanese thesis check out the Eclectica Fund's December newsletter. It's entertaining, even if you end up thumbing through the Golden Pages for nuclear fallout shelters...

Willem Buiter has a somewhat more orthodox exposition on Japan - via a detailed analysis of the eurozone's prospects (not good). He notes that:
For the same fundamentals that support the benign low interest rate equilibrium, there also exists a ‘fear equilibrium’. In a ‘fear equilibrium’ the marginal holder of Japanese sovereign debt believes there is a non-trivial likelihood of sovereign default (or of an inflationary and exchange rate depreciation solution to the public debt overhang) and interest rates rise sharply, thus validating the fear of worsening public finances that triggered the increase in interest rates in the first place. The timing of the shift to a ‘fear equilibrium’ cannot be predicted with any degree of precision. But absent any determined and sustained commitment to tackle the unsustainable fiscal programme of the sovereign, the shift from the benign to the fear equilibrium seems bound to happen sooner or later.
He also has a sobering view on Ireland:
Ireland is the prime example of a country where the sovereign is at material risk of default because of the support extended by the sovereign to the banking sector, through guarantees of unsecured debt and through large injections of capital. Like Iceland, the banking sector in Ireland was too large to save. Unlike Iceland, the Irish sovereign, when faced with the likelihood that it would not be possible to make whole both the banks’ unsecured creditors and its own creditors, did not leave the banks to sink or swim on their own but extended bank guarantees for initially up to €440bn worth of bank unsecured liabilities. With the consolidated sovereign and banking sector likely insolvent, in our view, the key remaining question is whether it will be the banks who default, the sovereign or both.
Probably a lot sooner than Japan. Though hopefully we won't go nuclear. Oh well, maybe Hatsune Miku will save us...

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