Saturday, January 19, 2013

A Little Bit On Japan

There's a great CNBC video up today on Japan's upcoming government debt implosion. It's worth watching the whole thing, but here's the payoff in case you want to skip it.

Japanese 10-year bonds yield about 0.76%. The new Japanese government has told its central bank to print money until they reach an inflation rate of 2%. That means anyone holding those bonds will be losing money as the interest rate will be less than inflation. It also assumes that the Japanese Central Bank can target an inflation rate and not overshoot it.

There is a positively enormous amount of Japanese debt out there.

When the Japanese bond holders decide they can find better returns elsewhere, and it won't be hard to beat a return of -1.2%, they will sell. They will sell at a loss. That will trigger others to make the same decision, resulting in a cascade effect with everyone trying to escape the stuff and the government with no options but to print huge piles of Yen to buy them up, resulting in more inflation, resulting in worse net yields for the remaining bind holders.

Good thing we're not primed for the same thing here.


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