Salient to Investors:

Takeshi Fujimaki said:

  • A delay in increasing the sales tax and reduction of Fed stimulus could cause Japan’s government bond bubble to burst.
  • Japan will not be able to avoid default and hyper-inflation with the tax increase, but that is no excuse not to go ahead with it.
  • Japan’s fiscal health is not ringing alarm bells in the market as the BOJ’s enormous amount of bond buying keeps yields low, and no matter how much fiscal spending, the pain won’t be felt, so the debt continues to balloon to the point of no return.
  • Postponing the sales tax would be a huge mistake and would be a clear signal for a government bond sell-off, or buying of puts. It could be a trigger for hedge funds which have been waiting for a collapse to start moving.
  • The risk of default is shifting from the private sector to the public as the BOJ splurges on JGBs. If we continue down this path the credibility of the BOJ will be lost and the yen will plunge.
  • We need a weaker yen to stoke inflation, because on fundamentals the yen should be around 180 to 200 per dollar, but because it has been around 80, we have had 20 years of deflation.

J. Kyle Bass at Hayman Advisors has predicted a Japanese fiscal collapse since 2010 and said in May that if JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities.

The IMF said Japan’s public debt may rise to 245 percent of GDP in 2013.

The BOJ is set to absorb half of the government bonds planned for sale this fiscal year, while domestic investors are looking overseas for higher yielding assets.

In Q2, Sumitomo Mitsui Financial almost halved its JGB holdings in Q2, Mitsubishi UFJ Financial cut holdings by 17 percent,  and Mizuho Financial cut by 20 percent.

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