Post-Cover_07 Of Mice & Yen 3

Of Mice & Yen: Part 3 of 4

Christopher Investment Post-Folio Leave a Comment

As I attempted to explain in Part 1 and Part 2 of this series, Japan has a demographic problem 1 and a debt problem 2.

The Eventual-But-Not-Sure-Exactly-When Japanese Debt Crisis

So here’s the issue. Japan currently has a budget deficit of about 6.9%.3  As long as the government is running a budget deficit it will continue to need more debt to fund that shortfall.  But… I’m not really even speaking of the new debt that is occurring… it is servicing 4 the massive debt load that’s already there that concerns me.

Remember Japan’s 226% debt to GDP ratio that we discussed?  To service that debt Japan already spends about 25% of its tax revenue on interest payments.5  And that’s with interest rates at rock bottom – remember… the yield on Japan’s 10yr bond is below 0.5%!  Japan is only able to finance that low because 95% of the debt is owned and purchased by the Japanese.  Enter the demographic problem…

As Japan continues to “age” and more Japanese go from the workforce to retirement, its citizens will be shifting from savers to spenders in their retirement years.  And to cut right to it, once the Government Pension Investment Fund and the Japanese retirees no longer need to purchase all of those bonds, Japan will have to go to the international capital markets to fund its deficits – just as Greece, the US, and others are forced to do. But that isn’t just me speculating; the head of Japan’s Government Pension Investment Fund Takahiro Mitani has himself stated that due to the changing demographics he’ll need to reduce his purchases of Japanese Government Bonds.6 Additionally, the Pension Fund will also be shifting the investment allocation to focus more on equities.  Both of these trends will mean that Japan will have to rely more on foreign buyers to step in and buy that debt.7

As the percentage of Japan’s domestic buyers decreases and Japan has to rely on more and more foreign buyers, you can bet that the rest of the world won’t be buying Japanese Government Bonds for a 0.4% interest rate! Japan will be under the same scrutiny that Greece faces and yields will need to go up.  That means that the Japanese government will have to spend even more of its tax revenue to service this debt.8 In 2013 Forbes ran an article stating that a rise in Japan’s interest rates to only 2% would cause the government to spend over 80% of its tax revenue on debt service! This, unfortunately, means insolvency.

What can be done?

To pause for a second, I’m not exactly breaking news here – the Japanese government is all over this issue. Prime Minister Shinzo Abe has dedicated his tenure in office to dragging Japan out of the “lost decade(s)” and into a brighter future. 9

The Japanese government is all too aware that the demographic problem must be faced. In addition to trying to promote an increase in the nation’s birth rate, Japan will also have to embrace immigration, something that it really hasn’t been fond of in the past. The Government has admitted that it might need to promote an immigration rate of as many as 200,000 people per year to offset the low birth rate and declining population.10  This will be a major uphill battle.

But will it work…?

Of course it is possible that Prime Minister Abe’s policies meet all of the economic and social goals, succeed in jump-starting the economy, AND Japan manages to reverse the declining population trend. And I really 11 hope they do both for the sake of the health of the global economy 12 and because of my personal love-fest with Japan with which I opened this series.

But sadly, if I was a gambling man, my money is betting that they do not achieve all of these goals. I really wish I wasn’t a pessimist here, but a 226% debt to GDP ratio is13 probably past the point of no return.

If that’s the case, since this is, what’s the trade here? We’ll cover that by closing out this post series with Part 4… coming soon! 14

In the meantime, Lauren said I had too many “words” in this series and needed a professional and informative info-graphic to sum it all up.15  So.. I hit up’s crack team of graphic designers16 and here’s what we came up with:

The Eventually-But-Not-Sure-Exactly-When Japanese Debt Crisis.  Presented without comment:

Of Mice & Yen - Japan Debt Crisis

Thanks for reading,


Back to Of Mice & Yen: Part 2
On to Of Mice & Yen: Part 4 

Random references and great articles, both current and a bit dated, for this series here –>17

  1. Japan’s population is declining and its citizens “aging” rapidly.

  2. Japan’s current debt to GDP is a super dangerous 226%

  3. For comparison the government budget deficit is -2.5% in the US, -2.8% in China, a budget surplus of +0.7% in Germany, deficit of -3.6% in Greece, and a surplus of +0.5% in S. Korea

  4. “servicing” is nerd-speak for making principal and interest payments on a loan.

  5. Think about that for a second… for every dollar of tax revenue the government collects, $0.25 already goes to interest payments on the national debt.  That is hard-earned revenue that is wasted on interest rather than spent toward investment in Japan’s future (i.e. education, infrastructure, industry, etc).

  6. referred to as JGBs in the market

  7. Again, I’m not making this up or throwing out some far fetched doomsday plan.  It’s already starting, although for a variety of complicated reasons.

  8. this works just like individual financial planning. If you owe $10k on your credit cards with an interest rate at less than 1%, you probably don’t notice much. But if that rate goes up by 5% you will find yourself with less cash at the end of the day and will definitely notice the strain on your monthly cash flow!

  9. There is way too much to cover in this already-too-long post series, but just google “Abe-nomics” if you haven’t heard of the guy and read about his “3 arrows.” He’s a very sharp cookie.

  10. Estimates show that if they cannot get the birthrate back to 2.0, this immigration number will need to be 650,000.

  11. REALLY

  12. Unlike Greece, Japan is the world’s third largest economy and a sovereign debt crisis could threaten the whole global financial system.

  13. sadly

  14. Don’t worry, there’s no rush. Betting on a Japan debt crisis/collapse is often called the widow trade. It’s been “about to happen” for years, and betting on it with a timeframe has generally been a losing proposition.

  15. Pretty sure she mean a pretty chart or graph with Debt-to-GDP comparisons and not the following…

  16. basically just me and my macbook

  17. Trade, exchange rates, budget balances and interest ratesThe Economist
    Impact of Japan’s shrinking population ‘already palpable’DW
    Japan’s Population Declined In 2014 As Births Fell To A New Low – NPR
    The Demographic Timebomb Crippling Japan’s EconomyThe National Interest
    The incredible shrinking countryThe Economist

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