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Japan: The Perpetual Crisis Tease

“Cassandra’s curse was that her warnings would never be believed,” writes the Economist. “Doom-mongers in the Japanese government-bond market have suffered a milder fate: they were just far, far too early.”

At HS Dent, we’ve been firmly in the Japan “doom-monger” camp for quite some time.  We’ve hesitated to take active bets against the Japanese bond market (believing that deflationary forces would keep bond yields low), and have even held out hope that the country might enjoy a mild “mini boom” with the maturing of that country’s small Echo Boomer generation.  But our long-term view has remained unchanged — that Japan, as a country and economy, was on a slow, steady track to oblivion.

The Economist largely agrees though thinks that Japans day of reckoning could be at least a few years off.  But come it will:

It certainly seems likely that at some point the worst fears of the bears will come to pass. Debt servicing already uses up some 35% of government revenues. Imagine what that figure would look like if Japan paid the same level of yields as Germany (or worse still, Greece). A fair chunk of Japanese debt is owned by government agencies, a financing pyramid that will eventually collapse. Historically countries with very high levels of government debt have defaulted or, more usually, inflated the problem away.

From “Apocalypse, Not Now“

It remains to be seen how the Japan saga will end.   It’s hard to imagine a good ending for the country’s bondholders, however.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy