What is happening in Japan?

The debate in Australia this week has been based on the budget and the decision of which political party has the right plan to reduce Australia’s debt levels.

In May 2012 the Australian debt ceiling, or the amount of Government debt that the country is legislated to have as an upper limit, was set to $300 billion. The Australian on May 16th reported that Australian Government debt would reach this $300 billion limit by December 2014 based on the Gillard Governments projected deficits.

If this seems like a large amount of debt consider what is happening in the world’s 3rd largest economy, Japan, right at this moment.

Japan has been in a deflationary environment for some time where prices go down due to lower priced imports from trading partners such as China and a high household savings ratios over the years, whereby Japanese consumers spend less of their incomes than European or US consumers – low spending and demand leads to lower prices. To stop this deflationary environment Prime Minister Shinzo Abe and the Bank of Japan (BoJ) have embarked on a Quantitative Easing (money printing) exercise aimed at boosting the Japanese economy and bringing about inflation of 2% over the next 2 years.

In doing so the BoJ is expanding its balance sheet to 270 trillion yen… that’s $2.66 trillion AUD. In comparison the Australian debt ceiling is current $0.3 trillion AUD!

Many commentators have warned that this move will cause Japan to default due to its debt which will have much larger ramifications for global investment markets that the fears of a Greek default.

Early signs of trouble were evident this week as the BoJ announced that the monthly bond purchases would be increased to 7.6 trillion yen (or $76 billion USD). Since this announcement Japan’s 10 year Government bond yields have surged as the bond market has been selling Japanese Government bonds due to this fear of a Japanese economic default.

Bond prices and yields have an inverse relationship with bond prices falling as yields increase. Bond market panic in Japan has caused a selling frenzy and panic selling of any type causes prices to fall.

The vital question is whether the Japanese economy can hang on, and if not what affect this will have on global investment markets. The answer to these questions is uncertain, but the fact many global hedge funds are betting against Japan’s survival doesn’t send comforting signals to the rest of us.

Important Information:
Value Investment Partners Pty Ltd is a Corporate Authorised Representative (Representative No.: 409849) ABN 72 149 815 707 of Sterling Managed Investments Pty Ltd, Australian Financial Services Licensee (AFSL 340744). This document has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person’s investment objectives, financial situation and particular needs. Before making any investment decision based on this advice, you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances.