Since the Abenomics has been implemented in Japan’s
economy it financial market in Japan has become wild and stormy that we experienced in
Nikkei and Japanese Bond market. Where
Nikkei came down more than 15%.
The Japanese economy has been in a slump for over a
decade, Japan has a debt to GDP ratio of well over 200 percent and they are
spending about 50 percent of all tax revenue on debt service. In a
desperate attempt to revitalize the economy and reduce the debt burden, the
Bank of Japan decided a few months ago to start pumping massive amounts of
money into the economy. At first, it seemed to be working. Economic
activity perked up and the Japanese stock market went on a tremendous run.
Unfortunately, there is also a very significant downside to pumping your
economy full of money. Investors start demanding higher returns on their
money and interest rates go up. But the Japanese government cannot afford
higher interest rates. Without super low interest rates, Japanese
government finances would totally collapse. In addition, higher interest
rates in the private sector would make it much more difficult for the Japanese
economy to expand. In essence, pretty much the last thing that Japan
needs right now is significantly higher interest rates, but that is exactly
what the policies of the Bank of Japan are going to produce.
There is a lot of fear in Japan right now. On
Thursday, the Nikkei plunged 7.3 percent. That was the largest single day
decline in more than two years. Then on Monday the index fell by another
3.2 percent.
And according to Business Insider, things are not looking
good for Tuesday at this point…
In post-close futures trading, the
Nikkei has dropped by another couple hundred points, and has dropped
below 14,000.
Are we witnessing the beginning of a colossal
financial meltdown by the third largest economy on the planet? The Bank
of Japan is starting to lose control, and if Japan goes down hard the crisis
could spread to Europe and North America very rapidly. The following is
from a recent article by Graham
Summers…
As Japan has indicated, when bonds start to plunge,
it’s not good for stocks. Today the Japanese Bond market fell
and the Nikkei plunged 7%. The entire market down 7%… despite
the Bank of Japan funneling $19 billion into it to hold things together.
This is what it looks like when a Central Bank begins
to lose control. And what’s happening in Japan today will be coming to the US
in the not so distant future.
If you think the Fed is not terrified of this, think
again. The Fed has pumped over $1 trillion into foreign banks, hoping to stop
the mess from getting to the US. As Japan is showing us, the Fed will fail.
Investors, take note… the financial system is sending
us major warnings…
If you are not already preparing for a potential
market collapse, now is the time to be doing so.
And all of this money printing is absolutely crushing
the Japanese yen.
Since the start of 2013, the yen has declined 16 percent against the U.S. dollar,
even though the U.S. dollar is also being rapidly debased. Just check
out this chart of the yen vs. the U.S. dollar. It is absolutely stunning…
The term “currency war” is something that you are
going to hear a lot more over the next few years, and what you can see in the
chart above is only the beginning.
What the Bank of Japan is doing right now is
absolutely unprecedented. It has announced that it plans to inject the
equivalent of approximately $1.4 trillion into the Japanese
economy in less than two years.
As Kyle Bass recently discussed, that
dwarfs the quantitative
easing that the Federal Reserve has been doing…
“What they’re doing represents 70% of what the Fed is
doing here with an economy 1/3 the size of ours”
The big problem for Japan will come when government
bond yields really start to rise. The yield on 10 year government bonds
has been creeping up over the past few months, and if they hit the 1.0% mark
that will set off some major red flags.
Because Japan has a debt to GDP ratio of more than 200
percent, the only way that it can avoid a total meltdown of government finances
is to have super low interest rates. The video posted
below does a great job of elaborating on this point…
It really is very simple. If interest rates rise
substantially, Japan will be done.
Investor Kyle Bass is one of those that have
been warning about this for a long time…
There’s a fatalism, he says, in everyone he talks to
in Japan. Their thinking is changing, and the way they talk to him about debt
is changing. They already spend 50% of tax revenue on debt service.
“If rates go up, it’s game over.”
The financial problems in Cyprus and Greece are just
tiny blips compared to what a major financial crisis in Japan would potentially
be like. The Japanese economy is larger than the economies of Germany and
Italy combined. If the house of cards in Japan comes tumbling down, trillions
of dollars of investments all over the globe are going to be affected.
And what is happening right now in Japan should serve
as a sober warning to the United States. Like Japan, the money printing
that the Federal
Reserve has been doing has caused economic activity to perk up
a bit and it has sent the stock market on an unprecedented run.
Unfortunately, no bubble that the Federal Reserve has
ever created has been able to last forever. At some point, we will pay a
very great price for all of the debt that the U.S. government has been
accumulating and all of the reckless money printing that the Fed has been
engaged in.
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