Jun 14, 2010
Time to Short Japan?
For further proof that Japan is, in John Maudlin’s inimitable words, “a bug in search of a windshield,” look no further than the advertising campaign the Finance Ministry launched today.
The Finance Ministry is trying to bolster native demand for Japanese bonds. How would they do this? By targeting “the untapped market”, men of marrying age and convincing them that buying bonds will make them, wait for it, more attractive.
As Bloomberg explained:
“I want my future husband to be diligent about money,” a 27-year-old woman says in an ad being run in free magazines promoting a fixed-rate, three-year note that Japan started selling last week. “Playboys are no good.” She’s one of five women featured in the page, which says “Men who hold JGBs are popular with women!!”
The ministry commissioned the ads to appeal to citizens for money at a time when record government borrowing threatens to outstrip demand. Prime Minister Naoto Kan, who took office yesterday, said he doesn’t have an instant fix to rein in the world’s largest public debt.
The government’s plan to attract marrying-age men comes after a campaign aimed at retirees started last August. …
“It strikes of desperation,” Christian Carrillo, a senior interest-rate strategist in Tokyo at Societe Generale SA said about the ad campaign. “I doubt this will be a successful strategy to attract retail investors.”
To make it even more worrying, they’re struggling to meet their obligations at a time when their three year bonds are yielding on a real basis (with inflation) negative 1% per year. (Women in Japan, apparently, aren’t looking for good investors.) What happens if their interest rate moves to just 2%, let alone 4% or 8%?
A nominal 1% return might be worthwhile when Japan experiences sharp deflation, but if that’s followed quickly by the debasing of their currency, it will be a disaster. What dominoes will fall globally? If the world’s financial system was brought to its knees by trouble in US subprime mortgages, and it took everything we had to avoid a depression, what is the remedy for a Japanese default? Surely the seizing up of the world’s largest bond market would have a catastrophic impact on the global economy and financial system. Right?
Which just goes to show how much more difficult it is to forecast rates and returns and to hedge risk in the current economic environment. This time isn’t different, but it sure doesn’t bear any resemblance to the world we’ve grown accustomed to over the last seventy years.
Stay tuned …