Japanese Government Bonds: The Beginning of the End?

Japan has one of the highest debt to GDP ratios in the world and yet it has the lowest interest rates in the world. It no longer runs a trade surplus and its population is starting to spend rather than save. As John Mauldin says, Japan is a bug in search of a windshield. At some point Japan is going to provide the trade of the millennium because the risk/reward presented by its debt is astronomical. With 10 year interest rates of 0.80%, the downside is probably bounded by rates of zero, while the upside in a middle of the road scenario is easily 2% if it were to come in line with world interest rates. But with a debt to GDP that is worse than Greece, its rates even came close to the Spartans, Japan would provide explosive returns.

Japanese Fiscal Situation

Zerohedge has provided 14 charts on the “terminal keyesian endgame” that is Japan. Here’s what Tyler has to say:

It is hard to find fiscal situations that are worse than Japan’s. The gross government debt/GDP ratio, at more than 200%, is the worst among the major developed economies. Yet yields on Japanese government bonds (JGBs) have not only been among the lowest, they have also been stable, even during the recent deterioration during the European debt crisis. Thisapparent contravention of the laws of economics is both an enigma for foreign investors and the reason for them to expect fiscal collapse as a result of a sharp rise in selling pressure in the JGB market

Some key take aways:

  • Japan’s fiscal situation is the worse in the developed world
  • Japan’s debt to GDP is worse than that of Greece
  • Japan’s savings rate is falling