Case study of the banking crisis - Japan's "Lost Decade"

[Magda Hassan]

Lots of talk recently about Japan's debt and the Bank of Japan's moving in to print money big time. Some articles in just the last week from Zero Hedge:

Japan's Debt Crisis Visualized

Submitted by Tyler Durden on 04/04/2013 20:59 -0400


In just a few short minutes, inspired by Kyle Bass, Addogram presents a short visual explanation of Japan's debt problem. In the time it takes Ben Bernanke to print $13.7 million you'll have a deep understanding of Aso, Abe, and Kuroda's impending debt crisis.

Kyle Bass: "Japan Will Implode Under Weight Of Their Debt"

Submitted by Tyler Durden on 04/04/2013 18:41 -0400


As the fast-money flabber-mouths stare admiringly at the rise in nominal prices of Japanese (and the rest of the world ex-China) stock prices amid soaring sales of wheelbarrows following Kuroda's 'shock-and-awe' last night, it is Kyle Bass who brings these surrealists back to earth with some cold-hard-facting. Out of the gate Bass explains the massive significance of what the Japanese are embarking on, "they are essentially doubling the monetary base by the end of 2104."
It is a "Giant Experiment," he warns, but when you are backed into a corner and your debts are north of 20 times your government tax revenue, "you're already insolvent." Simply put, Bass says they have to do something and they have to something big because they are "about to implode under the weight of their debt." For a sense of the scale of the BoJ's 'experimentation', Bass sums it up perfectly (and concerningly), "the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
What they are trying to do is devalue the currency to attempt to become more competitive while holding their rates market flat - the economic zealots running the world's central banks believe they can live in that Nirvana - and Bass believes that is not the case, as they will lose control of rates, since leaving the zone of insolvency is impossible now. His advice, "if you're Japanese, spend! or take it out of your country. If you're not, borrow in JPY and invest in productive assets." Do not be long JPY or Japanese assets as he concludes with the reality of Japan's "hollowed out" manufacturing industry and why USDJPY is less important that KRWJPY.

Nikkei Soars, Japanese Bond Yields Collapse On BoJ Front-Running

Submitted by Tyler Durden on 04/04/2013 20:19 -0400


If there is one thing the Fed taught the world's investors it was to front-run them aggressively; and whether by unintended consequence or total and utter lack of belief that despite a 'promise' to do 'whatever it takes' to stoke 2% inflation the BoJ are utterly unable to allow rates to rise since the cost of interest skyrockets and blows out any last hope of recovery, interest rates are collapsing. Japan's benchmark 10Y (that is ten years!!) yield just plunged from 55bps (pre-BoJ yesterday) to 34bps now. That is a yield, not a spread. Nothing to see here, move along. Of course, not to be outdone, Japanese stocks (Nikkei 225) are now up 6.75% from pre-BoJ (3% today) trading at 13,000 - its highest since September 2008 (Lehman). But there is one market that is showing its concerns at Japan's inevitable blow up - Kyle Bass' 1Y Jump risk has more than doubled in the last 4 months.





and TOPIX vs JGBs...


meanwhile, in 30Y JPY Swaps...


and the long-end of the JGB curve is clearly getting whacked with technicals (or just simple old front-running on the BoJ's extension) as it is looking very 'deflationary' relative to FX and stocks...


as JGB 5s10s collapses back across its 20 year channel...


JGBs vs Trade Deficit...


and one of Kyle Bass' preferred ways to play Japan - through 1Y jump risk (CDS) - has more than doubled in the last 4 months...


Charts: Bloomberg

Is It Beginning? Biggest JGB Price Collapse In Over 10 Years Triggers TSE Circuit Breakers

Submitted by Tyler Durden on 04/05/2013 00:48 -0400


Just over 4 hours ago we discussed the stunning collapse in 10Y Japanese bond yields. Since then - things have taken a very dramatic turn for the worse for bonds. 10Y JGB yields have exploded higher. The move from 32bps to 65bps triggered circuit breakers on the Tokyo Stock Exchange in JGB Futures trading as JGB prices plunged by their largest amount since September 2002. We can only imagine there is liquidations galore occurring given the massive outsize moves we are seeing in Japanese bonds, stocks, FX, swaps, and CDS. Did the BoJ just lose control?

Now that is a reversal!!


Biggest price drop in JGB Futures in over 10 years


Is the BoJ losing control?

Charts: Bloomberg

Japan's 13 Sigma Bond Swan

Submitted by Tyler Durden on 04/05/2013 14:27 -0400

• Bond
  
• Japan
  
• Nikkei
  

For six months the Japanese jawboning has seen investors front-running the BoJ, selling JPY and buying whatever risk-asset is the most correlated that day - whether it is the Nikkei 225 or the S&P 500. However, now that words have been replaced by actions, it appears that someone (cough Japanese institutions cough) has decided the 13.4-sigma swing in JGBs last night is just too much and have rotated to US Treasuries. The selling of JPY and buying of EUR (to fund peripheral bond buying) and USD (to fund Treasury buying) is very clear. That means, implicitly, that every ramp higher in JPY (weaker JPY) is simply more bond-buying - which leaves the algos directionless.

If you were a risk-manager, what would you do? And as far as all those VaR risk models - oops!!


It seems the 'sellers' of those JGBs have found a new place to put that capital to work (and in a non-devaluing currency)...


Charts: Bloomberg