English-speaking observers of Japan’s economy have been sounding warnings since last year (and many before that), but within the world of Wa, there seems to be little sense of panic.  Has time run out for Japan?

So says MarketWatch, and thanks to MarketingJapan’s Mike Rogers for the links: read Mike’s articles Yen Devaluation Now Imminent? Being Called by Major Financials! Get out of debt – Get your financial house in order now!
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“A massive 40% devaluation of the Japanese yen is imminent and inevitable…”

Mike’s articles contain excerpts from a MarketWatch article entitled “The Yen’s looming day of reckoning” and from a ZeroHedge article by Tyler Durden of March 26th, entitled, “Four Years of Japanese Central Planning Failure Charted”.  Both articles are worth reading in their entirety for the insights they give into how Japan’s economy works (or doesn’t, depending on your point of view).

Even though you may live and work in Japan, you may still get some insights  and surprises, probably unpleasant ones. So buckle up, hold onto your seat, and read on. Four Years Of Japanese Central Planning Failure Charted, tho what is charted is perhaps the failure of central planning period; as author Tyler Durden remarks,

Japan would then become a case study for failed central planning (yes, redundant), everywhere, but nowhere more than in the US. Which in turn, would not be a surprise to most, or at least to those who don’t chase dead end momentum trends and heatmapped assets in simplistic hopes of finding a greater fool 1 millisecond into the future. It also would not be a surprise to anyone who sees the following chart from John Lohman which shows the gradual failure of central planning since the second global depression started in 2007 (and offset to date by $7 trillion in central bank private-to-public risk offset), during which time the BOJ has been forced to load up its balance sheet with substantially more assets than its GDP has grown by. Alas, this trend will accelerate which is why with time the exponential chart of central bank balance sheet expansion will only get more “exponential” until it finally pops, bringing with it an end to the truly last bubble. We can only hope we are somewhere far away when that happens.

And here’s the chart referred to. Pretty much speaks for itself:

japan gdp vs monetization

japan gdp vs monetization

The comments that follow the ZeroHedge article are also worth reading.

Although 9 months old, this ZeroHedge article also has some useful information: The Endgame: Japan Inc. Plays By Its Own Rules:

After Japan’s bubble burst in 1989, the government resorted to deficit spending to prop up the economy, which accomplished two things: sporadic upticks in GDP and an explosion in government debt. At 230% of GDP, and still growing, that debt can no longer be serviced by a workforce that is shrinking—a result of two demographic shifts: decades of low birth rates and the retirement of baby-boomers.

And cracks have appeared in two other pillars that support the debt: the savings rate has sunk to American levels, and the trade surplus has been replaced by deficits at regular intervals (five months so far this year).

ZeroHedge author Wolf Richter refers to financial repression at work in Japan:

due to Japan’s institutional setup and insular psychology, it has been able to sell 95% of its JGBs within Japan. Individuals directly or indirectly hold over 50%. Government-owned or controlled institutions hold over 40%. Among them: the Government Pension Investment Fund, one of the largest pension funds in the world; the government-owned Post Bank, the largest deposit holder in the world; financial institutions the government can lean on; and the Bank of Japan.

There is essentially no free market for Japanese debt, and foreigners hold only 5%. Whenever the BoJ, the Ministry of Finance, and politicians say, “Buy these crappy bonds at these ridiculously low yields,” buyers fall in line. Example: the planned sale of reconstruction bonds. Those who buy certain amounts and hold them for specified periods get a gold trinket as reward, rather than yield. And it’ll work.

A comment below that article links to this article, also almost a year old, but contains some interesting graphs and charts, and a discussion of just what and where the Japanese government might trim its huge deficit: Japan’s debt crisis comes after Europe. Buy some long-term OTM Yen Puts. His conclusion?

My final conclusion about expenditures is that Japan has no big room for manoeuvre that will make change or will increase significantly the extra time before a gigantic debt crisis.

Another commenter on the ZeroHedge article “The Endgame” has this to say:

The large holders of their JGB’s are now sellers and the savings rate has declined to 2% and likely to go negative.  It is specifically because the earnings on their vast savings is so low that principal is withdrawn  for living expenses.  Demographics are poor; insurance companies are having more death claims.  Approximately 30% of bank assets are JGB’s.  Japan Post is the largest financial institution in the world and owns mostly JGB’s.  The big buyers have turned to net sellers.  The real question is who is going to buy the debt going forward?  Social Security is 55% of spending and liquidating $80 billion of JGB’s per year and growing.  Japan is borrowing more than 60% of this year’s total spending plus they must issue $80 billion more than their deficit to obtain funds for social security benefits.  They were the most indebted country before this at 230% debt to GDP; Greece is about 160%.   Interest at 1.4% uses up 23% of total revenue; at 3% it would approach 50%.  Their  trade surplus has turned negative.  If I had money in Japan, I would move it to gold or out of the country.

Another commenter suggests a simple, rule-of-thumb, way to gauge future risk:

if you want to know if the EuroZone will break up, ask the Costra Nostra if  it holds Euros.  It’s that easy.  As for an imminent Japanese implosion, are the Yakuza holding yen, or gold?

I wish it were “that easy”, but it make sense to find out what the smart rich are doing with their currency and their assets – if you can. One smart Tokyo resident, Mike Rogers, has this suggestion.

How will Japan react? What steps will the BoJ and the government take? The commenters seem to agree that Japan is a special case which makes predictions more difficult (you can’t base guesses on Western precedents). Here’s one pundit’s assessment:

The keiretsu (formerly zaibatsu) already function as nationalized companies, except that in their case, they own the country.  That’s why SO much pressure has and will be brought to bear on keeping the yen weak.  These guys directed trade policy for decades like a puppet on a string.  Corporatism at its friendliest.

The yen was already devalued after WWII which is why it takes 1000 yen to equal $10 (or $7.50 now, darn them fro screwing with my math).  They’d probably have to start over like Argentina if they went that route.

As far as hard money, I wish it wasn’t so but TPTB in Japan will be the last ones to figure out that gold and hard money are the way to go.  They have been playing tag-along to the Western (so-called) leaders since the Meiji Restoration and are enamored with Keynesian-ism like they were with imperialism and militarism previously.  It will take a massive smack in the face to get them weaned off.  Catastrophic systemic collapse is the only thing that has brought down the status quo that calcifies Japan periodically.  The collapse looks ugly and unsurvivable, and then Japan comes out stronger.

Back to the MarketWatch article by Andy Xie:

Japan has lost competitiveness in a swath of industries that it used to dominate. Its automobile industry is losing out to Germany, South Korea and the United States. Japan’s automobile industry used to be competitive in cost and far superior in quality to its global competitors. But the world has changed… The U.S. auto industry cut its labor costs and debt burden through the government bailout. It is now more competitive than Japan’s.

The automobile industry is the pillar of Japan’s economy. Its decline leaves Japan’s economy nowhere to turn. Indeed, if the auto industry leaves Japan, it will become a poor country.

Japan’s electronics industry, still significant to its economy, is losing out big time to its Asian competitors. Nothing hot in electronics is made in Japan now. U.S. companies like Apple AAPL +1.24%  leverage China’s manufacturing sector to turn out hot products. South Korea is embracing the vertically integrated model and churning out competitive products like Japan used to.

Nothing symbolizes Japan’s decline like its electronics industry. It was the envy of the world and had all the ingredients to take the industry into the mobile internet era. Instead, it embraced insulation and made products just for the Japanese market. Now it is almost irrelevant to the outside world.

Japan isn’t just facing macro troubles. Its micro competitiveness is rotting away. It is just bizarre to see that the whole world believes in a strong yen when Japan is failing on such a grand scale.

Japan’s trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreigners’ views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash.