Is Japan Next?

As the debt crisis in Europe has exacerbated in severity, speculation has grown that Japan could soon find itself in the same situation as the indebted euro nations. That is, facing extraordinary interest rates and the prospect of default. Kyle Bass of Hayman Capital has spearheaded this thesis, recently sending a note to clients on the prospects of Japan's future. (Readers can view the note on Zerohedge) Bass draws parallels between Japan and Bernie Madoff's infamous Ponzi scheme, noting that Japan's demographics make its future appear particularly grim. As Japan's population ages, its ratio of retirees to workers steadily declines. The country has a particularly low birth rate and its society is notoriously resistant to immigration. Japan already has a horrendous level of debt-to-GDP. As the country has remained in a crippling deflationary period of virtually no growth for the past twenty years, interest rates have remained low. For its part, Japan's government has been able to borrow rather easily from its populace, who maintain a high savings rate. Yet, as more and more Japanese retire, they will be unable to lend their government the money it needs (as they will need to live off their savings). Given Japan's shaky prospects, and ongoing trends in the developed world, will foreign investors be there to fill the gap for the Japanese government? Bass does not think so, and concludes that this will lead to the very real possibility of a Japanese default. Yet, how likely is this? While a default in a loose sense may be likely, a strict technical default may not occur for a few reasons. A default by Greece or Ireland or even Italy is a very real possibility because these countries owe debts in a currency they do not directly control. This is not the case for Japan. Japan's debts are denominated in its yen, which the Bank of Japan can print if needed. Although the BoJ may insist on its independence, if the prospect is print or default, the BoJ may turn on the presses, printing yen to prevent a default. If the BoJ turns to printing money, it could lead to significant inflation and even hyperinflation in the Japanese economy. Although significant inflation is undesirable, if the options are default or print, it may be more likely that Japanese officials turn to printing. The Japanese have no problem with a weak currency—in fact, their central bank has repeatedly intervened in recent months in an effort to drive down the value of the yen. Japan's economy is largely dependent upon its exports and a weaker yen may benefit its exporting industries. Certainly, the prospects for Japan appear to be bleak. Yet, with the world focused on Europe, it may be some time before markets turn their attention to Japan. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.