Japan's Decision: Just A Disaster Or The Apocalypse?

In spite of the steps taken by the government of Japan, irresponsibly welcomed by analysts, banks and foreign leaders, Japan speeds up in its way to deflation. There is always an acceleration phase in the last part of the trend. It's an irrational freefall that is impossible to stop and that is not a result of pensée unique (single thought).

Right now the problem is the Japanese public debt market. If interest rates are low investors earn no money. On the other hand if rates soar, the issuing entity -the Japanese state, in this case- has to pay more, which has a terrible result: bonds lose value and holders sell making interest rates soar even more.

This crisis cannot end in any other way than fatal deflation which would however prevent things from getting worse. The much-praised Abenomics won't work; it will become the worst blunder ever.

Japan has a debt of one quadrillion yen. But that's not the problem. The problem is the cost of that debt.

The decrease in tax revenue since the crash of the stock market bubble in 1989 and the lack of economic growth (or at least insufficient growth) make it very difficult to put the economy back on track.

As result of this situation we can see a huge fiscal imbalance. Japanese 10 year bond interest rates are situated between 0.2% and 0.3%, which is barely bearable. Almost a quarter of tax revenues are used to pay the cost of financing public debt, a situation that in many other countries would have already caused a complete collapse.

If interest rates climbed up to 2%, Japan would have to use three quarters of its tax revenues to pay financial services. For this last scenario there's no way out, and the sea that surrounds Japan is too cold to swim away in.

The inflation Abenomics intended to achieve is clearly a disastrous idea, or even worse, the shortest way to apocalypses. It's a huge mistake, like putting the cart before the horse. First, growth. Then, inflation.

Unfortunately, Japanese pension funds are selling bonds as it's impossible for them to hold that hot potato, which means they are running the constant risk of losing capital. It's something that a 1% or even 2% rate change can't justify in any way.

Furthermore, those instruments are excessively leveraged, which means that market movements are magnified in portfolios.

Many tried to make us believe that the problem was an expensive yen. But the problem is the gap between tax revenues and spending. Among the latter, public debt is too big an issue.

Interest rates shouldn't climb any more. Otherwise, we'll see a scenario much more disastrous than an allegedly expensive yen, which exporting companies can actually tolerate by hedging.

Let's make it clear. The yen is not expensive at all. Actually, it's very cheap. I've just visited the official web page of the Bank of Japan. The present exchange rate is very similar to the one in 2007 and the real exchange rate is the cheapest in more than 30 years.

Additionally, the inevitable next financial crisis (knowing that deflation will draw a clear trend), will return the yen to a safe-haven currency status.

The problem--not the solution--is the search for inflation in these times, when the trend doesn't help. In the past, inflation climbed along with interest rates, but now it's the other way around. A deflationist spiral can be hard, but it's better than a total disaster.

Still, that disaster won't happen. You can never underestimate the Japanese people. But there will be hard times as there's no 'land ahoy'. And worse, there is no instruction manual for a deflationist crisis.

I've repeatedly insisted that an expensive yen is part of the solution for the fiscal problem. We cannot say that deflation is a solution, but it's a better option than an explosion of the debt market. After all, there's a lower death rate.

Politicians don't understand because their calendar is different than ours. They just care about the election calendar.

Japan's liquidity trap will fix with time, when the bubble is completely deflated. By then, things will get better; there will be growth, inflation. With higher tax revenues Japan will be able to pay more interest in an inflationist atmosphere that will liquidate public debt little by little. Maybe someday they'll have hyperinflation, and then they'll liquidate the debt completely.

That's the way leverage and debt problems are solved. However, first you have to face the music. To sum up, it's not the end of the world. Just penance for the remission of sins committed.

We must remember that 24 years have passed in Japan, whereas in the United States the journey hasn't even started yet. A president of the Federal Reserve seems to have chosen the Japanese model so as to prevent the bomb from exploding, even if that means that a whole generation will have to cope with financial difficulties in order to save a group of banks and companies that had no future but took the reins of the economy by prevailing over politicians with no credentials as statesmen.