The Japanese debt dilemma is one that I have been thinking about for quite some time. In particular, how has one of the most industrious countries on the planet managed to go from a viable debt-to-GDP level of 50% in 1980 to 240% in 2013? That’s akin to a country generating $100,000 in revenue while attempting to deal with a $240,000 credit card.
In truth, $240,000 does not adequately capture the gargantuan nature of the monstrosity. We’re actually talking about a quadrillion yen ($10.5 trillion U.S. dollars). What’s more, roughly 1/2 of all Japanese revenue is sucked up in the servicing of existing obligations.
Is it even feasible for Japan to pay its creditors back without defaulting? I suppose that Japan can continue paying the “credit card minimums” to avoid default. On the other hand, there is no chance that it can retire its debt load altogether. Even more frightening is the fact that the debt-to-GDP has risen every year since 2008, and it is on target to jump from 212% in December of 2012 to 250% by the end of the year. This hardly seems like a looming catastrophe can be avoided.
Nevertheless, Japan is giving it the ‘ol money printing try. After all, the U.S. Federal Reserve did not invent quantitative easing (QE) whereby a central bank prints currency to buy government bonds. And while we’re busy talking about when the U.S. will taper its QE bond buying, Japan simply cannot afford to do so. The only way to stem the rising tide of ever-increasing debt is to see the economy grow at a faster pace. That requires the yen to fall in value to help exporters; it also requires the Bank of Japan (BOJ) purchasing government bonds from Japanese financial institutions with the goal of those companies lending to businesses and consumers.
Again, Japan will never escape from its debt woes. It can tread water, though. And its companies can improve their balance sheets in the same way that American corporations have done.
Unfortunately, even if you hedge against the Japanese yen with WisdomTree Japan Hedged Equity (DXJ), you may be getting in at an expensive price. Some reports peg Japanese equities at a price-to-earnings ratio of 19. The U.S. is less expensive with a higher dividend; so are most developed economies. Stated gently, the easier money has already been made.
I might be more inclined to short Japanese government bonds. However, I’m not willing to go against the Bank of Japan just yet. The shock-n-awe campaign of the largest pound-for-pound QE program in the world means that I will be watching the trends of notes like PowerShares DB 3x Inverse Japanese Government Bond Futures (JGBD) as well as the more subdued PowerShares Inverse DB Inverse Japanese Government Bond Futures (JGBS).
The fund with the best shot of success at this juncture may be ProShares UltraShort Yen (YCS). Recent yen strength has left the yen struggling for long-term direction, yet YCS is still above a long-term 200-day moving average. With support at the 57 level, as well as an unwavering determination by the Bank of Japan to weaken its currency and to strengthen its hand in foreign trade, YCS lines up nicely with the quadrillion yen quandry.
Gary Gordon is president of Pacific Park Financial, Inc.