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Latest from James Smith. The ending is really creative. I hope for
everyone's sake it doesn't play out this way...
JW
(I do not have any association with James Smith)
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Monday, June 26, 2000 9:17 PM
Subject: The only thing "Divine" about Japan is the Wrath that is
coming
down.
The only thing "divine" about Japan is the "wrath" that is coming
down on it. Mori-san may have bungled in calling Japan a Divine
Nation, but perhaps there is such a thing as "Divine Wrath"which
comes from financial mkts that have lost patience. JGBs & JPY
reacted to a narrow win by the LDP in less than charitable manner.
The election marks a Major Turn for both JGBs & JPY. The market
will no longer tolerate the "fiscal pork" that the LDP has so
often resorted to. Worries about a credit downgrade are well-
founded. No matter what the LDP does, the JGB ponzi is coming
undone. Best course is to allow the Yen to devalue, paying back
the humongous JGB debt in funny money. Devaluation will help
exporters and perhaps also spark a domestic revival...because
consumers who don't spend their savings....lose it to inflation.
Many analysts have forecasted an ever-stronger
Yen as the BOJ is now threatening to abandon
the Zero Rate Policy. We agree that abandoning
the Zero Rate Policy should act to strengthen the Yen,
but this will not be the only influence on the Yen.
Japan is sitting on a ton of debt which they have no
chance of ever paying back....unless they devalue
and pay back with funny money. . Debt is now 130% of GDP.
Note that an opposition Democrat nearly lost his seat
in the election because he was a major proponent of
"raising taxes" to solve Japan's problems. Rest assured
other Japanese politicians saw this and took notes.
If "raising taxes" is risky to your political career, perhaps
a hidden tax thru massive Japanese yen devaluation
would be easier to foist onto a rather unforgiving
electorate.
But even if they politicians can fool the public, they can't so
easily fool the financial markets.
Has everyone forgotten how the markets disciplined Sweden
for relying too heavily on debt-financing to continue their
welfare state utopia? Has everyone forgotten what happened
to Canada and their similarly socialist agenda? The markets
can be ever so cruel to air-heads.
Some may argue that because Japan does not rely on external
financing to the same degree as Canada or Sweden, that they
can get away with it. And they'd be right...for a while. In fact,
it would be very hard indeed for any govt that borrows from abroad
to get away with having a debt ratio of 130% of GDP. But even
if Japan relies mostly on domestic financing, this is still a bubble.
As most sensible people realize, every bubble has to pop.
Just as the Nasdaq bubble has popped and may even now
be setting up another sharp leg down, the same may be true
of Japanese Government Bonds.
Certainly a Credit Downgrade from Moody's or the S&P would
pack a punch. If the credit rating agencies don't downgrade
Japan, they are simply not doing their job. They will lose
credibility in the financial markets. How can they allow one
country to carry such a huge debt load and yet still give it
a AAA rating without any hint of discipline. These agencies'
ratings may lose any meaning to the markets is they delay
judgment for too much longer.
It may very well be that the BOJ will be forced
to raise Short Rates just to control the speed of a coming
Yen Slide. Of course, it is equally possible that raising
short-rates will add to the problem. From an investor's
point of view, "Why take a lousy 1.7% on a 10 year bond
when you can get an ever rising rate of return, short term
with less risk?
If the fear of a Credit Downgrade causes JGBs to begin
to slide, this will impact the Nikkei negatively. Higher
longterm rates will slow the economy and send the
Nikkei into a FreeFall.
A FreeFall in the Nikkei will force a devaluation of
the Yen because the only way Japan can combat declining
stock prices is to devalue the Yen so that Japanese exporters
can sell more goods overseas. This too may become harder
if the US and Europe slow down. Japan will have to devalue
the yen all the faster just to maintain current exports. US
consumers are spending a greater proportion of their
disposable income at the gas pump. This means they
have less left over for that Sony Wega TV, that Toyota
Camry, or that Toshiba stereo.
If the trade deficit between the US and Japan hit a record of
over $7 billion for the month of April and yet the Japanese
economy is still weak, what exactly do you suppose will happen
once the US slows down? "Divine Wrath" is what I'd call it.
You have the makings of a vicious cycle.
In a previous article I mentioned that by holding short term
rates at Zero, Japan has chosen to bankrupt the Life
Insurance companies in order to save the banks. It
now appears that the Life Insurance companies are
on course to be devastated.
In a recent FT article ("Japanese Life Groups Suffer Falls
in Income", June 5th), we see that indeed the plain facts
are that these institutions have managed to lose money
on nearly everything they invest in.
They are suffering the effects of what the FT calls a
"negative spread"--the gap between the return on
investment assets and the pay-outs guaranteed to
policyholders.
I've talked about this problem before, but it is important
to realize that the problem is only getting worse.
These same Life companies that have lost money
on their domestic investments due to the "negative
spread" have also lost money on foreign investments
due to a stronger yen.
They now believe the correct course of
action is to refrain from investing overseas. Most
of them are increasing their investments in JGBs
and other domestic bonds. Why?
This is what we call the "deer in the headlights"
phenomenon. They have lost money so often due
to exchange rate changes, that they now have
no appetite for risk. But by piling into JGBs at
the top of the market as the Moody's and S&P
get ready to downgrade Japanese debt, are
they not adding to their problems?
Have the Life Companies in Japan become a
contrarian indicator?
Now let's see how this all adds up on a
more personal level.
You are a "Japanese SalaryMan" making
a lousy wage but at least you have a guaranteed
position at the company for life. Your wife
is nervous that you are going to get fired
because she rightly figures that if you are
as useless at the company as you are
around the house, you'll be the first to get
the axe. So what does she do? She puts
even more of your savings into the Post
Office even though the current return is
less than 1%. In fact, by socking away
so much money, your wife as well as
every other housewife in Japan, is causing
the Japanese economy to contract.
So when the Nikkei tanks and the economy
spins downward because the idiots at the
BOJ decide "now" is the time to raise
rates (slowing the economy), you do in
fact lose your job. The BOJ quickly
realize that it was about as wise to raise
rates at this juncture as it was for the JPN
govt to raise the consumption tax in 1997,
but the damage is already done. The
Nikkei has gone into a Mexican Swan
Dive. The BOJ quickly announce that no more rate
hikes are planned, but the market doesn't
trust them, and continues to punish the
Nikkei. The BOJ then begin to add
monetary stimulus to the system...quite
aggressively to make up for the stupidity
of their recent rate hike.....and this only
causes the Yen to slide.
Your wife goes to the Post Office to get
her savings, but she can't because
about 100 million other Japanese had
the same idea at the same time. No
one wants to keep their money in Yen
because everyone knows it will become
monopoly money.
Your wife rants at you non-stop and
you are tired of dressing in your suit
and leaving for the office job that
no longer exists to sit on a park bench.
You think about killing yourself, but
you don't have a gun and you don't
like pain. On the way
home you have a heart attack.
Your wife is sorry that you are dead,
but immediately calls the Life Insurance
company to collect on the insurance
plan you had taken out.
The insurance company folded
right before your wife called. Once
again your wife is pissed off at you.
If you had only died a few days earlier
she'd have gotten the life insurance
money. But it turns out that plenty of
other wives' husbands died before
you did, which caused the Life Company
to fold. Call it "negative payout" if it
makes you feels better. She cannot
collect on the insurance until the govt
sorts outs the mess. The govt's
brilliant idea is to saddle any good
Life Insurance companies with the
obligations of the bankrupt ones....
kinda like what they did with the banking
crisis. Mega-mergers to create
a bigger mess.
Because of a near total loss of
confidence in the government, new
elections are called for.
But before the election takes place
an earthquake hits Tokyo.
With the chaos comes opportunity....
for some. Ishihara-san (current Mayor
of Tokyo) manages to seize control
of the govt in what effectively becomes
Marshall Law.
China and the rest of Asia are none
too pleased to see a rabid nationalist
like Ishihara-san in charge of Japan.
Menacing words are exchanged and
a new round military defense spending
in Asia turns into a global arms race.
Your wife feels bad about you dying,
but she truly feels you're the lucky one
to have died before things got really nasty.
And if you are not a Japanese Salaryman,
do you honestly believe you will go unaffected
by these events???
Have a nice day.
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