Mr. Bass explains this anomaly by the high savings rate that has been prevalent among Japanese institutions and individuals. These savings in turn have been reinvested into Japanese bonds, accounting for 95% of Japanese debt to be held domestically.
According to his analysis, though, the situation in Japan is alarmingly changing. First, population growth in Japan peaked in 2004 and since then has been in a steady decline. Second, traditionally, there is no openness to immigration, therefore there will be no outside infusion in the population. Third, the composition of the population itself is biased towards senior citizens — 23% of Japanese are over 65 years of age, compared to 13% in the US and 8% globally. As the dynamics of Japan’s demographics play out, the government of Japan will have to seek out international markets to finance their debt. If they have to pay rates, say, comparable to AAA-rated France, all their income will go to servicing the debt.
http://www.hedgefundletters.com/category/hayman-advisors/
ReplyDeleteA corollary of Mr. Bass’ analysis of global debt is indeed that eventually as countries come dangerously close to a default, their cost of debt would increase as investors would demand a higher rate for the added risk – thereby causing a spiral effect where an increase in interest rates causes a country to devalue their currency which leads to more interest rate cost which leads to default.
A historical exception to this has been Japan where decades of deficit spending and central government borrowing have not led to currency devaluation or higher interest rate. As a matter of fact, Japan has enjoyed a near-zero or Zero Interest Rate Policy (ZIRP) for a decade.
Mr. Bass explains this anomaly by the high savings rate that has been prevalent among Japanese institutions and individuals. These savings in turn have been reinvested into Japanese bonds, accounting for 95% of Japanese debt to be held domestically.
According to his analysis, though, the situation in Japan is alarmingly changing. First, population growth in Japan peaked in 2004 and since then has been in a steady decline. Second, traditionally, there is no openness to immigration, therefore there will be no outside infusion in the population. Third, the composition of the population itself is biased towards senior citizens — 23% of Japanese are over 65 years of age, compared to 13% in the US and 8% globally. As the dynamics of Japan’s demographics play out, the government of Japan will have to seek out international markets to finance their debt. If they have to pay rates, say, comparable to AAA-rated France, all their income will go to servicing the debt.
While it not clear whether Hayman Capital has placed any trades on the Japan thesis, for overall currency devaluation and consequent inflationary pressures, they have been recommending gold and other scarce commodities as a hedge. Not surprisingly, the emphasis is on owning the actual commodities rather than any paper (fiat) security that represents an ownership interest in the commodities.