No, there hasn’t been an explosion in the Asahi Super Dry factory. But it might be almost as bad. SocGen’s Dylan Grice has a note out on Japanese government bonds (JGBs) – and fears their maturity dates presage an imminent blow-up.
The canary in the mineshaft? As Grice explains (emphasis his) :
The biggest JGB holder on the planet – the Government Pension Investment Fund (GPIF) – which has already admitted it’s no longer able to roll maturing bonds, has announced that it will open credit lines so it doesn’t have to sell them to fund its obligations…
… Japanese debt markets have been stable for such a long time it’s difficult to imagine anything different, so we don’t imagine anything different and predict that the future will look like the past. Now, Japan’s debt markets may well remain very stable in the future and I’m very open to the strong possibility that I’m barking up the wrong tree. But logic like that outlined above is lazy indeed.
It’s a big canary, by the way. GPIF’s portfolio is bigger than India’s GDP. Two-thirds of that is piped into JGBs. But what about Grice’s own logic?
It’s a scary story – but scarier for pointing out how little we really know about Japan’s debt fundamentals, rather than for Grice’s own bearishness.
Grice’s starting point is the obvious one of how household savings can continue to fund government debt and start retirement spending as Japan’s ageing crisis bites.
This is usually the point at which the editorial pages weigh in with some bullish counters on the low cost (1.3 per cent) to Japan of servicing its debt, plus the luxury – denied to Greece – of having almost all of it held by home investors.
But Grice says that may be the entire problem – there’s little evidence that corporate savings rates are large enough to take over from households, or that government assets would really be fungible in a crisis, given their domestic entanglements – such as the non-privatisation of Japan Post Bank.
Pause for thought.
And it all makes Japan’s relatively short debt maturity (six years, compared to the UK’s fourteen) rather uncomfortable. Ten trillion yen rolls over this month alone.
As it is, JGB futures far from predict any impending crisis. Indeed, they jumped to a two-month high last week, on the back of a good 10-year bond auction – although that tells us relatively little about the early maturity problem. And at any rate, the high has receded this week, as investors shift to the stock rally.
Boring stuff. But is it the calm before the storm? Last word goes to Grice (emphasis his again):
To spell that out: we are going into a year in which the government has ¥213 trillion of bonds to roll over… and the biggest holder of JGBs is openly admitting he has no new inflows of money.
And if he’s right, drop the weak beer. Make it a stiff shōchū.
Related links:
JGB update: Is Japan the next Greece? – FT Alphaville
Is Japan preparing to intervene? – FT Alphaville
Japan’s debt woes are overstated - FT
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