Saturday, December 29, 2012

Kyle Bass: 5 Reasons Why The Japanese Bond Market Will Collapse

1. Japan simply cannot repay its existing debt
(240% Debt to GDP, 25 times tax revenue; total on-balance-sheet debt is one quadrillion yen; Bass expects a bond crisis in 2-3 yrs)

2. Japan's Interest Expense is Unsustainable
(Japan spends a quarter of their tax revenue on interest even at near-zero rates; "this is what the non-linearity looks like"; the "most obvious thing" he's seen in his career, "only a question of when")

3. Japan is not self funding. Current Account deficit will grow. BOJ will need to print more
(Current Account Surplus at under 1% is much lower than Fiscal Deficit of 10.5%, so not self funding; Current Account will be negative by Q3/4 next year; Balance of trade is deteriorating fast)

4. Japan's population crisis is here. Taxable Income will decline, savings rate will decline, Social Security Payments will rise
(Population peaked at 129M people and now at 125M, one of the most homogeneous and xenophobic developed nations in the world; Life Insurance companies are paying out more than they're bringing in)

5. Japan's govt has no idea what to do
(Elected 10th finance minister in the last 6yrs; Privately saying can't implement consumption tax hike; Posted budget on xmas eve last year and showed social security expenditure decreasing 8% even though it was increasing by 9.5% a year for the last 5 years; They would finance this by issuing "compensation bonds" that will be paid for by future radical reform of the tax system; Ministry of Finance said they didn't want to issue more JGBs so as to not upset the "delicate balance" of the JGB market)

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