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About three weeks ago, I speculated that the bottom on interest rates had come and gone, and interest rates were rising.
This now seems more and more certain. Because of Abenomics, yields on Japanese government bonds have shot up and set off an ugly chain reaction. Bond prices are falling and yields are rising. Rather quickly, I might add.
Take a look at these charts of yields for selected Canadian government bonds. Pay extra attention to the longer-term bonds.
First, marketable bonds. The average yield on 1-3 year bonds:
Now 3-to-5 year bonds:
Here’s the average for 10+ year bonds:
Now the benchmark bonds.
First, the 2-year:
Long-term benchmark bonds:
Here’s the long-term real return bond yield:
You can draw your own conclusions from this data, I’m sure.
While the distraction of Japanese currency collapse, the resultant nominal offsetting surge in the value of the Japanese stock market, the doubling of the Japanese monetary base and the BOJ’s monetization of 70% of Japan’s gross issuance have all been a welcome diversion in a society still struggling with the catastrophic aftermath of the Fukushima explosion on one hand, imploding demographics on the other, and an unsustainable debt overhang on the third mutant hand, the reality is that Japan, despite the best intentions of Keynesian alchemists everywhere, is doomed.
One can see as much in the following two charts from a seminal 2012 research piece by Takeo Hoshi and Tatakoshi Ito titled “Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?” and which begins with the following pessimistic sentence: “Recent studies have shown that the Japanese debt situation is not sustainable.” Its conclusion is just as pessimistic, and while we urge readers to read the full paper at their liesure, here are just two charts which largely cover the severity of the situation.
Presenting the countdown to Japan’s D-Day.
The technical details of what is shown below are present in the appendix but the bottom line is this: assuming three different interest rates on Japan’s debt, and a max debt ceiling which happens to be the private saving ceiling, as well as assuming a 1.05% increase in private sector labor productivity (average of the past two decades), Japan runs out of time some time between 2019 and 2024, beyond which it can no longer self-fund itself, and the Japan central bank will have no choice but to monetize debt indefinitely.
and Exhibit B.
Figure 12 shows the increase in the interest rate that would make the interest payment exceed the 35% of the total revenue for each year under each of the specific interest scenarios noted in the chart above (for more details see below). The 35% number is arbitrary, but it is consistent with the range of the numbers that the authors observed during the recent cases of sovereign defaults. In short: once interest rates start rising, Japan has between 4 and 6 years before it hits a default threshold.
The paradox, of course, is that should Japan’s economy indeed accelerate, and inflation rise, rates will rise alongside as we saw in mid 2013, when the JGB market would be halted almost daily on volatility circuit breakers as financial institutions rushed to dump their bond holdings.
In other words, the reason why Japan is desperate to inject epic amounts of debt in order to inflate away the debt – without any real plan B – is because, all else equal, it has about 8 years before it’s all over.
Here is how the authors summarize the dead-end situation.
Without any substantial changes in fiscal consolidation efforts, the debt is expected to hit the ceiling of the private sector financial assets soon. There is also downside risk, which brings the ultimate crisis earlier. Economic recovery may raise the interest rates and make it harder for the government to roll over the debt. Finally, the expectations can change without warning. Failure in passing the bill to raise the consumption tax, for example, may change the public perception on realization of tax increases. When the crisis happens, the Japanese financial institutions that holds large amount of government bonds sustain losses and the economy will suffer from fiscal austerity and financial instability. There may be negative spillovers for trading partners. If Japan wants to avoid such crisis, the government has to make a credible commitment and quick implementation of fiscal consolidation.
A crisis will happen if the government ignores the current fiscal situation or fails to act. Then, the crisis forces the government to choose from two options. First, the Japanese government may default on JGBs. Second, the Bank of Japan may monetize debts. The first option would not have much benefit because bond holders are almost all domestic. Monetization is the second option. Although that may result in high inflation, monetization may be the least disruptive scenario.
Finally, this is how the BOJ’s epic monetization was seen by the paper’s authors back in March 2012.
Bank of Japan could help rolling over the government debt by purchasing JGBs directly from the government. The Bank of Japan, or any other central bank with legal independence, has been clear that they do not endorse such a monetization policy because it undermines the fiscal discipline. However, at the time of crisis, the central bank may find it as the option that is least destructive to the financial system. If such money financing is used to respond to the liquidity crisis, this will create high inflation.
The prospect for high inflation will depreciate yen. This will partially stimulate the economy via export boom, provided that Japan does not suffer a major banking crisis at the same time.
An unexpected inflation will result in redistribution of wealth from the lenders to the borrowers. This is also redistribution from the old generations to the young generations, since the older generation has much higher financial assets whose value might decline, or would not rise at the same pace with inflation rate. This may not have such detrimental impacts on the economy, since many who participate in production and innovation (corporations and entrepreneurs) are borrowers rather than lenders.
For now monetization is indeed less disruptive. The question is for how much longer, since both Japan and the US are already monetizing 70% of their respective gross debt issuance. And once the last bastion of Keynesian and Monetarist stability fails, well then…
Once the crisis starts, the policy has to shift to crisis management. As we saw above, the crisis is likely to impair the financial system and slow down consumption and investment. Thus, the government faces a difficult tradeoff. If it tries to achieve a fiscal balance by reducing the expenditures and raising the taxes, the economy will sink further into a recession. If it intervenes by expansionary fiscal policy and financial support for the financial system, that would make the fiscal crisis more serious. This is a well-known dilemma for the government that is hit by debt crisis…. If not helped by the government, the banking system will be destroyed, and the economy will further fall into a crisis. Rational depositors will flee from deposits in Japanese banks to cash, foreign assets or gold.
* * *
The private saving ceiling is the absolute maximum of the domestic demand for the government debt, but the demand for JGBs will start falling well before the saving ceiling is ever reached. One potential trigger for such a change is that the financial institutions find alternative and more lucrative ways to invest the funds. In general, when the economic environment changes to increase the returns from alternatives to the JGBs, the interest rate on JGBs may start to increase. If this suddenly happens, this can trigger a crisis. Increases in the rate of returns may be caused by favorable changes in the economic growth prospect. The end of deflation and the zero interest rate policy would also lead to higher interest rates.
In Figure 6 , the authors calculate Japan’s debt’GDP over the next three decades using the following assumptions on the interest rate:
- R1: Interest rate is equal to the largest of the growth rate (?t) or the level at 2010 (1.3%).
- R2: Interest rate rises by 2 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%).
- R3: Interest rate rises by 3.5 basis points for every one percentage point that the debt to GDP ratio at the beginning of the period exceeds the 2010 level (153%) .
R1 is motivated by the fact that the average yield on 10 year JGBs over the last several years has been about the same as the GDP growth rate during the same time interval, but constrains the interest rate to be much lower than the current rate even when the GDP growth declines further. R2 and R3 assume that the interest rate rises as the government accumulates more debt. Many empirical studies have demonstrated such relation. R2 (2.0 basis points increase) uses the finding of Tokuoka (2010) for Japan. R3 (3.5 basis points increase) assumes the coefficient estimate used by Gagnon (2010). It is the median estimate from studies of various advanced economies
A more reasonable scenario is to assume the growth rate of GDP per-working-age person (or an increase in labor productivity) to be similar to that of the 1990s and 2000s. We consider two alternative growth rates per-working-age population. The low growth scenario is that the increase in labor productivity at 1.05% (average of 1994-2010) and the high growth scenario is at 2.09% (average of 2001-2007, the “Koizumi years”).12 Table 6 shows the growth decomposition on the assumption of the 1.05% growth rate of GDP per-working-age person…. The upper bound for the debt accumulation is reached by 2024 at the latest.
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Japanese (And American) Governments Go to Extreme Lengths to Cover Up Fukushima and Other Disasters
Japan and the U.S. are doing everything they can to cover up the danger of the Fukushima crisis.
The Daily Beast notes:
The Japanese government, which already has a long history of cover-ups and opaqueness, is on its way to becoming even less open and transparent after the lower house the Diet, Japan’s parliament, passed the Designated Secrets Bill on Tuesday. With new powers to classify nearly anything as a state secret and harsh punishments for leakers that can easily be used to intimidate whistleblowers and stifle press freedom, many in Japan worry that the if the bill becomes law it will be only the first step towards even more severe erosions of freedom in the country.
Even politicians inside the ruling bloc are saying, “It can’t be denied that another purpose is to muzzle the press, shut up whistleblowers, and ensure that the nuclear disaster at Fukushima ceases to be an embarrassment before the Olympics.”
The new law would enact harsher punishment to leakers and ominously would allow journalists who obtained information by “inappropriate means” and whistleblowers to be jailed for up to ten years. The law would also allow the police to raid the offices of media organizations and seize evidence at their discretion.
The bill has even grants no longer existent agencies the power to classify secrets.
Despite the bill’s enlargement of the state’s power over information, it contains no oversight process to act as a check on ministries and government agencies designating large amounts of information as ‘secret’ for capricious or self-interested reasons.
Masako Mori, the Minister of Justice, has declared that nuclear related information will most likely be a designated secret. For the Abe administration this would be fantastic way to deal with the issue of tons of radiated water leaking from the Fukushima Daichi Nuclear Power Plant since the triple meltdown in March of 2011.There seems to be no end to stopping the toxic waste leaks there but the new legislation would allow the administration to plug the information leakspermanently.
Mizuho Fukushima, former leader of the Social Democratic Party, compared the bill to the pre-World War II Peace Maintenance Preservation Laws and other Secrecy laws at the time, remarking that there was a time in police-state Japan when the weather reports could be considered “secret.”
““Once you open the door to such kind of laws, the government will have the right to designate anything as a state secret and by speaking about it or mentioning it, you can be arrested and prosecuted.” Ms. Fukushima explained, “Especially during war time, it was very difficult for defendants and lawyers to fight their court cases, because they were not told what exactly what was the state secret that they had been accused of having revealed.”
Outspoken Upper House Councilor Taro Yamamoto, who is known to be a strong supporter of investigative journalism, minces no words: “The path that Japan is taking is the recreation of a fascist state. I strongly believe that this secrecy bill represents a planned coup d’état by a group of politicians and bureaucrats,” he warned.
While his statement may seem alarmist, even a senior official of the National Police Agency agrees. “I would say this is Abe’s attempt to make sure that his own shady issues aren’t brought to light, and a misuse of legislative power.
The Japan Newspaper Publishers & Editors Association, the Civil Broadcasters Federation, and most major news organizations in Japan’s have expressed staunch opposition to the bill.
Japan is about to take a giant step back into its oppressive past. When one also considers Prime Minister Abe’s stated ambition to restart Japan’s nuclear power plants and remove Article 9 from the constitution, the article which prevents Japan from waging war, it seems like the Empire of The Sun may be moving towards darker times.
Indeed, Ex-SKF notes that :
A citizen was forcibly removed from the balcony in the Diet where he was observing the debate of the State Secrecy Protection Law in the Lower House on November 26, 2013, as he shouted his opposition to the passage of the law. His mouth was stuffed with cloth so that he couldn’t shout any more while being removed by several guards against his will.
(From Tokyo Shinbun, 11/26/2013, via this tweet)
What’s even scarier to me than the man being forcibly removed by the guards is people sitting near him. They just sit there as if nothing is happening. They are not even looking; the one in the same row even looks away.
It’s not just Fukushima … and It’s not Just Japan
It’s not just Fukushima …
Governments have been covering up nuclear meltdowns for 50 years.
There has been a cover-up by the American government ever since the Fukushima earthquake. TheAmerican (and Canadian) authorities virtually stopped monitoring airborn radiation, and are not testing fish for radiation.
The U.S. government increased allowable radiation levels so that we could be exposed to radiation. Nuclear expert Arnie Gundersen says that high-level friends in the State Department told him that Hillary Clinton signed a pact with her counterpart in Japan agreeing that the U.S. will continue buying seafood from Japan, despite that food not being tested for radioactive materials.
The American government controls Japanese nuclear policy. And the Japanese would never have proposed such a draconian bill without U.S. backing. Indeed, the U.S. Charge d’Affairs Kurt Tong saidof the Japanese bill:
It’s a positive step that would make Japan a “more effective alliance partner.”
Earlier this year, the acting EPA director signed a revised version of the EPA’s Protective Action Guide for radiological incidents, which radically relaxed the safety guidelines agencies follow in the wake of a nuclear-reactor meltdown or other unexpected release of radiation. EPA whistleblowers called it “a public health policy only Dr. Strangelove could embrace.”
It’s not just nuclear accidents … it’s everything.
The American government repeatedly covers up how bad things are, uses claims of national security to keep everything in the dark, and changes basic rules and definitions to allow the game to continue. Seethis, this, this and this.
When BP – through criminal negligence – blew out the Deepwater Horizon oil well, the governmenthelped cover it up (and here). As just one example, the government approved the massive use of ahighly-toxic dispersant to temporarily hide the oil.
The government covers up the disgusting and unhealthy natureof much industrially-produced food.
The government’s response to the outbreak of mad cow disease was simple: it stopped testing for mad cow, and prevented cattle ranchers and meat processors from voluntarily testing their own cows (and see this and this)
In response to new studies showing the substantial dangers of genetically modified foods, the government passed legislation more or less pushing it onto our plates.
The Centers for Disease Control – the lead agency tasked with addressing disease in America – covered up lead poisoning in children in the Washington, D.C. area.
The former head of the National Mine Health and Safety Academy says that the government whitewashed the severity of the Tennessee coal ash accident.
And after drug companies were busted for using fraudulent data for drug approval, the FDA allowed the potentially dangerous drugs to stay on the market.
Indeed, the cynical might say that the main function of government these days is to throw money at giant corporations and to cover up for them when their misdeeds are revealed.
And the American government is censoring reporters at least as much as Japan.
Japan – Like the U.S. – Turns to Censorship
2 weeks after the Fukushima accident, we reported that the government responded to the nuclear accident by trying to raise acceptable radiation levels and pretending that radiation is good for us.
We noted earlier this month:
Japan will likely pass a new anti-whistleblowing law in an attempt to silence criticism of Tepco and the government:
Japanese Prime Minister Shinzo Abe’s government is planning a state secrets act that critics say could curtail public access to information on a wide range of issues, including tensions with China and theFukushima nuclear crisis.
The new law would dramatically expand the definition of official secrets and journalists convicted under it could be jailed for up to five years.
Unfortunately, this is coming to pass. As EneNews reports:
Associated Press, Nov. 26, 2013: Japan’s more powerful lower house of Parliament approved a state secrecy bill late Tuesday […] Critics say it might sway authorities to withhold more information about nuclear power plants […] The move is welcomed by the United States […] lawyer Hiroyasu Maki said the bill’s definition of secrets is so vague and broad that it could easily be expanded to include radiation data […] Journalists who obtain information “inappropriately” or “wrongfully” can get up to five years in prison, prompting criticism that it would make officials more secretive and intimidate the media. Attempted leaks or inappropriate reporting, complicity or solicitation are also considered illegal. […] Japan’s proposed law also designates the prime minister as a third-party overseer.
BBC, Nov. 26, 2013: Japan approves new state secrecy bill to combat leaks […] The bill now goes to the upper house, where it is also likely to be passed.
The Australian, Nov. 25, 2013: Japanese press baulks at push for ‘fascist’ secrecy laws […] Taro Yamamoto [an upper house lawmaker] said the law threatened to recreate a fascist state in Japan. “This secrecy law represents a coup d’etat by a particular group of politicians and bureaucrats,” he told a press conference in Tokyo. “I believe the secrecy bill will eventually lead to the repression of the average person. It will allow those in power to crack down on anyone who is criticising them – the path we are on is the recreation of a fascist state.” He said the withholding of radiation data after the Fukushima disaster showed the Japanese government was predisposed to hiding information from its citizens and this law would only make things worse. […] The Asahi Shimbun newspaper likened the law to “conspiracy” regulations in pre-war Japan and said it could be used to stymie access to facts on nuclear accidents […]
Foreign Correspondents’ Club of Japan president Lucy Birmingham: “We are alarmed by the text of the bill, as well as associated statements made by some ruling party lawmakers, relating to the potential targeting of journalists for prosecution and imprisonment.”
Activist Kazuyuki Tokune: “I may be arrested some day for my anti-nuclear activity […] But that doesn’t stop me.”
Lawrence Repeta, a law professor at Meiji University in Tokyo: “This is a severe threat on freedom to report in Japan […] It appears the Abe administration has decided that they can get a lot of what they want, which is to escape oversight, to decrease transparency in the government by passing a law that grants the government and officials broad authority to designate information as secret.”
U.S. Charge d’Affairs Kurt Tong: It’s a positive step that would make Japan a “more effective alliance partner.”
Prime Minister Shinzo Abe: “This law is designed to protect the safety of the people.”
Rather than addressing the problems head-on, the Japanese government is circling the wagons.
Unfortunately, the United States is no better. Specifically, the American government:
- Censors journalists who raise inconvenient truths
- Pressured the Japanese government to re-start its nuclear program, and is allowing Fukushima seafood to be sold in the U.S.
- Weakened safety standards for U.S. nuclear reactors after the Fukushima disaster
As we noted 6 months after Fukushima melted down:
American and Canadian authorities have virtually stopped monitoring airborne radiation, and are not testing fish for radiation. (Indeed, the EPA reacted to Fukushima by raising “acceptable” radiation levels.)
The failure of the American, Canadian and other governments to test for and share results is making it difficult to hold an open scientific debate about what is happening.
Earlier this year, the acting EPA director signed a revised version of the EPA’s Protective Action Guide for radiological incidents, which radically relaxing the safety guidelines agencies follow in the wake of a nuclear-reactor meltdown or other unexpected release of radiation. EPA whistleblowers called it “a public health policy only Dr. Strangelove could embrace.”
When the economy imploded in 2008, how did the government respond?
Did it crack down on fraud? Force bankrupt companies to admit that their speculative gambling with our money had failed? Rein in the funny business?
Of course not!
The government just helped cover up how bad things were, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this.
So now that Japan is suffering the worst nuclear accident since Chernobyl – if not of all time – is the government riding to the rescue to help fix the problem, or at least to provide accurate information to its citizens so they can make informed decisions?
Of course not!
The EPA is closing ranks with the nuclear power industry ….
Indeed, some government scientists and media shills are now “reexamining” old studies that show that radioactive substances like plutonium cause cancer to argue that they helpprevent cancer.
In other words, this is a concerted propaganda campaign to cover up the severity of a major nuclear accident by raising acceptable levels of radiation and saying that a little radiation is good for us.
Any time the results of bad government policy is revealed, the government just covers it up rather than changing the policy.
David Suzuki has issued a scary warning about Japan’s Fukushima nuclear plant, saying that if it falls in a future earthquake, it’s “bye bye Japan” and the entire west coast of North America should be evacuated.
The “Nature of Things” host made the comments in a talk posted to YouTube after he joined Dr. David Schindler for “Letting in the Light,” a symposium on water ecology held at the University of Alberta on Oct. 30 and 31.
An excerpt of the talk shows Suzuki outlining a frightening scenario that would result from the destruction of the nuclear plant.
“Fukushima is the most terrifying situation I can imagine,” he said.
“Three out of the four plants were destroyed in the earthquake and in the tsunami. The fourth one has been so badly damaged that the fear is, if there’s another earthquake of a seven or above that, that building will go and then all hell breaks loose.
“And the probability of a seven or above earthquake in the next three years is over 95 per cent.”
Suzuki said that an international team of experts needs to go into the Fukushima plant and help fix the problem, but said the Japanese government has “too much pride to admit that.”
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