The most significant financial news today was the downgrade of Japanese debt by the ever “prescient” S&P group. It seems that after all these years of government spending and the huge negative impact of deflation on government revenues, the rating agency finally found the fortitude to tall investors that Japanese debt is in need of rebalancing. The markets sold the YEN on the news but the JGBs barely moved and the Nikkei actually rallied a touch, although it is down more than one percent tonight. It must be remembered that the Japanese Debt is 97 percent held by domestic investors so the international impact is not immediately felt like in the Greek and Irish situation.
Also, as rates in Japan have been very low for more than 15 years, the Japanese budget has not felt the pains of a Rogoff/Reinhart disaster. The percentage of the BUDGET that goes for interest expense is a mere 1.2 percent, unlike in some of the PIIGS where the interest payment percentage of the BUDGET has exceeded 5 percent.
In Friday’s Financial Times, Peter Tasker has an article, “The Japanese Debt Disaster Movie.” Tasker actually claims that the downgrade is not a disaster and offers up some vision about to correct the growing imbalance. He asserts, as have many others over the years, that Japan must create durable growth “which requires a combination of monetary and fiscal stimulus and structural reform.” Mr. Tasker is opposed to the quick fix of a higher consumption tax as it would impede consumer demand. The consumption tax was tried in 1997 and proved an abject failure.
Prime Minister Naoto Kan appointed a new minister for economic and fiscal affairs, Kaoru Yosano, who crossed over from the LDP to join Kan’s Cabinet. Mr. Yosano is a long time deficit HAWK and his joining PM KAN has seen that the DPJ leadership was truly getting serious about correcting the huge budgetary imbalances. The problems in Europe and the simmering U.S. problems have prompted the debt-ladened economies of the world to acknowledge the need for action. The Japanese have dragged their feet for many years on the deficit because the huge pool of savings has kept the bond vigilantes at bay. It is important to remember that Japanese investors and corporations continue to repatriate huge sums of money that they earn abroad and this has kept the current account in massive surplus, enabling Japan to self-finance, but has also kept the value of the YEN higher than the Japanese exporters would prefer.
In another Financial Times article, Murie Dickie and Lindsay Whipp contend that today’s S&P DOWNGRADE holds a”silver lining” for prime minister Kan. The sclerosis that has plagued Japanese politics may be awoken as the global financial media now has a new hot issue to deal with–exit the little PIIGS pursued by Godzilla. As the greatest concern about Japan throughout the years has been the population implosion and its negative impact on future growth. The best thing is that the youth of Japan get busy; very busy for the benefit of the BONDHOLDERS.
The global political scene is being rocked by rioting in Egypt that was prompted by the success of the Tunisian populace removing its corrupt leadership. Years of corrupt autocracy have fomented a simmering anger that is coming to a boil. The U.S. is in a very precarious situation as it has supported and sustained the Mubarak Dictatorship as a remnantof the Cold War. The Egyptian ruling class was content to fill its pockets with American largesse while surpressing any political dissent. The winds of change are blowing in the Arab world and the U.S.Foreign policy establishment is possibly caught in a potential Iran situation. If it pulls support from Mubarak and offers verbal support to those seeking immediate change it may wind up being a victim of “blowback,” as the Egyptian radicals hold the U.S. responsible for aiding and abetting the repressive regime.
There is a great deal at stake as so much of the world’s OIL moves through the Suez Canal, which has been a flashpoint for many of the ills of Egyptian society. The CANAL creates much revenue and jobs, little which makes it way outside the cronies of the Mubarak regime. There is talk tonight of Mohamed El Baradei, the highly respected Egyptian diplomat and former head of the International Atomic Energy agency, possibly being a person with the credentials to help defuse the violence that is erupting. Baradei has the respect of the reformers and the international prestige to be a compromise for all involved parties.
From a market perspective it was interesting that GOLD and other safe haven asset classes failed to be bid, as GOLD and OIL were both sold heavily. In such turbulent times when safe havens fail to rally, it sends alerts that other variables are in motion. When it comes to GOLD I am left to wonder if one of the large HEDGE FUNDS that very openly publicized its huge desire for GOLD is now heading for the exits, as every short term rally is met by relentless selling in the late afternoon (just alert to the divergence taking place). That is why 2+2=5 in the Notes From Underground.
January 28, 2011 at 6:56 am |
Very good points. Thanks for sharing your thoughts.
January 28, 2011 at 8:00 am |
an error–should read Peter Tasker–my apologies
January 28, 2011 at 8:18 am |
actually, oil has not come off, only wti has. This is because it can not be exported I believe, all other oil mkts brent etc are on multiyear highs
January 28, 2011 at 8:55 am |
yes but the brent trade is rising as certainly so much middle-east oil goes thru the canal—-that is a good point ken but if the canal closed and oil is for the most part fungible oil would have to find its way to europe from any other source but you are right as to why the brent/wti may be as wide as it is—I am way to focused on the wti as an old trader
January 28, 2011 at 9:56 am |
Yra good stuff. What I don’t understand is why this crisis in Egypt is not moving oil higher.
January 31, 2011 at 7:48 am |
Tim–Ken made a very good point –the initial impact was on the Brent–that spread to WTI has gone out to record wide levels