Sunset – maybe

There are two parts to economics – sort of – either Macro or Micro. Micro has to do with what I might describe as Tactics and Macro as Strategy. Economists worry about both, and in general Macro impinges on Finance and large scale trends.

Japan – land of the Rising Sun – is currently in a very bad place from a Macro point of view. Never mind the political turmoil engendered by the resignation of the Prime Minister, Japan faces huge issues on a number of fronts which might eventually destabilise the West and the rest of the world. 

A falling and aging population has already played havoc with pensions and the ultra- loose monetary policies of the last few years (think quantitative easing on steroids) are now impacting critically on all those Japanese bonds of which the Bank of japan holds 52%. Worse yet, they hold some $1.1trillion of American treasuries. If the pension funds in Japan started to sell off their holdings of Japanese securities and bonds to gather some liquidity, (realising losses and probably putting their solvency at risk) the BoJ might have to start selling US Treasuries. And no one knows where that might lead. Oh and Japanese indebtedness is over 120% of GDP.

Troubles never come singly but in battalions, and Japanese GDP has been shrinking for some time, putting even more pressure on the situation. Rising interest rates (in Japan they have gone from 0% to over 3%, virtually unheard of) has resulted in the BoJ having to shoulder unrealised losses of nearly 30 trillion yen. That’s more than $200 billion and rising fast. It’s not just the BoJ. The country’s insurers are facing losses of some $75 billion plus as well. I stress they are unrealised, but there is no easy way to sterilise these sums.

These are all severe tests for Japanese financial stability. For context, every 1% rise in interest rates adds $300 billion to US debt servicing costs. In case you haven’t noticed, Central Banks have moved from splashing money about like confetti to being quite mean with it. The world liquidity index is already falling and  - dare I say it – that is one reason Bitcoin is struggling. We are fast approaching an inflection point worse than 2008 which may have profound consequences for the future of the world as we know it.

Another issue is the politisisation of the US FED. What that means is that they have diverted away from their overarching  statutory mandate of maximum employment, stable prices, and moderate long-term interest rates. True, 2008 and Covid have both tested all financial institutions, but what has happened is that the balance sheets of the FED and US Treasury have been stretched beyond belief. That makes the FED somewhat reliant on the Treasury and that means it can be leant on. Powell has worked hard to maintain independence and relevance, but nothing is easy, and the American economy (despite Trump not being entirely wrong) is undergoing a great deal of pressure. Arguably there should not have been a 25 basis points reduction as inflation shows no signs of having been beaten, but for sure the cut will stand the economy in good stead. After all, as I continually say, Governments don’t mind inflation at all. They can just print more money to cover it whilst the actual value of borrowings continues to decline.

On the other side, Trump has quietly added a buyer of last resort to cryptos. By this I mean that stablecoins  - far from depositing cash in Banks, which is a terrible idea – buy US Treasuries. And why wouldn’t they? Your friend and mine Warren Buffett is currently the largest holder in the world of these instruments and he definitely knows a thing or two about risk and safety.

So let’s all hope Japan finds that elusive Money Tree that all governments are desperately looking for and doesn’t have to sell US Treasuries.

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