Japan & the Yen Scenario

(This is another article from frequent contributor, Chan Cheh Shin, to this blog site. Thanks to Chan for his sharing.)

Bearish case for Yen - strategic thinking drafted on Apr. 17 2013

The Bank of Japan (BoJ) policy board decided to employ extreme measures in a bid to stoke inflation, as demanded by Prime Minister Shinzo Abe. And that demand has been obediently taken in by the new “leaders” of BoJ. This is a dangerous omen as BoJ is totally no more independent.

 With unanimous support to double the monetary base in two years, we believe the central bank has demonstrated that it will employ all its tools to achieve inflation, and that it is likely to ‘succeed’.

The 2% CPI is very possible in two ways : 

·         Runaway property price due to FREE flood of liquidity

·         Higher import price due to weak (may be VERY weak) Yen.

 In Japan, the most important categories in the consumer price index are Food (25 percent of total weight) and Housing (21 percent). Transportation and communications accounts (14 percent).

The first scenario :

Japan JGB yield moved up from (for the 10 years) 0.5% to 2.5%. That means the Japan government needs to pay more coupon.

Let’s compare Japan to other major developed countries :

The above projection is using current coupon at 0.6%. The debt burden will grow exponentially after the new measures. The argument here usually is that since JGB is being financed by the Japanese citizen themselves, there should be no fear.

However, the fact is Japan is not only an aging country; it is a shrinking country (the death rate is higher than the birth rate). That will lead to two problems :

1.       A diminishing pool of citizen that is buying the JGB

2.       A 2% inflation will force the old age to dip into their saving. This again will reduce the demand for JGB from the domestic Japanese.

With an explosive deficit, but without a natural support for JGB and a BoJ that loss its independency, Yen is set to fall. The following chart shows this weakening of Yen can easily moves to 150 level.

Below is a news from Japan itself  on popular situation :

Japan’s population fell by a record 0.22 percent to 127.515 million as of last Oct. 1, while people aged 65 or older surpassed the 30 million mark for the first time, the government said Tuesday.

The figures are from a survey by the Internal Affairs and Communications Ministry.

The decline of 284,000 in the total population, which also included foreign nationals, was the largest of its kind since officials began compiling comparable data in 1950.

It was also the second year in a row that the population has fallen.

Ministry officials attributed the decline to the number of deaths exceeding births and a rise in the number of foreign residents who left Japan compared with those entering the nation because of the impact of the March 2011 earthquake and tsunami and the economic slump.

People aged 65 or older accounted for a record 24.1 percent of the total population.

The number of people in this age bracket rose by 1.04 million to 30.79 million partly because many of those born in the baby-boom years of 1947 to 1949 have turned 65 years in a telling sign that measures such as increased social welfare spending must be addressed swiftly.

Meanwhile, the number of people 14 and younger fell to a record low of 13 percent.

The population decreased in 40 of the 47 prefectures. Fukushima Prefecture, home of the crippled Fukushima No. 1 nuclear plant, suffered the worst decline at 1.41 percent.

Of the seven prefectures that posted gains, Okinawa topped the list with a 0.56 percent increase.

For the first time, the number of people aged 65 or older surpassed those aged below 14 in every prefecture.

Akita Prefecture had the highest percentage of people 65 and older at 30.7 percent, followed by Kochi at 30.1 percent and Shimane at 30.0 percent.

What do you foresee the future economic outlook if the current population trends persist in Japan........say, 20 years down the road from now?