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Xie Guozhong: The Time To Liquidate The Yen Is Not Far Away.

2012/3/30 22:14:00 11

Yen

It may depreciate sharply 30%-40%.

The depreciation of the Japanese yen in 1996 was a major factor contributing to the Asian financial crisis.

China, South Korea and Southeast Asian countries must have a healthy banking system to withstand the sharp depreciation of the yen.

By the three quarter of 2011, Japan's nominal GDP contracted by 8% in four years, of which 6 percentage points were caused by deflation.

Without increasing government spending, the contraction may increase by 1 percentage points.

Japan's persistent deflation is unprecedented since 1930s.

Without the government deficit, the Japanese economy would go down more severely.

During this period, central government bonds and loans, plus its secured debt increased by 116 trillion and 300 billion yen, equivalent to 1/4 of nominal GDP in the three quarter of 2011.

If Japan adopts a balanced budget, its economic contraction may be 2 times to 3 times that of today, and it will trigger a debt crisis in the private sector.

Strong yen, deflation and rising

Government debt

A short-term equilibrium is formed, and the equilibrium will continue as long as the market believes in its sustainability.

Since the Japanese yen was decoupled from the US dollar in 1971, the yen has maintained a sustained upward trend, from 360 yen to 1 U.S. dollars to the current 83.4 yen to 1 dollars.

When wages and asset prices rise, currency strength is reasonable; but when wages and asset prices fall, a stronger currency is a suicide.

The nominal GDP of Japanese yen peaked in 1997, in other words, nominal wages in Japan reached its peak.

Its real estate prices have gone from bad to worse.

The Nikkei index is still near its lowest level in 30 years.

The Japanese generally believe that the yen should be strong. This belief is wrong, but it can be self fulfilling.

The reason why it lasted for so long was that the Japanese government adopted a policy to eliminate the adverse effects of deflation caused by the strong yen.

Therefore, Japan's national debt is rising at the same time as the value of the Japanese yen.

In 2012, it is estimated that the national debt will reach 1000 trillion yen, or about 215% of GDP, with a per capita debt of 7 million 800 thousand yen, or 93 thousand and 600 dollars, about half of household net wealth.

Japan's long-term maintenance of deflation depends on market confidence in the Japanese debt market.

Because Japanese institutions and families hold almost all of the government debt, their confidence in the government is the Amulet of the Japanese deflation spiral.

The Japanese government has the highest debt and the lowest bond yield.

Deflation

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The real interest rate (nominal interest rate plus deflation) is close to that of other countries.

This requires deflation and sustainability.

However, deflation will reduce nominal GDP or tax base.

How can the government repay its rising debt on a shrinking economy? It can only keep its debts by borrowing money continuously, which is in line with the definition of Ponzi scheme.

The Ponzi scheme of Japanese bonds explains why Japanese society is not too painful.

The strong yen and deflation did not lead to employment crisis, because the government deficit is pushing up aggregate demand.

As long as wages and prices fall synchronously, people will not feel pain.

Japanese household debt is only half of GDP, which is half of the US debt level.

Deflation did not cause too much trouble to the balance sheet.