We’d like to mention a pressing issue for Australian shares; the looming fiscal crisis in Japan. Yes, you heard us correctly. The next domino to fall in Europe is Japan.
Japan’s current account deficit went negative in January for the first time since 2009. The single-biggest reason Japan is now running a deficit is that it’s entered what some are calling an “energy death spiral“. Imports of Liquefied Natural Gas (LNG) are up by 74%. This is the energy shock directly related to Japan’s nuclear power plants going off line following last year’s triple disaster.
Rising energy costs are obviously going to affect Japan’s manufacturing and export competitiveness. But the real ticking time bomb is the government budget deficit. Total government debt is already 235% of Japanese GDP. Interest expense on that debt consumes nearly 90% of government tax takings.
With Japan now set to run trade and current account deficits, watch for the interest expense on government debt to rise. Japan’s decades of trade surpluses made it possible for it to recycle those trade profits into the government bond market. Savers were also happy to buy government bonds rather than stocks or houses.
But in demographic terms, Japan’s savers are now ready to consume those savings as they retire. If Japan cannot fund its government deficits through internal savings, it has two choices. It can join the global queue of governments tapping the market for trillions. Or, the Bank of Japan (BoJ) can print money to buy government bonds.
The BoJ is on the case. It’s already doubled its planned purchases of government bonds. It’s set aside $363 billion in total for asset purchases designed to support…asset prices. The BoJ is probably happy to buy government bonds. This prevents Japan from being at the mercy of foreign creditors. But it isn’t so good for the yen.
A weaker yen is a direct result of Japan’s easier monetary policy (printing money to buy government bonds). When you couple the easier monetary policy in Japan with the likelihood that China will relax credit to “fine tune” growth (Wen Jiabao’s words), then you have two potentially bullish forces in the region.
That’s probably the way the stock hustlers are spinning it this morning, anyway. For our money, these two news items spell trouble for Aussie stock prices. What’s happening in Japan and China is part of a global story. And that story is about to take a surprising twist. More on that tomorrow.
for Markets and Money
From the Archives…
Why BHP Should Be Bracing Itself For a China Slowdown
2012-03-30 – Greg Canavan
What Does “the Market” Mean to You?
2012-03-29 – Joel Bowman
Why Australian House Prices Are Set to Crash
2012-03-28 – Dan Denning
Why US Manufacturing Could Be Made in America…Again!
2012-03-27 – Chris Mayer
The Best Real Estate Bets
2012-03-26 – Eric Fry