Japan’s Slow-Motion Train Wreck

Japan is in the midst of a slow-motion train wreck. The country has a massive national debt and it is starting to feel the pressure of rising interest rates. In his podcast, Peter Schiff talked about the situation in Japan and pointed out some disturbing parallels to what’s happening in the US.

The Japanese yen against the dollar has fallen to the lowest level in more than 20 years. The yen is tanking because of the ongoing money creation program by the Japanese central bank. It is still running quantitative easing in order to support its bond market.

The national debt in Japan is around $9 trillion. That is well over 200% of the country’s GDP. Interest payments on the debt make up about a quarter of the country’s government expenditures. But that’s with extremely low bond yields. If yields were to increase to 4%, the debt payment would grow larger than the current expenditures for the entire government. Peter called it a “slow-motion train wreck.”

Obviously, this is a disaster not just waiting to happen, but it is guaranteed to happen.”

The Japanese central bank carefully controls bond yields. It is currently targeted at 100 basis points. While still a low yield in the big scheme of things, it is high for Japanese bonds. Peter said the problem is that 100 basis points aren’t going to work any better than 50.

Nobody in their right mind is going to lend the Japanese government money for 10 years for 1% when inflation is already 3% based on the way they measure. it.”

Ironically, the Japanese government and central bank view this higher inflation as a victory over “too low” inflation.

They’ve already lost. They’re not victorious over anything. Because, remember, low inflation was never the problem that Japan had. They had problems, but low inflation wasn’t one of them. But now they have a high inflation problem. This is a real problem, especially when you have as much debt as the Japanese government does, and the market is starting to adjust because interest payments are going to skyrocket.”

The Japanese central bank is in a predicament because if it stops buying bonds, yields will spike even more. That means the Japanese government either has to raise taxes or cut spending, or the central bank just has to keep printing money and buying bonds.

It becomes a self-perpetuating spiral because the more bonds the Bank of Japan buys to keep rates from going up, the more upward pressure is on rates because they have to create inflation and drive down the value of the yen in order to prop up the price of these bonds and keep the interest expense artificially low for the government.”

The Bank of Japan currently owns about 45% of the country’s outstanding debt. That’s about double the percentage of US national debt the Federal Reserve owns.

Imagine what would happen if the Bank of Japan switched to quantitative tightening and tried to shrink its balance sheet.

And yet people still think the US can get away with a massive national debt because Japan has. As Peter said in a previous podcast, the US is more like Argentina than Japan.

There are other things that enabled Japan to get away with this much debt for as long as it has. But they didn’t get away with it in the sense that they’re not going to have to suffer the consequences. They’re going to suffer the consequences. They’re just going to be worse, but they’re going to be felt later.”

But in one sense, the US is similar to Japan. Its national debt is also a ticking time bomb. America is also buried in debt and it’s about to see its own interest payments go through the roof.

In the 1990s, then-Treasury Secretary Robert Rubin began borrowing using low-interest, short-term debt. Since interest rates were artificially low, this lowered the federal government’s interest payments even further. It was a short-sighted policy that worked as long as rates remained low. But rates aren’t low anymore. Over the next three years, 50% of the debt matures. It will have to be refinanced at much higher interest rates. That means Uncle Sam’s interest payments are poised to go through the roof.