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WATCH JAPAN CLOSELY IN MARCH  - Screen Shot 2012 02 21 at 3.55.43 PM

At Hedgeye, we monitor key global market, economic and political events, and assess the potential macro risk or reward that each of these events might have. One event in particular, the maturation of Japanese government debt in March, has us sitting up and taking notice. That’s because a significant amount of marketable Japanese government bonds (JGBs) mature next month, and those maturities may be a global macro risk that is currently being underestimated.

While Japan certainly does not face an imminent sovereign debt crisis, for the first time in many years, the fact that there’s even a mention of such a potential crisis is worth noting.

Again, we are not saying such a crisis will happen, but the perception around Japan’s sovereign debt load may be at an inflection for a number of reasons, including:

  • Japan’s current account: For years, the country’s run a healthy current account surplus, but that’s no longer the case. As the current account erodes, strains will emerge as the country looks to finance its ever-expanding public debt.
  • Possibility of a sovereign debt downgrade: If such a downgrade happens, it will trigger capital raises across the Japanese banking system to the tune of roughly $80 billion.
  • Acceleration of inflation: Long-term inflation expectations could rise as the Bank of Japan (BOJ) may look to alter its mandate and dramatically increase its purchases of JGBs.
  • Rapidly deteriorating government credibility: Most market participants worry that the Japanese government has no credible plan to solve the country’s fiscal woes.

In another sign of weakness, just today Japan reported its widest-ever monthly trade deficit. In the coming weeks, we will keep you abreast of other important events that will shape the future of the Japanese economy.