"I can take pot or leave it. I got busted in Japan for it. I was nine days without it and there wasn't a hint of withdrawal, nothing."
If the quote above from Paul McCartney is accurate, he cured his dependence on an illicit substance after a visit to Japan. The question as it relates to the Japanese in 2012 is whether the Japanese government can cure their dependence on debt to sustain their economy.
Earlier today, the Hedgeye Macro Team, led by CEO Keith McCullough, Director of Research Daryl Jones, and Senior Analyst Darius Dale hosted a conference call to update our investment view on Japan with a 100 page presentation.
- Accelerating debt maturities - In the context of credit default swaps on Japanese government debt doubling since we introduced our Japan's Jugular thesis on October 5, 2010, a cascade of maturities in 2012 -- specifically March -- increase the probability that Japan's sovereign debt market comes under pressure over the intermediate term.
- Long term demographic headwinds - Japan has the oldest population in the G-7 and by some estimates, based on current demographic trends, the Japanese population will decline by more than 30% over the next 40-years. The headwind of demographics has specific implications for government entitlement spending and GDP growth, both over the short and long term.
- Government policies gone awry - Decades of Keynesian economic policies have left Japan with a structural deficit of 8-9% of GDP and a revolving door of political leadership. Current policy proposals on the horizon actually appear poised to push Japan closer to the abyss of debt and deficits by structurally impairing economic growth incrementally.
All told, we think Japanese government bonds are at risk of being downgraded by the market due to the aforementioned factors, as well as notable inflections in a number of key tailwinds. The main risks are as follows:
- The threat of official ratings downgrades to critical levels;
- A structural erosion of Japan’s net creditor status;
- A failure to pass any meaningful fiscal reform at a critical juncture as it relates to the global perception of sovereign credit risk; and
- A structural increase in long-term inflation expectations.
To access the replay podcast, please copy/paste the following link into the URL of your browser:
To access the accompanying slide deck, please click on the following link (try copying/pasting if clicking it does not work): http://docs.hedgeye.com/Japan2012.pdf
As always, feel free to email our team with questions.
Have a wonderful weekend.
The Hedgeye Macro Team