Il crollo del Giappone innescherà la fine dei giochi?

Il crollo del Giappone innescherà la fine dei giochi?

Japan is currently in the midst of a growing economic crisis. A rapidly depreciating currency, soaring inflation, and a bond market teetering on the brink of collapse are all signs that the island nation is starting to reach the end of the road. As Japan is the largest buyer of global sovereign debt worldwide, what happens in Japan matters for the rest of the world. And as Japan nears the endgame, everyone is left to wonder what really happens if Japan blows up. But first, in order to understand the complexities of the Japanese economy, we need to go back to the beginning. We need to go back to the heydays of the 1980s. [Music] During this time, Japan was in the midst of a massive economic boom. Electronics conglomerates like Sony and Panasonic were pumping out highquality stereos and TVs that were being shipped around the world. We had the Sony WMAN, which changed how people listen to music. and Nintendo launched the Famicom, aka the NES, in the West, which started the global console craze. This was also the decade Japan went from an underdog to a global car king. [Music] By the mid1 1980s, Japanese cars were everywhere. The Toyota Corolla was the bestselling car globally, and the Honda Civic had become a household name in both the US and Europe. Japanese tourists were flying around the world, snapping up Van Go paintings, US real estate, yes, even the Rockefeller Center, and everything luxury. Japan was on top. And in fact, many Americans were worried that the Japanese would soon overtake the US in terms of economic hegemony. But behind all of this success was a dark underbelly. The Japanese economy was unlike any other. After the ravaging of Japanese industry that was World War II, a new western style constitution was forced upon them by General Douglas MacArthur. The goal for the Americans was to liberalize the Japanese system and rebuild their post-war economy so that they could become a major supplier for US operations in the region. At the time, the looming threat of the Soviet Union occupied the minds of policymakers at all levels of the US government. The Bank of Japan was a key tool in their arsenal to rebuild the Japanese industrial sector. The BOJ had the power to allocate credit throughout the economy through a system that they called window guidance. This was essentially a process where the central bank would tell individual commercial banks how much and where to lend. This allowed for centralized stimulation of the economy and centralized direction of which industries would be winners and losers in the post-war order. Unfortunately, the bank was not fully independent. It still required signoff from the Ministry of Finance. This was the official government agency that managed most of the Bank of Japan operations such as approving, increasing or decreasing interest rates or changes to reserve ratios. As the decades dragged on and Japan began to boom, the Bank of Japan began to use the window guidance tool to greater and greater effect. The foundations for the weaponization of this tool began in the 1970s. During this period, the world experienced a series of shocks that rocked the global monetary system to its core. First, we had the depaging of gold from the dollar in August of 1971, which effectively severed the Breton and Woods agreement and free floated all currencies against each other. In 1973, the crisis worsened as geopolitical tensions in the Middle East culminated in the Yang Kapor War. October 17th, reported by John Chancellor. Good evening. The Middle East war produced developments all over the world today. The oil producing countries of the Arab world decided to use their oil as a political weapon. They will reduce oil production by 5% a month until the Israelis withdraw from occupied territories. If the Arab countries keep that pledge, it would reduce their production by almost 50% in one year. In response to Western support for Israel, members of the Organization of Arab Petroleum Exporting Countries, or OPEC, imposed an oil embargo on the United States and other allies. This embargo significantly reduced oil supplies on the global market. As a result, crude oil prices quadrupled from approximately $3 to 12 per barrel. The sudden spike in energy costs contributed to a widespread economic disruption, triggering a period of stagflation. an economic state characterized by high inflation combined with stagnant economic growth and rising unemployment. To fight the stagflation, Paul Vulkar was appointed chairman of the Fed and he wasted no time in taking drastic action. In 1980, he decided to start hiking interest rates and he didn’t stop until they got to north of 16% for the federal funds effective rate, which is essentially the risk-free overnight rate at which banks can borrow from each other. At such high rates, the US dollar began to rapidly strengthen and the back of inflation was finally broken. However, despite his seeming success on the inflationary front, Paul Vulkar was causing another problem in the global marketplace. Because US interest rates were so high, capital began to flow into the US and out of emerging markets or other developed markets like Japan and Germany. Their currencies therefore started to weaken considerably against the dollar. To head off the threatened protectionism, Baker picked New York’s Plaza Hotel as the site for secret monetary diplomacy. A 1985 gathering of finance ministers and central bankers from the G5, the big industrial nations. Their surprise decision, the Plaza Accord, an agreement to sell dollars on worldwide currency markets in an effort to send the dollar and American export prices down. On September 22nd, 1985, finance ministers and central bank governors from the G5 nations met at the Plaza Hotel in New York City to define a solution. The result was a coordinated plan to devalue the dollar against these five currencies via currency manipulation, aka central bank swap lines. The plan worked. Over the next 2 years, the dollar depreciated by more than 40% against the yen and the Deutsche mark. US exports became more competitive and the trade deficit finally began to narrow. But for Japan, the stronger yen made exports less profitable and led to an influx of capital. This contributed to excess liquidity in the economy, setting the stage for the asset bubble of the 1980s. To make things worse, Japanese central bankers and monetary policy makers were worried that this stronger yen would have an adverse effect on the Japanese economy. As a result, they began lowering interest rates in the mid1 1980s and using window guidance, that credit allocation tool we discussed earlier, to greater and greater effect, forcing more and more industries to take on bigger and bigger amounts of loans. The evolution of the Bank of Japan is a long and complex one. And in order to understand this story better, I decided to put my feet on the ground. I decided to fly to Tokyo and meet with Weston Nakamura, one of the foremost experts on the Boj. [Music] And so I just want to show you things that you should know about, okay? And then you can do what you will with it. Okay? So this plot of land, this was famously during the peak of the Japan asset bubble in the 80s. This plot of land was valued at more than the land value of the state of California. So the Japan asset bubble in the 80s was truly like the craziest of you know history history’s asset bubbles like uh throughout from the South Sea bubble to all that kind of thing. What’s even more shocking than the size and the scope of this bubble is the fact that it was orchestrated. You see after World War II, Japan was completely devastated. Cities lay in ruins and the entire domestic industry was shattered. But by the 50s and 60s, Japan was growing faster than any economy in the world. Unlike free market models in the west, Japan’s system relied heavily on government guidance. The Ministry of Finance, often called the MOF, played the central role. At the same time, the Bank of Japan was technically responsible for monetary policy. But in reality, the MOF often treated the BOJ like a subordinate agency. But by the 1980s, things started to change. As Japan became richer, pressure to liberalize the economy increased, both from within and from abroad. The US and international organizations like the IMF criticized Japan’s opaque financial system and heavy-handed state controls. Inside Japan, technocrats at the Bank of Japan started to push back. They wanted more independence, especially when it came to interest rates and credit creation. So, what did they do? They started a bubble. went from just an economic fundamental boom and maybe a little bit of speculation to just outright excessive exuberance. You know, Tokyo, the the Imperial Palace of Tokyo is worth more than all of California, right? Um stock prices and all that too, right? um stock prices were like onetenth of global market cap and like the start of the 80s by the end of the 80s is like it’s like over 40% of global market was was took so you could say like this was purposely done in order to um you know as you were saying princess of the end style like this was a bubble that was engineered. This started to kick off a massive real estate, equity, and bond price bubble that had already begun in the early 1980s. By the mid 1980s, Japanese real estate was growing by more than 15% a year. Famously, the grounds of the Imperial Palace in Tokyo were estimated to be worth more than all the real estate in the entire state of California. On the stock market side, the NIC 225 more than tripled between 1985 and 1989, climbing from around 13,000 to a peak of nearly 39,000 by the end of the decade. Corporate earnings didn’t justify the rise. Price to earnings ratios on many of the stocks soared to above 60 and speculation was rampant. Many conglomerates and banks flushed with capital funneled money into equities, sometimes using company shares as collateral to borrow even more, reinforcing the feedback loop. By the end of the 1980s, their plan was complete. In an attempt to rein in the rampant asset price speculation and cool down a dangerously overheating economy, the Bank of Japan made a bold move. It began hiking interest rates. By the end of 1989, the key discount rate had risen from a rock bottom 2.5% to 6% by 1990. The goal was to deflate a rapidly growing real estate and stock market bubble in a controlled manner. But what followed wasn’t just a soft landing. It was a collapse. The nicke plummeted from nearly 39,000 to just under 15,000 in a few years. Real estate values in most major cities fell by more than 50%. and commercial land plots in cities like Tokyo, Osaka, and Kyoto fell by 80%. Corporations once flushed with speculative profits now found themselves crushed beneath the weight of bad loans and evaporated collateral. This marked the beginning of what became known as Japan’s lost decade, a prolonged period of economic stagnation, deflation, and policy paralysis that haunted the country throughout the 1990s. and in like that almost like Hollywood movie slowly rolling over and over and more and more people and luggage are thrown out and there’s just chaos and you know despair but it’s this like there’s no like seminal moment of a lemon failure. It’s right. There’s no there’s no crash. There’s no there’s no one day 10% 20% limit down. There’s just again it goes down half a percent. It goes down half a percent. It starts to roll over. This this small company declares uh bankruptcy. This small company this this bank fails. That bank fails. But but those those start to Yeah, those definitely start to happen a lot too. But it’s what you see in the chart is like almost like a you know this the slow decline is a visual reflection of remnants of this time is different. Yeah. Like it’s if it’s this time is if this time is truly different is how you perceive it then you’re not going to just immediately give that up. It’s like immediately sell and panic. you’re going to hold on and then that that half a percent drop in the nick a half a percent half a percent half percent that slow bleed turns into this like again slow motion train crash that just grinds you grinds you grinds you lower and you just you don’t want to sell at 30% down you don’t want to sell at 40 and you just keep holding you don’t want to sell at all if you’re a believer in that right um throughout the 1990s banks were saddled with enormous volumes of non-performing loans but instead of rapidly writing them off or restructuring Most banks kept many of these assets on their books, engaging in what became known as zombie lending, extending credit to insolvent borrowers just to keep the bad loans from being recognized. The result was a credit crunch that suffocated new investment and starved healthy firms of capital. A full-blown financial crisis was narrowly avoided, but at the cost of a decade of anemic growth. Households delayed purchases in hopes of lower prices, while firms hesitated to expand. Knowing that revenue projections were uncertain and demand was weak, real GDP growth averaged just above 1% per year throughout the entire decade. Unemployment rose steadily and underemployment became very common, particularly among younger workers and recent graduates who entered a stagnant labor market. Even the government’s efforts to stimulate the economy through infrastructure spending and interest rate cuts fell flat. Policy was often too late or too timid. So, in the aftermath of this bubble bursting and the slow motion train wreck that begins, the BOJ is essentially continuing this power struggle with the Ministry of Finance. And finally, in like February 1998, they’re granted a um, you know, a legal order to basically grant them independence, which means that they no longer take marching orders from the Ministry of Finance. They no longer need big daddy ministry of finance approval for every little thing they do like raising or lowering interest rates since the wartime economy when ministry finance you know directed BOJ this you are here for the wartime effort and that had remained yeah so what so what happens next what is this new found what do they do with this newfound freedom oh so what you’re talking about is the bank of Japan act of 1998 or 1987 right implement 1998 so that was like the de declaration of the independence of the Bank of Japan from government affairs, right? Um, and so with that newfound independence, independence, the Bank of Japan kind of went on these different sort of, you know, like rates down to the zero bound ZER, not NERP yet and all that kind of thing. But um that independence the Bank of Japan kind of treasured because they knew how important it was from the outside you know perception of legitimacy, credibility and all that. So if central bank is supposed to be independent then damn it it will be independent. Mhm. Um and then in 200 but so but nothing was nothing that they were doing was having an impact on re you know shaking Japan out of this deflationary spiral this liquidity trap all this right interest rates were cut to zero by the end of 1999 but by then the banking sector’s dysfunction and the psychological scars of asset collapse had already cemented a deep conservatism among both borrowers and lenders. Japan’s fiscal position deteriorated as the government racked up debt trying to spend its way out of the malaise, but consumption remained sluggish. The 1990s in Japan was not marked by dramatic crisis or visible upheaval. Instead, it was a slow erosion of vitality, a wealthy, advanced economy stuck under the debt of bad loans it could never pay off. By the end of the decade, Japan had not only failed to recover, it had become zombified. alive in name only but all economic growth had been sucked out of the system due to these practices. So we talked earlier about you know zombie companies and you know this this idea of these these firms that have huge debt loads you know 200% of their operating margin 300% of their operating margin that are basically unable to pay the interest alone on those on those debts. In the wake of the bubble, the Japanese banks all were in, you know, obviously daily talks with um the Ministry of Finance and the BOJ and they decided that because the deflation was already bad enough as is, they decided that they couldn’t enforce um you know interest rate minimums or like minimum payments on their own clients on the companies and they just told the clients to pay whatever they could. So that meant that even though on paper the three 200% 260% debt to GDP is this huge thing that none you know huge behemoth that none of these corporate entities can ever pay or even the government can ever pay. It’s like everyone just agrees to not enforce the payment mechanism and just let them continue to borrow and continue to to lend and continue to just kind of survive. And so again, all that capital is still frozen in these zombie companies that do not innovate, do not grow, do not spend, do not do they just sit there. They just don’t do they don’t do anything. And all the people are working for those companies. So how can you how can you think of a society with real consumption before you solve that problem? As Japan’s massive asset bubble collapsed in the early 1990s, the Bank of Japan responded by aggressively cutting interest rates from levels above 6% in 1991. Policy rates fell steadily to near zero by the mid1 1990s and then officially zero by 1999. [Music] But despite these efforts, the economy remained stuck in a deep rut. Prices stagnated or fell. Investment dried up and consumer demand was weak. Traditional monetary policy had lost its effectiveness. Japan had entered what is called a liquidity trap where even ultra- low interest rates couldn’t spark recovery. But the problem went deeper. Many of Japan’s largest firms and banks were still saddled with massive debt and non-performing assets from the boom years. Rather than allowing inefficient or insolvent companies to fail, banks propped up by cheap credit continued to lend to them to avoid recognizing losses. These firms became known as zombie companies. Technically alive, but economically dead. In the late 1990s and the early 2000s, the Bank of Japan took things a step further by pioneering quantitative easing. It began buying long-term government bonds and flooding the banking system with reserves in the hope that the banks would lend more freely and inflation would pick back up. But as a foreshadow of what would happen in 2008 and 2013, this new liquidity mostly remained trapped in the financial system. Banks still under capitalized and riskaverse continued rolling over loans to struggling firms rather than allocating capital to more productive uses. QE combined with rock bottom interest rates inadvertently extended the life of these zombie companies by making it easier for them to survive without restructuring or improving. The very policies meant to revive the economy may have ended up preserving its most dysfunctional parts. So this this glorious thing, this is Bank of Japan headquarters. Uh this is what I always call the monetary policy global monetary policy experimentation laboratory. Okay. So for example, uh interest rates down to zero. Zero interest rates. That was done here first. Okay. when interest rates when you drop interest rates down to zero and you still need to ease there’s not much much more you know you could go below zero this is before negative rates and so what they started doing was quantitative easing which is buying of financial assets namely government bonds and when you do that you print money you buy bonds from banks and exchange them for like fresh liquidity and that pumps liquidity into the system by the way none of these things worked okay um over the years over the decades in comes Abnomics uh ex former prime minister Shenzo Abbe who basically he was prime minister for like a moment uh and then there was a period of political volatility in Japan where Japan had went through like five prime ministers in five years and all that oh my gosh what years were these this was basically like the you know the aftermath of 2008 um and and so a was openly campaigning to get for re-election on like QE. Yeah. It’s just insane. So when people say like is there like independence of central bank independence or are they an independent body from the government? Dude, Abbe ran on and won on monetary policy is like stimulus. With the Bank of Japan untethered from the moorings of the Ministry of Finance, the institution was now free to experiment as it pleased. As we said earlier, in 2001, the Bank of Japan began buying government bonds to inject liquidity into the banking system, what we now call QE. The idea was to jolt inflation back to life, encourage lending, and to spark investment. But it didn’t work. Inflation stayed flat, growth remained sluggish, and banks continued lending to zombie firms. So, Japan doubled down. In 2010, they began doing QE again, even larger due to the effects of the 2008 financial crisis. After this had limited effect again in 2013 under the Abbe government and with Heriko Kuroda leading the central bank, the BOJ launched qualitative and quantitative easing or QQE. This wasn’t just bond buying. It was shock and awe. The bank promised to expand the monetary base by trillions of yen each year and buy longerterm government debt, corporate bonds, and even equity ETFs. Still, inflation remained stubbornly below the 2% inflation target. Despite flooding the financial system with liquidity, real demand of the economy didn’t grow. By 2016, the Bank of Japan was at its wits end. In the first few months of that year, they rolled out NERP or negative interest rate policy. This practice charged banks a nominal percent to hold their reserves at the central bank. As a result, banks began to charge customers for holding money in their account. This still didn’t work. By September, with options running out, the BOJ rolled out its most extreme policy yet, yield curve control, or YCC. This was essentially QE infinity. The bank promised to keep 10-year government bond yields pinned at around zero, buying as many bonds as it needed to do it. That meant if markets sold off government debt and yields rose, the BOJ would step in and buy regardless of how many trillions it had already spent. Over time, this led to a dramatic concentration of Japan’s sovereign debt in the hands of the central bank. As of today, the Bank of Japan owns over half of the entire Japanese government bond market. Despite this enormous effort, the results have been underwhelming. Japan has spent decades with low inflation, stagnant wages, and near zero real growth. That was the kick off the process of acquiring enormous amounts of Japanese government bonds such that the balance sheet was just massively inflated and so much like yen printed pushed into the economy and all that and and that was like a defining sort of uh you know character you know both of them uh respectively and it’s not something that like neither of them are in power anymore obviously but like they’ve taken irreversible actions on Yeah. And right now the bank fans are trying to like unwind the very tip of that iceberg. But you can’t undo that. You can’t buy it’s impossible. They when you get to a point where you acquire 70% of you know most issuances of JGBs and over 100% of some and 60% of the entire market like there’s no way destroyed trading liquidity and trading capabilities. Yeah. where where we see, you know, weeks where certain teners of the 10-year JGB don’t trade at all. In their vain attempt to simulate demand via negative real rates and QE infinity, the Bank of Japan had created a black hole of their own design. The more they lowered rates, the greater the propensity to hoard cash and the less economic growth could be stimulated. Any new monetary easing was simply offsetting the 1990s losses from the zombified corporations and banks. In the meantime, the Bank of Japan was eating their domestic bond market. Their holdings of government bonds continued to skyrocket and trade liquidity deteriorated significantly. By 2022, the worst of their fears began to materialize. With the Federal Reserve beginning rate hikes in March of that year, a massive carry trade began to open up on the Japanese yen. Since domestic Japanese rates were pinned at zero, traders could borrow yen, sell it on the currency market in exchange for dollars and use these dollars to invest in assets yielding 5% or more. It was basically free money, but the net effect of the carry trade was horrific. The yen blew out from 113 in February to 148 by October 2022, a devaluation of almost 30%. The Bank of Japan responded with emergency currency market interventions, the first time it had done so since 1998. They flooded the market with $60 billion a month in US dollar reserves, buying back the end in order to strengthen it. But this was only a stop gap measure with billions burning every month. The BOJ decided to lift the bans on yield curve control to 0.5% in December 2022. That only provided a brief rest bit. By July 2023, they moved the upper limit of the ban to 1%. while still retaining a target of 0% for the 10-year Japanese bonds. Finally, in March 2024, the bank hiked the discount rate out of the negative territory and got rid of yield curve control altogether. This was a desperate bid to slow the depreciation of their currency. In late April and early May, the bank blew through another $65 billion in interventions to save the end. By July 2024, after another $ 36 billion ammo clip fired from the BOJ, they decided to hike rates aggressively to a quarter of 1%. By January 2025, the policy rate reached 0.5%. However, none of this cured the alien yen. So, it’s your question of like are the history books going to be kind to that? the Bank of Japan’s history books if if written if the author is the the Bank of Japan the Bank of Japan said we did what we had to do because if not for that the government would like debt levels would have deemed Japan insolvent and that’s not just bad for Japan that’s bad for like destroys everything yeah imagine forcing the world’s largest sovereign creditor of you know US government bonds US corporate bonds EU bonds like government and dem and like corporate to sell that to raise capital to pay off their own debt load That’s that’s an unwind of a carry trade that is literally trillions of dollars in the making. The collapse of the Japanese yen isn’t just a domestic story. It’s a global signal. For decades, Japan has been the world’s great deflationary anchor with ultra- low interest rates, massive QE, and a stable currency that kept global capital flowing and borrowing costs low. With a savings rate four times higher than the rest of the G7 and 54% of household assets in cash, the Japanese have since 1990 been the lynchpin of the world’s bond markets. However, the country is now trapped. After this long period of excessive monetary easing, public debt is at an eyewatering 260% of GDP. Private debt is north of 172%. The authorities are running out of road. Currency interventions, rate hikes, and policy reversals from the Bank of Japan are warning signs. The era of defying economic gravity may be ending even in the last hold out of easing money. And as Japan continues to hurdle past the monetary event horizon, more and more desperate measures will be enacted by the BOJ and Ministry of Finance in a frenzied bid to escape. The terrifying truth is that it’s already too late. The currency is quickly becoming the escape valve for the massive pressure building inside their financial system. As the yen continues past 150, 200, and eventually 250 to the dollar, Japanese investors will withdraw their support for bonds and finally begin to move their 7.2 trillion worth of cash out of the slowly sinking ship. As inflation returns to Japan and real yields remain near zero, this liquidity wave will shift markets around the world. This means even more biders for US equities, gold, and Bitcoin, ripping these assets ever higher in a neverending feedback loop. The yen is the first domino. The question is, what falls next?

The Yen is Collapsing. Will the carry trade destroy the global sovereign bond market?

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