Moody's Sees Fiscal `Tipping Point' Sooner on Quake and Other Japanese Stories

Here a few stories from the 14th, that are irrelevant now, since it seems like nothing is able to shake the confidence of US and European equity speculators. Tokyo closed down with a -10%, the US futures hit -3% but finished with less than 1% losses.

Here a piece from Bloomberg on the 22nd of Feb, when Japan's debt got downgraded by Moody's. Not a good news for Japanese Government Bonds (JGBs).

Feb. 22 (Bloomberg) -- Japan’s debt rating outlook was lowered to negative from stable by Moody’s Investors Service on concern that political gridlock will constrain efforts to tackle the biggest debt burden of any nation.
[...]
Today’s move adds pressure on Prime Minister Naoto Kan as his public approval rating slides and he struggles to secure lawmakers’ support for measures to reduce debt, including a possible sales-tax increase.

The cut by Standard & Poor’s last month was the company’s first in nine years for Japan and reduced the nation’s rating to AA-, on a par with China.
[...]
The prime minister’s public approval rating fell to 20 percent in an Asahi newspaper survey taken Feb. 19-20, down 6 percentage points from January and the lowest since he took office in June, the paper reported yesterday.

There is “increasing uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response to the debt and growth challenges,” Moody’s said in today’s statement.
[...]
The nation faces “chronic deflationary pressures” and can’t grow its way out of debt, making fiscal adjustments essential for mending its finances, Moody’s said. At the same time, Japan’s large economy and deep financial markets can help the nation withstand shocks and the ratings company doesn’t see any funding crisis “in the near- to medium-term.”

A downgrade could be triggered by a failure to push through tax reform, a swing to a current-account deficit, or a drop in household savings cutting the domestic appetite for government debt, Moody’s indicated.

Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent for the U.S.

The debt will probably swell to 997.7 trillion yen ($12 trillion) in the year starting April 1, Japan’s Finance Ministry said last month. When Standard & Poor’s lowered its rating, the company said the government lacks a “coherent strategy” for tackling the debt.

 On the 25th, the largest Japanese public pension fund announced that it might become a net seller of JGB. This is what Kyle Bass from the Hayman fund forecasted about a couple of years ago as what could have been the tipping point for Japan to default on their debt.

Feb. 25 (Bloomberg) -- Japan’s public pension fund, the world’s largest, said it may become a net seller of bonds to cover payments in the world’s most rapidly aging society.

The Government Pension Investment Fund, which oversees 117.6 trillion yen ($1.4 trillion), in September forecast that it would sell 4 trillion yen in assets in the business year ending March 31 to fund payouts. Sales may be less than that in the year starting April as bonds reach maturity, said Takahiro Mitani, president of the fund, known as GPIF.

“We will likely be a net seller in the market,” Mitani, a former executive director at the Bank of Japan, said in an interview in Tokyo yesterday. “We certainly have to come up with an adequate amount” to pay pensions, he said, declining to elaborate on the amount.

Sales by the fund, which helps oversee public pension funds for Japan’s 37 million retirees, come as the first of Japan’s baby boomers is set to turn 65 in 2012, making them eligible for pension payments. [...]

The GPIF, historically one of the biggest buyers of Japanese debt, held 82.4 trillion yen in domestic bonds, or 70 percent of its assets, as of September, according to the fund’s latest quarterly financial statement. That compares with 12.6 trillion yen in Japanese stocks, or 10.7 percent, 9.6 trillion yen, or 8.2 percent, in foreign bonds and 11.5 trillion yen, or 9.7 percent, in overseas stocks, the report shows.
[...]
GPIF doesn’t plan to start investing in so-called alternative assets such as commodities, real estate, infrastructure, private equity or hedge funds because the risks don’t suit its strategy, Mitani said.

“It’s too early to get into alternative investments now,” Mitani said. “Japanese investors are conservative and it’s hard to justify to the public investing in asset classes such as commodities, real estate and hedge funds.”
[...]
People aged 65 or older will account for 29 percent of the country’s population in 2020 and almost 40 percent in 2050, according to the statistics bureau. They accounted for 23 percent population at the end of 2010, the highest among the Group of Seven countries, data compiled by Bloomberg show. That compares with 12 percent in 1990.

About 8 million people, or 6 percent of the population, were born between 1947 and 1949, regarded as the baby-boomer generation in Japan, government data show.

The number of pensioners in Japan was 37 million in 2009, an increase of 3.1 percent on the previous year, according to the Ministry of Health, Labor and Welfare.

And now with the earth quake and the fiscal and monetary insanity that it brought, it looks like there's another push toward the "tipping point" that mainstream financial companies dare to mention openly — which, as a contrarian indicator would mean that we're not there yet.

March 14 (Bloomberg) -- Japan may “at some point” reach a fiscal “tipping point” if the market loses confidence in the soundness of government finances and demands a risk premium on government bonds, said Tom Byrne, a senior vice president at Moody’s Investors Service.

“The earthquake may have shifted such a potential tipping point a bit forward, unless Japan’s political parties are galvanized by the crisis to also address the country’s long-term fiscal challenges,” he said in an e-mailed note today.
[...]

Finally, if I had found this report sooner, it would have been very useful in order to forecast the equity during today's session from about -3% to about -1% in the US and the +5% to +6% gain in the Japanese futures: the panic was total, and hence, the bottom near.

Mar. 14 (Bloomberg) Trading of bearish options on Japanese stocks jumped to a record in the U.S. as investors bought protection against further losses after an 8.9-magnitude earthquake hurt the world’s third-largest economy.

Almost 190,000 puts to sell the iShares MSCI Japan Index Fund (EWJ) changed hands, more than 23 times the four-week average. The ETF tracking 323 companies tumbled 7 percent to $10.05 for the biggest slide since November 2008.

Investors paid higher prices for options after the earthquake on March 11 caused a tsunami that killed thousands and sparked the risk of a nuclear meltdown. The Nikkei 225 (NKY) Stock Average today fell to 6.2 percent to 9,620.49, the biggest decline since December 2008.
[...]