Thursday, May 30, 2013

If…then in Japan

If Japan starts to spiral out of control, then what do they do? A spiral would be a sudden move higher in JGB rates with a simultaneous crash in the Japanese Yen. Their response would be to try to slow the positive feedback loop through external intervention. Fortunately for Japan, they have amassed a significant reserve position of 1.2 trillion compared to a US reserve position of 135 billion, so they do have some firepower.

japanReserves <- getSymbols("TRESEGJPM052N", src = "FRED", 
    auto.assign = FALSE)
asTheEconomist(xyplot(japanReserves, scales = list(y = list(rot = 1)), 
    main = "Japan Foreign Reserves excluding Gold"))

From TimelyPortfolio

Based on data from the US Treasury, 1.1 trillion of the 1.2 trillion of Japanese foreign reserves are US Treasury bonds. If Japan decides (is forced) to liquidate, the only thing they have to liquidate are US Treasury bonds. Who will buy if they sell? What happens next?
# get data from US Treasury for top 10 foreign
# holders of US treasuries
foreignUSTreas <- read.csv("", 
    skip = 4, nrows = 13, stringsAsFactors = FALSE)
top10 <- data.frame(foreignUSTreas[4:13, 1:2])
colnames(top10) <- c("Country", "Value")
top10$Value <- as.numeric(top10$Value)
top10$Country <- factor(top10$Country, levels = top10$Country[order(top10$Value)])

barchart(Country ~ Value, data = top10, origin = 0, 
    xlab = "Value (in $Billions)", main = "Foreign Holders of US Treasuries - Top 10", 
    scales = list(y = list(alternating = 3)), par.settings = theEconomist.theme(box = "transparent"), 
    lattice.options = theEconomist.opts())

From TimelyPortfolio

For those comparing the Federal Reserve H4 data to the US Treasury TIC data, this is a very good summary


  1. I did have a much longer comment, but decided to cut it, and directly answer the question(s). Japan won't spiral out of control on the inflationary side (risks are to the downside/deflation). So risk of Yen collapse is low. Japan has a population decline problem (deflationary), and so called benign deflation through productivity gains from Asimo. If they incur a problem with JGB's getting away on them, I imagine the MoF will tell institutions to dump Europe Sovereigns, or as you pointed out, they've got their reserves, but they've also got Bernanke's blessing to set a ceiling on the curve. BoJ will buy unlimited quantities of JGB's which won't be inflationary but unfortunately, exactly the opposite. Its the fiscal side that needs boosting given the circumstances. And what if they sell USTs, who will buy... the Fed, they'll cap rates if they have to as well. Sigh, seems like my comment is long again. Oh well. The point being, deflation is the concern, nominal rates will not get out of control (or needn't).

    So what is next is Nikkei keeps falling (probably after a bit of S&P BTFD bounce) as Fiscal isn't large enough, and Yen begins to rise again (wrote this last night and lo and behold another 400 pips move on the Yen) and folks run from that trade. Back to square one. This is more or less from the perspective of MMT, which I think helps to explain why Japan isn't going to blow up (particularly with rates). Eventually you just control the market if it gets out of order, and you can do it because you control the currency. I also feel like the icy depths of deflation and the fiery hells of inflation have remarkably kept the world afloat somewhere in between (as these fears cancel each other out).

    Actually, I was quite bearish on the Yen in Nov 2011 but I think I was right for the wrong reasons believing it would blow up and destroy Yen and somehow be deflationary (became a bull on Yen around February watching divergences and unstoppable stock market... might be a clue if a stock market goes up 80% in 6 months, etc). and the most recent price signals are worries its not enough, I feel deflation makes more sense, and in that case lower nominal rates (higher real rates) and Yen soaring again while the stock market collapses which I assume goes for the US as well, at some point, because Japan is not an island... ok well they are, but global interdependence connects the war for wealth.


  2. sorry, it has taken me so long to reply. I switched to disqus and lost my comments with a botched import. Looks like it is all resolved now.

    Thanks so much for the comment. Deflation has prevented the disastrous sovereign spiral. I wonder if deflation can persist and spiral still begin. I guess we shall see.