A note on Banzai Bonds

Published: February 22, 2012 8:33 am
This article received : 15 Comments

Yesterday, leading rating agency Standard & Poor’s maintained its credit rating for Japan at AA-. And although the state of public finance should give some reason for concern, S&P nevertheless is quite confident that Japan’s future current account will be sufficient in the black in order to absorb the domestic funding needs. Well, it used to be like that but since a year or so, things have dramatically changed.

A lot has been written on the JPY surge and the fact that Japanese international trade has become more and more uncompetitive due to the strong currency. And it certainly has had an impact, no doubt about that. Last year, Japan posted a trade deficit for the first time since 1980. And 1980 is no co-incidence either because in 1979, the world fell victim to a second negative oil-shock. Looking at the final 2011 numbers, we could conclude that the strong JPY is forcing exports down (-9,3%) and pushed imports up (+9,8%). But when looking at a geographical split-up on imports, we immediately see that the yearly increase was most significant in the case of the Middle East, hence energy. And the Gulf is now responsible for 14% of total Japanese imports (including Russia, it amounts 16%). Especially the yearly increases in case of Saudi Arabia and UAE is eye-catching, respectively +27% and +33%. Overall mineral imports increased by 24% in 2011.

Chart : evolution Japanese imports coming from Saudi Arabia in bio JPY


The reason is of course self-evident, being Fukushima and the need for more fossil fuel imports. But there is more at stake because not only is the trade balance going into the red, the global balance of payment is also under pressure. And if this deteriorating trade balance trend persists – for reasons of a strong JPY or further energy import needs and price hikes on commodities – it could easily wipe out the narrow surplus on the total current account.

Now why Banzai ? Well, so far, no one really seemed to care about the Japanese debt problem, in spite of its huge accumulation of annual deficits (currently 9%) and its mass public debt overhang (gross debt 230% of GDP). And a significant roll-over problem this year amounting almost 60% of GDP in maturing debt, a repetition of last year’s exercise:


No problem say a majority of economists, there is still a huge domestic savings’ surplus which can be addressed. Well, not entirely. We already mentioned the balance of payment problems currently on our hands but in addition, the domestic savings’ rate has year by year being sliced down, from almost 20% 2 decades ago to a meager 2,5% as we speak. So far, it seems the population has been willing to finance this debt at an average 1% in a deflationary environment. But Japanese banks and insurers are loaded with the bonds as well :

Screen shot 2012-02-21 at 17.04.02.png

And these same financial players in Japan lately have been sounding the alarm bell. Japanese banks’ risk management over JGBs was in the spotlight early this month when the Asahi newspaper said MUFG has drawn up a contingency plan that flags 2016 as the time when yields on JGBs could surge if the current account falls into deficit. As the chart shows, Japanese investors hold about 95% of government bonds. But a fast ageing population also means a growing number of elderly Japanese will be running down on their savings. And increasing pension cost ticking like a time bomb under the future public debt. So we could indeed have a serious problem of funding once Japan is forced to tap the international investor. And I think Japan will not be capable of pulling this trick @ 1% funding cost.

“Banzai” is a traditional Japanese exclamation meaning “(May the empire live) 10,000 years”. Kamikaze pilots used to shout this after finishing their farewell sake ritual and climbing on board of their airplane for their final divine mission. And yes, strangely enough, they wore helmets. But it didn’t serve them in the end. And when you are a JGB holder 5 or 10 years from now, my guess is that a helmet will be of no use to you either.

A more in depth IMF study on the subject of Japanese government bonds can be found at


15 Responses to “A note on Banzai Bonds”

  1. Philippe says:

    I have no doubt that our current leaders, if they had been in charge of Japan in 1944-1945, would not have hesitated to send the kamikaze fighters tfully naked o their death, just to save a few yens on the war effort. A few yens that could then be reinvested in a charity for broke bankers.

    After the treaty of Amiens, Britain, whose survival, during the first phase of the Napoleonic wars, was almost entirely due to the sacrifices made by its navy and its elisted personnel, showed the most profound disrespect for its naval personnel. For instance, the elites did not hesitate to confiscate through cahrities scam the benefits due to orphans, widows or to those having suffered a permanent handicap while serving their king and country.

    This might thus be a cultural trait. Should respect be shown to those sacrificing themselves. Or does their sacrifice warrant the use of new margins to whatever their lordships think fit to their present needs ?

    Now, joke aside. Helmets are useful, even on a suicide mission. They contain the radio equipment that will allow ground control to guide the action. they protect the head during manoeuver, so that the pilot doesn’t get stupidly knocked out (and lost without any gain) while manoeuvering. Moreover, if the kamikaze did not find a target, he came back to base to try it again another time.

  2. christof Govaerts says:

    Thanks for the instructive commentary on the “devine winds”. But no kidding, even when listening to the radio when wearing the helmet 5 years from now, I doubt the music will sound sexy. I guess it will be something like Japanese industrial metal !!

  3. Theo says:

    A kamikaze drone – priceless!
    For every other arbitrage or carry trade transaction, US soldiers will be able to take advantage of by using Google Android pads.
    “It’s a wonderful world”

  4. Philippe says:

    Well, one can of course only guess what we will be listening at.

    For the moment, I am rediscovering Berlioz. Tempest, the overture. The sabbat of the witches in the Symphonie fantastique ( Just imagine Draghi & Bernanke in the 5th movement to follow my mind )
    (http://www.youtube.com/watch?v=cao6WyF-61s ) .

    And do not forget how this movement develops… the Dies irae of course. That’s what’s next.

    And I think I will add Heinrich August Marschner , as German Romantism at its height certainly tells us that civilizations do decline. Oh, And Camille Saint Saens for the finale. “danse macabre”. So fitting

  5. Nacht Und Nebel says:

    question:The only mystery in life is why the kamikaze pilots wore helmets.
    answer:’If you have to go then be sure that you are dressed to kill and you leave with a big bang’-I.Dexiatronic CEO Black Hole Finance.

  6. Nacht Und Nebel says:

    Er is leven na de dood?


  7. Philippe says:

    If the tablet had been a result of the advancement of military grade technology, this would have been a sign of the technological hedge of the US army. Now, that they rely on an evolution of a commercial appliance ( with software encryption rather than dedicated security gardware…hmphhh ) to develop at a lower cost their battlefield communications looks to me like a sign of decline rather than advance.

    There is one type of operation in which this could provide a huge hedge: urban warfare in a communication-rich environment. Exerting a zone of control on urban environment is probably one of the worst scenarios for any regular army.

    Just hope that the future is not the past.

  8. Philippe says:

    Another illustration of the past/present/future continuum

    Compare the preamble of the Edict of the maximum ( 301 AD) with what Nancy Pelosi just said on oil prices.

    “Who has so insensible a heart or has removed himself so far from human feeling that he can fail to know to what an extent shameless pricing has spread? Neither abundance of goods nor the bounty of good years tempers this unrestrained lust for stealing! (…)

    Some people always are eager to turn a profit even on blessings from the gods: they seize the abundance of general prosperity and strangle it. Or again they make much of a year’s bad harvest and traffic by the operations of hucksters. Although they each wallow in the greatest riches, with which nations could have been satisfied, they chase after personal allowances and hunt down their chiseling percentages. On their greed, provincial citizens, the logic of our shared humanity urges us to set a limit. “

  9. Philippe says:

    There better be because there will soon be no life before…


  10. Nacht Und Nebel says:

    The thought of living forever bores my to death.What is the worh of a life when you cannot die?So he claims that soon we all be living at least a hundred years.So we all be going down hill a little longer.It is interesting that most politicians are starting to think about a wheelchair economy knowing that most of them never worked a day in their life.
    Funny that these visionaries are the same peoples that are responsible for the empty pension funds.
    Luckily for us that we still have the silver fund

  11. Nacht Und Nebel says:

    what Japan needs is a Diruposhima.Looking at the tax rate it is very low compared to Belgium.

    Taxable income (Yen) Tax Rate Deduction (Yen)

    0 – 1,950,000 5%
    1,950,000 – 3,300,00 10% 97,500
    3,300,000 – 6,950,000 20% 427,500
    6,950,000 – 9,000,000 23% 636,000
    9,000,000 – 18,000,000 33% 1,536,000
    Above 18,000,000 40% 2,796,000

    Average taxrate 24 percent

    VAT 5 percent

    Belgium who does not pay at least 50 percent and 21 percent VAT??
    So the problem of Japan is much smaller then then Belgian problem
    Taxable Income (EUR) / Tax Rate %

    EUR 0 – 7,900 25%
    EUR 7,900 – 11,240 30%
    EUR 11,240 – 18,730 40%
    EUR 18,730 – 34,330 45%
    Above EUR 34,330 50%

  12. Philippe says:

    In all honnesty, the Belgian tax rates are more due to a Maertens-Dehaeneshima than anything else. It is the freeze of the tax brackets that made the tax rate heavier on low and medium income than they ought to be.

    Dirupo and his clique are more Chinese than that. A “death by thousand cuts “

    And wait till one anounces the measures to be taken at European level to ensure competitiveness. In the absence of a possibility of competitive devaluation, the only available variables are salaries and taxes.

  13. Theo says:


    It looks to me that these kind of tablets are good for mercenaries – very “professional” soldiers… like they used to hand out BlackBerry to very “professional” traders at banks
    Now that’s past, present and future… all in one.

    Don’t forget that what you think is the present (what you see) is always only the past – it takes time for data to travel to your eyes and your brain. Hence the future is always already here – you just either haven’t seen it or haven’t processed it yet.
    That’s both the philosophical and Taleb’s black swan all nicely wrapped up in one for you.

  14. Nacht Und Nebel says:

    you are right about the cause of the belgian tax rates and dirupo and de croo take the begian comsumer the other way.Their goal is that the tax deductibles goes to zero.
    It looks like no tax increase but it is the same thing.
    Next step will be that we will all have to pay a yearly wealth tax on the possible added value of our houses and that the stockholder will have to pay a dividend tax of 50 percent.
    They will forget of course that the stockholder already payed a tax rate of 33 percent.
    In the end the free net disposable income for consuming is at risk of going to zero so the outcome is simple.There will be no middle class and with no middle class we are all doomed.

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