Video: A Bleak Long-Term Economic Picture for Japan?

Predicting the Land of the Rising Sun's future is a complex undertaking, and many a financier has had both their belt and suspenders handed to them from betting on Japan's economic implosion.

I'll admit up front that I don't have a ready prediction that X will happen by Y date. But here are some of the macro elements to keep in mind:

1. Japan is a major surplus country, meaning it produces and sells much more than it consumes. Much of the savings the country generates, which have to go somewhere, have been invested at home in Japanese Government Bonds (JGBs) and abroad in U.S. dollar denominated assets. Alongside China, Japan is the second largest holder of U.S. treasury debt with as almost $1 trillion in holdings.

2. While Japan has a breathtaking 200%+ public debt/GDP ratio (the highest in the developed world), 94% of that debt is Japanese owned. What this means, basically, is that so long as the Japanese keep buying JGBs then Japan's fiscal future is in its own hands. In contrast, the U.S. depends on foreigners to finance a large portion of its federal deficit. The thrifty Japanese save enough to finance their Keynesian stimulus policies all by themselves and still have plenty left over to spot Uncle Sam!

Now, the Japanese savings rate has been steadily declining to what would seem an unsustainable level in terms of maintaining the current fiscal course.

Continue reading the full article published on SeekingAlpha here.

Bank of Japan Intervention: What Happened Last Time? What's Next?

On Tuesday the yen traded at ¥82.88 yen per dollar, its highest level since May 1995. As predicted the Japanese government decided it had seen enough and instructed the Bank of Japan (BOJ) to 'intervene in the currency market' (aka print money). This caused the yen to quickly fall back to ¥85 per U.S. dollar level.

The BOJ also confirmed that its intervention -- reported to be in the ¥300-¥500 billion range ($3.61-$6.02 billion) -- will go unsterilized, which means that the BOJ will not seek to withdraw the new yen it has 'printed'.

Currency Traders Now Have an ¥82 Yen Bullseye

Via Bloomberg, Japan’s Chief Cabinet Secretary Yoshito Sengoku communicated two very important pieces of information:

1. ¥82 yen per dollar is "the line of defense to prevent currency strength from harming the economy"
2. "The government is seeking to gain the understanding of the U.S. and Europe for the intervention"

We now know the Japanese government's pain point (¥82 yen per dollar). Providing the market with an exact target -- not unprecedented for Japan (see below) -- could prove to be a mistake.

We can also infer from the "seeking to gain the understanding" comment that the BOJ's intervention was not only uncoordinated, but also without the consent of other central banks. It would be surprising if the Fed and ECB signed off on the BOJ's intervention. Europe, the U.S. and other nations are mired in a slow recovery and seeking export led growth. Japan's currency intervention makes U.S. and European goods more expensive in Japan.

What Happened Last Time the BOJ Intervened?

It was six years ago when the Bank of Japan last intervened in the currency market. In 15 months through March 2004, the BOJ sold ¥35 trillion yen ($421.7 billion) for dollars. What was the BOJ trying to accomplish? As noted back then Economy Trade and Industry Minister Takeo Hiranuma said "a dollar at ¥115.00 is the ultimate life-and-death line for Japanese exporters".

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