Shilling: Japan Train Wreck Accelerating

By The Sizemore Letter

In an interview with Henry Blodget this week, Gary Shilling expained that the “Japan train wreck was accelerating.”

It is easy to dismiss Shilling as just another Japan doomsayer.  They have been plenty of analysts and money managers over the past 20 years who have forecast the country’s impending collapse, and yet Japan continues to muddle along.

You should listen to what Shilling has to say, however.  I covered many of Shilling’s points in an article earlier this year (see “Japan’s Endgame Nears“), and I agree with his basic premise: Once Japan has to access the international bond markets, the country is looking at a debt crisis that makes Europe’s look mild by comparison.   

Japan has been able to roll over its gargantuan debts–220% of GDP–because its large pool of domestic savers were willing to accept low yields in a deflationary environment.  International bond investors are not likely to be as generous.  Just look at the pressure faced by Italy and Spain last year–two countries whose sovereign debt loads are a fraction of Japan’s.

Take a look at what Shilling has to say:

If you cannot view the embedded video, please click here: Shilling on Japan

As an aside, I reviewed Shilling’s The Age of Deleveraging, and I highly recommend that you pick up a copy (see “Book Review: The Age of Deleveraging“).

 Shilling may prove to be early on Japan.  My own timeline on Japan’s demise is in the range of 1-5 years.  The fall in the yen’s value that Shiller highlights is not a warning signal in my view.  If anything, it is a sign of investor risk appetites returning; the yen had risen over the preceeding years due to the unwinding of the carry trade and a deleveraging of the financial sector.

The key in my view will be the 10-year Japanese bond yield.  When Japanese yields enter a prolonged rise, the game is up.  Japan will not be able to roll over its debts at an affordable rate, and Japan will be looking at a debt and currency crisis that would make the Greeks blush.

Keep an eye on the Japanese 10-year bond.