Soros Adviser Turned Lawmaker Sees Crisis by 2020: Japan Credit

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Takeshi Fujimaki, former adviser to billionaire investor George Soros and member of Japan's House of Councillors, speaks during an interview at his office in Tokyo on Sept. 24, 2013. Close

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Takeshi Fujimaki, former adviser to billionaire investor George Soros and member of Japan's House of Councillors, speaks during an interview at his office in Tokyo on Sept. 24, 2013.

Takeshi Fujimaki, a former adviser to billionaire George Soros and now a member of Japan’s upper house of parliament, said a fiscal crisis in Asia’s second-biggest economy is inevitable and neither a higher sales tax nor the 2020 Olympics will be able to stop it.

“I decided to become a politician because I think financial crisis will come sooner or later,” Fujimaki said in a Sept. 24 interview in Tokyo. “This total debt will continue to increase. I don’t think Japan can survive until 2020.”

Yields on 10-year Japanese government bonds may jump to 70 percent based on what happened in Russia when it defaulted in 1998, Fujimaki said. The benchmark yield is now the lowest in the world at 0.68 percent and the cost to protect the sovereign debt from default is near a four-month low at 62 basis points.

Before sweeping to power in December elections, Prime Minister Shinzo Abe’s Liberal Democratic Party outlined in 2011 a plan known as the X-day project to fend off a potential bond crash. Public debt totaled 924.4 trillion yen ($9.37 trillion) that year and has ballooned to more than one quadrillion yen, more than twice Japan’s gross domestic product, the highest ratio globally. Abe is set to decide on Oct. 1 whether to raise the 5 percent consumption levy.

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Women buy vegetables from a vendor at Honcho market in Niigata City, Niigata Prefecture, Japa. Close

Women buy vegetables from a vendor at Honcho market in Niigata City, Niigata Prefecture, Japa.

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Women buy vegetables from a vendor at Honcho market in Niigata City, Niigata Prefecture, Japa.

“It’s inevitable we will see a very big mess and the LDP has to step down,” said Fujimaki, who won his upper house seat on a Japan Restoration Party ticket in the July 21 ballot.

Market Principles

The Bank of Japan is aiming to stoke 2 percent inflation in two years by buying more than 7 trillion yen of JGBs a month. Consumer prices excluding fresh food rose 0.8 percent in August from a year earlier, the fastest increase since 2008, as energy costs climbed, the statistics bureau said today.

“Because the BOJ is buying huge amounts of JGBs, market principles in this country do not work,” Fujimaki, who served as managing director and treasurer in Tokyo at Morgan Guarantee Trust Co., which later merged into JPMorgan Chase & Co. “Monetary easing is creating a JGB bubble. Sooner or later the market will reflect credit risk.”

The core inflation gauge will climb 1.3 percent in the year starting April 2014 and 1.9 percent in fiscal 2015, BOJ board members forecast in July, excluding the effects of a planned sales-tax increase to 8 percent in April and 10 percent in 2015.

Captive Audience

The International Monetary Fund estimates Japan’s debt will grow to 245 percent of GDP this year. The nation will spend 22.2 trillion yen servicing its debt in the fiscal year begun in April, accounting for more than half of total tax revenue and occupying about 24 percent of the government’s budget, according to Finance Ministry estimates in January.

Photographer: Junko Kimura/Bloomberg

Takeshi Fujimaki, former adviser to billionaire investor George Soros and member of Japan's House of Councillors, poses for a photograph at his office in Tokyo on Sept. 24, 2013. Close

Takeshi Fujimaki, former adviser to billionaire investor George Soros and member of... Read More

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Photographer: Junko Kimura/Bloomberg

Takeshi Fujimaki, former adviser to billionaire investor George Soros and member of Japan's House of Councillors, poses for a photograph at his office in Tokyo on Sept. 24, 2013.

Japan will implement more than 5 trillion yen of stimulus measures in the year starting April 2014 and tax breaks of as much as 500 billion yen for companies making capital investments, Asahi newspaper said on Sept. 21, without citing anyone. In a reform plan known as Abenomics, the prime minister has pledged to defeat 15 years of deflation using the so-called three arrows of fiscal stimulus, monetary easing and a package of growth-oriented initiatives.

“Institutional investors in Japan are a captive domestic audience,” Ryutaro Kono, the chief Japan economist in Tokyo at BNP Paribas SA, said on Sept. 25. “The gist of Abenomics is monetization,” he said referring to the practice of central banks financing government deficits.

Abe will announce his decision on the sales tax on Oct. 1 after the release of the BOJ’s Tankan survey of business sentiment.

Political Responsibility

“We will not be able to avoid a crisis with a consumption tax increase, but it is our responsibility as politicians to raise it,” according to Fujimaki, who says the levy needs to be 35 percent to 40 percent. “Corporate tax should be cut so Japanese companies can be competitive globally. We need to make our best effort to improve the economy to delay this coming crisis.”

Takatoshi Ito, the dean of Tokyo University’s Graduate School of Public Policy, said earlier this week Japan can avert disaster by raising the tax to at least 20 percent by 2020.

“There is a narrow path to escape from the disaster,” Ito, who leads an investment panel for the 121 trillion yen Government Pension Investment Fund, said in an interview on Sept. 24.

The yen rose 0.3 percent to 98.67 per dollar as of 3:53 p.m. in Tokyo, and has lost about 12 percent in 2013. It touched a 4 1/2 year low of 103.74 on May 22. The currency will end the year at 102 and will slide to 110 in 2014, according to median estimates of economists.

120 Yen

“If the yen goes up to 120 per dollar, Mr. Abe doesn’t need a third arrow,” according to Fujimaki, who expects the currency to drop to as low as 1,000 when Japan faces hyper-inflation in the next two years. “Japan just has to make a weak yen: there would be no need for a fiscal stimulus package or any sad arrows.”

Fujimaki joined the Tokyo office of Morgan Guarantee Trust Co., which merged into JPMorgan Chase & Co., in 1985 and later served as managing director and treasurer. He was hired by Soros Fund Management, once the world’s biggest hedge fund group, in 2000 and stayed less than a year, saying to Bloomberg News at the time that he failed to read the Japanese bond market correctly. He has been predicting an eventual default in Japan since at least 2009.

Tokyo beat out Madrid and Istanbul to stage the 2020 games in a Sept. 7 decision by the International Olympic Committee, bringing the event back to Japan’s capital for the first time since 1964. By that time, the nation will have already gone through its financial crisis and be on an upswing, Fujimaki said.

“The Olympics will come at the time of a booming economy,” he said. During that period of economic growth “maybe 5 or 6 percent are reasonable levels for the 10-year yield.”

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Kenneth Kohn in Tokyo at kkohn@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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