Prime Minister Shinzo Abe’s fiscal and monetary stimulus measures may trigger a collapse of Japan’s economy as early as this year, according to Takeshi Fujimaki, a former adviser to billionaire investor George Soros.
The yen has slumped 6 percent since elections last month returned power to the Liberal Democratic Party run by Abe, who’s demanded that the Bank of Japan undertake unlimited cash infusions to end deflation. The premier also unveiled 10.3 trillion yen ($116 billion) in extra spending last week, a step that will add to public debt that’s already more than double the size of the nation’s economy.
“Large-scale spending is ridiculous given the amount of debt Japan has accumulated, while I think highly of Abe in regards to his intention to weaken the yen to support growth,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview on Jan. 11. “Abe’s policies would have worked some 10 years ago, but now they will only accelerate an economic collapse.”
Fujimaki said in an interview last June that Japan may default on its debt within five years and the yen could weaken to as much as 400-500 per dollar. He advised Japanese investors then to hold assets in foreign currencies such as the greenback, Swiss franc, U.K. pound and the Australian and Canadian dollars.
Borrowing in yen and investing in those currencies would have returned an annualized 32 percent as of yesterday, Bloomberg data show.
The BOJ, scheduled to hold a policy meeting on Jan. 21-22, is poised to adopt the 2 percent inflation target advocated by Abe, doubling its existing goal of 1 percent, according to people familiar with BOJ officials’ discussions. Central bank Governor Masaaki Shirakawa said today the economy remains weak and the BOJ will pursue “powerful monetary easing.”
The yen’s drop and the government’s spending plan have helped drive the Nikkei 225 Stock Average of domestic shares up 12 percent since the election. A weaker yen makes Japanese-made products more competitive overseas and boosts the value of repatriated earnings.
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 since lectured at Waseda University and Hitotsubashi University in Tokyo, and written more than 20 books, including a title due for release this month that translates to “A Vulnerable Japan: Objections to Baseless Optimism.”
Japan will issue an additional 8 trillion yen in bonds to finance the supplementary budget for the fiscal year ending March 31. The nation’s outstanding debt will swell to 245 percent of gross domestic product in 2013, the most in the world and twice the debt-to-GDP ratio for the U.S., according to estimates by the International Monetary Fund.
“The government won’t be able to get enough funding if the Japanese withdraw their bank deposits to buy foreign-currency assets in fear of further yen weakness,” said Fujimaki. “Japan’s fiscal collapse could happen even tomorrow.”
So far, the market for Japanese government bonds hasn’t signaled any concern about an impending collapse. Benchmark 10-year securities sank four basis points to 0.77 percent today, the least this year and the third-lowest level globally. Persistent deflation has supported domestic demand for JGBs, which are 91 percent owned in country.
The yen may weaken beyond 400 per dollar should the BOJ print money to absorb the nation’s debt, according to Fujimaki, describing a process known as monetization. The yen reached 89.67 per dollar yesterday, the weakest since June 2010, before rallying to 88.81 as of 5:20 p.m. in Tokyo today.
“I prefer to see a crash of Japan’s debt sooner than later because there’s no other way to revive Japan’s economy,” said Fujimaki. “The biggest merit for that is we won’t have to repay debt that we can never repay. Otherwise, young people will have to work like coach horses just to pay tax.”