Japan Credit Growth - Is Deflation Over?

davefairtex
By davefairtex on Fri, Apr 25, 2014 - 1:05am

The biggest problem the Fed has with causing inflation is getting people to borrow.  They have moved heaven and earth to spur borrowing, but an over-indebted nation more or less refuses to take on new debt at a rate that would make the Fed happy.

After 20 years of debt deflation, things in Japan appear to be turning around - at least from a credit growth standpoint.  PM Abe appears to be getting just what he wants.  After languishing in mostly negative territory for two decades, credit growth in Japan has skyrocketed, and as of the end of 2013, is now around 5%.  That's the highest its been - well, since the early 90s.  Roughly this should translate directly into inflation, as long as the money being borrowed into existence stays inside Japan.  (Of course, with the carry trades, that's a big question mark).

Some of that credit growth (but not all of it) does seem to be leaking over into the CPI.  Notice how credit growth isn't a perfect predictor of the CPI, but they are related.  That's because price inflation in a global commodity market is sometimes caused by other nations credit growth - especially true in 2008 for Japan.  Most of Japan's cost of living problem in 2008 came from elsewhere.  It wasn't inflation per se, it was just "stuff getting more expensive" because of rising commodity prices worldwide.

Lastly, here's what deflation looks like from a "total private credit" perspective.  This is what we need to do - reduce the overall indebtedness of the private sector by paying down debt.  Notice how the private sector bank loans went from 1800 trillion yen to 1340 trillion yen.  That's credit shrinkage, which is deflationary from a monetary standpoint.  This started in 2009 for the US, but the Fed refused to let that happen.

If PM Abe gets what he wants - and the new credit money stays in Japan, interest rates should rise.  It will be interesting to see what that does to the willingness of organizations in Japan to hold onto their JGB positions.

Bottom line: this could be the start of Kyle Bass's JGB blowout scenario.  Currently 10 year JGBs are trading at 0.62%.  Market says: nobody is worried.  Well that, and the BOJ is buying a whole lot of JGBS right now.  But there are an awful lot of JGBs in circulation.  That JGB 10 year rate bears some close watching, and if some big organization decides to liquidate, it will likely pop higher pretty quickly.

2 Comments

dreinmund's picture
dreinmund
Status: Member (Offline)
Joined: Mar 19 2011
Posts: 22
I have followed Kyle bass for

I have followed Kyle bass for a while. By dumb timing luck, I went into YCS (ultra short yen ETF) in November 2012. I had a handsome return so far.

Being short JPY seems like one of the safest long-term investments out there.

robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1148
Me Too

Mr K.Bass didn't get where he is by being.....well...

 some where he said Oct. of 2015...the worm will turn

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