Societe Generale’s Dylan Grice has declared 63 million his 15-year target for the Nikkei if the Japanese government begins to aggressively monetise the country’s sovereign debt.
Grice’s argument is based on three core ideas:
- The Japanese government spends 27% of its tax revenues on interest payments.
- Japanese government debt is not just a public sector problem, it is also a private sector problem, as Japanese individuals and companies own a great deal of their own sovereign debt.
- Japan will buy sovereign bonds the market can’t absorb, this will lead to inflation.
Note the fact that Japan isn’t coming close to meeting its spending needs.
Photo: Societe Generale
So, why does this put a country with an ageing population on a the course for inflation, rather than more deflation? Grice argues that Japan exhibits what Israel did during its massive inflationary period (1972-1987). During that period, Israeli spending was too high and the government chose to print money to deal with the problem. Inflation averaged approximately 84% during the period.
Grice thinks monetization of Japan’s debt will have the same impact there, as the printing presses in Israel.
From Societe Generale, emphasis ours:
The truth is we can’t know when this will happen. We suspect only that the writing is on the wall, and the further out we look, the bigger and bolder that writing becomes. But if Japan was to follow a similar trajectory to Israel’s, the Nikkei would trade at around 63,000,000 (63 million) by 2025.