2010 was supposed to be the year that Japan finally broke, and hedge funds finally made good on their “career trades” shorting Japanese government bonds (JGB) or the yen.
Well, that was a total flop, but it already sounds like the drop-dead date for Japan has just been set at some unknown time in 2011.
Last week various pundits including Felix Salmon, Megan McArdle, and Matt Ygliesas talked about the country’s so-called “Fiscal Disaster” and the “slow-moving trainwreck” that is the country’s budget.
Fortunately for the citizens of Japan, this level of hyperbole and fear-mongering exists only in the world of punditry and on the pages of the Wall Street Journal.
In the real world — which is to say, what markets think — nobody thinks Japan is in any fiscal danger. JGBs trade at record low yields, and the yen remains near multi-generational highs.
When the Bank of Japan can actively print yen, unsterilized — something that Felix Salmon actually talked about when it happened — and the yen still goes up, it’s obvious that the country is more than capable of financing itself.
The fact is: Japan is nothing like Greece, Ireland, or Spain, which don’t have their own free-floating currencies. It’s not just that this gives Japan more leeway, it means it’s in a totally different monetary league altogether, with different rules. For what it’s worth, the US is in the same boat as Japan, and for a good explanation of how radically different the US/Japan system is, see this at PragCap.
If the yen does weaken and JGB yields do widen in 2011, it will be as a result of new economic optimism. Anyone betting on a hyperinflationary collapse or default — like Kyle Bass — will be disappointed again.
And for a little perspective on the amazing yen, here’s a long term USD/JPY chart: