The Yen Doomsday Machine

The Bank of Japan decided to increase the pace at which it expands base money to ¥80 trillion per year. Previously, the BOJ targeted a mid point of ¥65 trillion. However, if calculated in U.S. dollar terms for the big three-day yen loss the annual increase is from $602 billion (¥65 trillion x 0.925) to $708 billion (¥80 trillion x 0.886). You can do the calculus at each level (0.87, 0.85, 0.83, etc.) and it erodes the effect.

The shift of Japan’s pension fund out of Japanese government bonds to foreign equity markets is $110 billion. Not all of that is earmarked to the U.S.; but regardless, it is not enough to support trillions in existing Ponzi units, and it leaves a hole in the hyper-inflated JGB market.

About $250 billion in JGBs will be liquidated out of the state pension fund. This process was underway before the announcement. It should be noted that a key reason for the JGB liquidation is to gamble on higher returns to cover increase payouts to Japan’s aging pensioners. The JGB Ponzi unit is approaching $13 trillion. At this point, 79% is not owned by the BOJ.  Japanese banks, financial institutions and insurance companies hold about half ($6 trillion) of these JGB Ponzi units.

Chart source: Wall Street Journal

This exercise will quickly become a flash in the pan if both the price of the JGBs and the yen simultaneously crater. I will be watching for this daily.

Asked a little differently, would anybody even notice if Venezuela, Argentina or Zimbabwe boosted its money base by 23% (over one year) only to be followed by a currency drop of an even greater percent in a matter of weeks? No. The only effect in global finance would be even more economic misery in those countries.

That’s what could quickly be in store for Japan as this Doomsday Machine accelerates. And we will no doubt soon be getting a response from China, Korea and Germany, Inc. on the matter. With overcapacity in its own domestic industries, China will find a way to make life more miserable for the low man on the totem pole: Japanese firms operating in China. This is really a Kamikaze act of financial war against China and has zero bullish consequence.

Frying Pan Into the Fire

Magnitude 5.0 earthquakes during the last seven days.

A portion of the cash to be derived from the Japanese pension fund program of JGB dumping will used to purchase Japanese real estate that is in turn insured and financed by the aforementioned Japanese insurance companies and banks.

There is a surge of earthquake activity right now. Much of it is in the western part of the Ring of Fire, including Japan. The odds of another big one happening in Japan are higher than normal. That would likely be lights out, as I don’t think the yen and JGB could survive a triple whammy of Abenomics, a massive earthquake and a grand finale for Fukushima. The ripple effects defy the imagination.