The Great Debate UK

from Anatole Kaletsky:

Japan as the crisis next time

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Which major economy is most likely to disappoint expectations this year, and perhaps even cause a financial crisis big enough to break the momentum of global economic recovery? The usual suspects are China and southern Europe. But in my view the most likely culprit will be Japan.

While Japan no longer attracts much attention these days, it is still the world’s third-largest economy, with a gross domestic product equal to France, Italy, Spain, and Portugal combined. Its industries still pose the main competitive challenge to U.S., European and Korean manufacturers, and its regional weight is still sufficient to trigger financial crises across the whole of Asia -- as it did in 1997.

To make matters worse, the Japanese government bond market is in an enormous financial bubble that could burst catastrophically if Prime Minister Shinzo Abe’s audacious economic program is seen to have failed.

I was an early enthusiast for Abenomics, but I became alarmed about Japan’s prospects last October, when Abe decided to impose a massive tax hike on consumers beginning in April this year. With this crunch point now approaching, I travelled to Japan to get a firsthand feel for economic conditions. What I saw and heard from financiers, businesses and officials has heightened my concerns.

The QE billions should go direct to consumers

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By Mark Hillary. The opinions expressed are his own.

In 1998, the Japanese government was ridiculed for giving away almost $6bn (at 1998 value) of shopping vouchers. The plan was that consumers would spend more of this ‘free money’ and help lift Japan out of the seemingly endless malaise it suffered in the nineties – as many other developed economies were enjoying a roaring decade.

One of the major faults in the Japanese plan was that the vouchers could easily replace the need to spend actual money. If my groceries cost me $100 then why would I still spend $100 of cash on groceries and buy a nice meal in a restaurant with my voucher, when I could just use the voucher for those groceries?

What message is the CDS market sending us?

By Laurence Copeland. The opinions expressed are his own.

Not many people seem to have noticed, but something almost unthinkable has happened in the Credit Default Swap (CDS) market recently. It is now one point cheaper to insure against a default by Her Majesty’s Government than by the Federal Republic of Germany. Given that only a few months ago, Markit was quoting twice as much to insure against a default on gilts as on bunds, this is a major change – but what is it telling us?

The message is unclear, but my guess is it is not quite the one which Britain’s Chancellor, quite reasonably from his point of view, would have us believe. Yes, the market has faith in our ability and willingness to repay – but that is far from the whole story.

from Breakingviews:

Japan’s widow-maker bond trade still looks lethal

By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

TOKYO -- Bond traders have been betting against Japanese government debt for years -- and losing spectacularly. Victims of the so-called "widow-maker" trade of shorting JGBs thought the March disaster would vindicate them. Rebuilding, after all, will add to Japan's sky-high debt and, with a shrinking workforce and rising pension costs, push yields up. But the quake hasn't disrupted the self-perpetuating money machine that drives JGBs. Doomsayers still run the risk of becoming road kill.

from Global News Journal:

Hope and Fear at the World Bank

It was early March and Kristalina Georgieva, the European Commissioner of International Cooperation Humanitarian Aid and Crisis Response, was traveling in Asia. Her plan was to attend a 7.5 magnitude earthquake simulation that would hit Indonesia and generate a tsunami. A few things, however, changed in her itinerary: The destination turned out to be Japan, the earthquake was 9.0 and it not only generated a huge tsunami, but also a nuclear catastrophe. Plus, it was real.

“Usually our fears are bigger than reality. In this case our reality was worse than our fears,” Georgieva said recently at a World Bank panel on the climate, food and financial crises the world is facing today and the way they all intertwine. Georgieva’s strong Slavic optimism brightened the gloomy panel, but the data she threw in didn’t back up her positive view:

from Reuters Investigates:

Japanese quake cost bad, but far from the worst

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By Ben Berkowitz

INSURANCE/JAPANThe March 11 Great Tohoku Earthquake in Japan was a tragic disaster of historic proportions -- but from a purely financial standpoint it pales in comparison. (For a special report on insurers, click here.)

Estimates are still coming in but it seems likely the quake will end up ranking as the costliest of the last generation in insured losses, surpassing even the Northridge earthquake that struck southern California in 1994. (The one that collapsed a number of major freeways, by way of reference).

The safest form of power: Everything in moderation

By Morven McCulloch

The ongoing crisis at the Fukushima Daiichi nuclear plant in north-eastern Japan, seriously damaged by a March 11 earthquake and tsunami, has led to anti-nuclear protests in several countries and forced governments to rethink their energy policies.

The UK currently has 10 nuclear power stations, representing 18 percent of the country’s energy supply according to Energy UK. Should British Prime Minister David Cameron, like German Chancellor Angela Merkel, reverse his position on the safety of nuclear power?

from Reuters Investigates:

Is a 10 percent chance of disaster too high for a nuclear power station?

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JAPAN-QUAKE/Kevin Krolicki has another alarming special report from Japan today challenging the assertion that the disaster facing Fukushima Daiichi nuclear plant was beyond expections.

The report quotes Tokyo Electric's own researchers who did a study in 2007 on the risk of tsunamis: 

from Breakingviews:

Four reasons to hedge against Japanese equities

What was a contrarian view right after Japan's earthquake has become consensus: confidence in a V-shaped recovery has powered a 10 percent rally in Japanese stocks since March 15. That outlook still appears likely, but questions surround the speed and strength of the recovery. Investors should hedge against the risk that politics, power shortages, and nuclear troubles prompt investors to turn tail.

Amid a drumbeat of cautiously optimistic forecasts, foreign investors pumped almost $12 billion into Japanese stocks, a surge that helped stoke an unwanted spike in the yen. Even Warren Buffett joined the chorus of support for Japanese equities. The rally also turned up some reconstruction darlings such as generator-maker Denyo <6517.T>, which has climbed 44 percent since March 15; water purification company Nihon Trim <6788.T>, up 48 percent; and lighting company Iwasaki <6924.T>, up 58 percent. 

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