How Long Until the Japanese Yen Collapes? Months, Years, or Another Decade?

The collapse of yen is inevitable. No government can fund half of their spending with debt forever. The Japanese government debt burden is so enormous that the Bank of Japan must hold down the cost of  borrowing by funding the debt via being the primary buyer of Japanese government bonds (aka money printing). With Japan's aging population leading to increased demands for government spending, there is no way out for the Bank of Japan's (BOJ) program of buying up government debt. The debt issuance is so enormous, and the bonds are such a risky investment that it is totally unrealistic to think that market would soak up all the debt issuance without the BOJ's buying. Thus, this massive debt buying/money printing by the BOJ can not be halted. This massive debt buying/money printing will eventually lead to the debasement of the yen and a run on Japan's currency.

The eventual collapse of Japan's economy has been widely predicted for years. I came across a 2001 article on Japan's Runaway Debt Train. And even back in 2011, shorting Japanese bonds was referred to as "the widow maker" because it had been such a disastrous trade for so long. However, at this point, with the interest rate on the benchmark Japanese government 10 year bond at just 0.5%, further declines are getting close to being mathmatically impossible.

However, the "widow maker" trade is to short Japanese bonds. It's my opinion that the smarter trade in the near term may be to short the yen, as bond buying by the BOJ may hold down interest rates on government debt at artificially low levels until well after the decline in the value of the yen is well underway. Given the goal of the government bond buying by the BOJ is to increase inflation while holding interest rates low, in the near term going with the flow and assuming the BOJ will have some success at both goals, shorting the yen may be a quicker route to profits.

Eventually, shorting the yen is going to be spectacularly successful. The critical question, and one that is frustratingly challenging to answer is, "when will the yen collapse?". It seems almost impossible to believe that the crash of the yen will not occur within this decade. Yet on the other hand, there is little to indicate that the crash of the yen is only months away either.

Here is why the yen is destined to collapse sometime in the near future. Both Japan's total government debt and the annual deficit are insane and unsustainable.

Japan Government Revenue and Expenditures

Revenues (2013) - $460 billion
Expenditures (2013) -  $945 trillion
(source - WSJ)

The gap between revenues and expenditures is enormous - $485 billion

Projected Interest Expense (2014)  - $224 billion

Funding half of government spending via debt/money printing is not sustainable, particularly given that the Japan's government debt has now passed a quadrillion yen. According to Japan's budget forecast, revenue from bond sales will pay for 43% of the 2014 budget, down from 46% in 2014. This  is the official number and is likely highly optimistic - my guess is that final 2014 numbers will equal or exceed last year's 46% (the official numbers for deficit percentages do not match up with the WSJ revenue and expenditures totals shown above in part due to off budget items, thus the government figures understate the depth of the problem).

And the BOJ is not printing money solely to buy up newly issued government bonds. The BOJ has pledged to increase the money supply by 60-70 trillion yen ($589-687 billion) in 2014, an even larger amount than the deficit.

Interest payments of $224 billion essentially eat up half of all revenue, and that is with the BOJ holding down interest rates on Japan government debt under 1%. Without BOJ's bond buying, higher interest rates would result. Simply a small rise in interest rates would lead to an enormous budget busting cost of debt financing

Putting further pressure on the yen will be Japan's total debt of $12.7 trillion (which expressed as percent of GDP is 242.3%, and $99,725 per person according to Bloomberg). To date, Japan deficit financing has not led to a crash of the yen. But the huge deficits have led to Japan's government being even more indebted than even the PIGS (Portugal, Italy, Greece, and Spain) as a percent of GDP. No nation in history has been able to sustain money printing for a prolonged period without eventually causing a crash, and the Japanese economy is not so exceptional that it will be able to escape this trend.

The yen did decline by 20% in value in from October 2012 to May 2013, from 87 yen to the dollar to 103 yen to the dollar. But it has since stabilized and is back to 101.5 yen to the dollar. When the yen does finally crash, as is absolutely inevitable, the future decline will dwarf last year's 20% drop . And it seems likely that the crash of the yen may not be too far off.

       click chart for current Yahoo Finance report

The fact that the Yen has not collapsed is in part due to the claim that Japan is moving toward a budget surplus in 2020. That claim seems about as likely as peace in the Mideast, the fountain of youth, or turning lead into gold.

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