Asia is the real story |

Asia is the real story

The world is worried about oil, and rightfully so. The Middle East is in turmoil – I get it. However, as an investor, now is the time to focus on the marginal buyers and sellers, and while securing energy supplies is a key theme for my energy focus, I am now more focused on the stories that are being under-reported in Asia.

Yesterday, I mentioned the social unrest that is happening in China, which few are talking about. The day before we pointed to the bank runs in South Korea. Today, Bloomberg ran a story with the following heading: “World’s Biggest Pension Fund ‘Will Likely’ Sell Japan Bonds” (h.t. Mish’s Global Economic Analysis). Here are the opening paragraphs:

Japan’s public pension fund, the world’s largest, said it may become a net seller of bonds to cover payments in the world’s most rapidly aging society.

The Government Pension Investment Fund, which oversees 117.6 trillion yen ($1.4 trillion), in September forecast that it would sell 4 trillion yen in assets in the business year ending March 31 to fund payouts. Sales may be less than that in the year starting April as bonds reach maturity, said Takahiro Mitani, president of the fund, known as GPIF.

Why is this important? Because internal purchasers, most notably the pension system, have allowed the Japanese government to continue printing endlessly, and have made Japan the single most vulnerable developed country (in terms of finances, not politics). If Japan’s pension plans will become net sellers, the governments printing will only exacerbate the increase in yields and will force either a massive cut in spending, massive cut in entitlements, or massive inflationary pressures. This is zero hour for Japan. It also does not bode well for local Japanese sellers as they’ll face ever-higher input costs. It could be OK for exporters who will benefit from currency differentials, although that might be negated by internal taxes and politics. I’m staying short the yen and will look to increase the position in the next few months.

Japan’s example should serve as a warning for governments and inflation-mongers alike. Governments can print endlessly and still face deflationary pressures for years and decades, with no net benefit, and with huge eventual costs placed on their citizens.

Relevant ETFs: YCS, FXY, DXJ

Last 5 posts by Yaron Sadan

That sinking feeling - May 18th, 2012
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Early can hurt - May 16th, 2012
Diversify your Diversification - May 15th, 2012
Losing Money Isn't a Crime - May 15th, 2012