Japan Is The Next Shoe To Drop
Charles Sizemore | Nov 22, 2012 12:16AM ET
The fiscal cliff has been getting most of the media attention these days. And when not fretting over U.S. political gridlock, investors have turned their attention to Europe.
But the real crisis brewing—and the one that no one seems to notice—is in Japan. The land of the rising sun is a ticking time bomb, and when it finally blows up it will make all the talk of eurozone disintegration seem petty by comparison.
Japan is the most heavily-indebted nation in the world with government debts of over 220% of GDP and a gaping budget deficit of nearly 10% of GDP.
To put that in perspective, Greece, Spain and Italy—the European countries most viewed as being at risk of default—have debts equivalent to 160%, 68% and 120% of their respective GDPs. The United States recently tripped over the 100% mark, but for all of the (completely justified) fretting about out-of-control debt in America, Japan’s debts are more than twice as big.
Once the statistics are released, we will most likely get confirmation that Japan spent a good part of 2012 in recession. And already, Endgame , John Mauldin called Japan a “bug in search of a windshield,” and it’s an apt metaphor. It’s just a question of when it will splat and what the particular windshield will be.
For now, it’s a waiting game. When investor sentiment finally turns on Japan, I see it creating an incredible short opportunity in Japanese assets. If you missed the opportunity in 2008 to short subprime lenders and banks, fear not. You’ll almost certainly be able to make a bundle shorting the yen, Japanese bonds, and Japanese stocks.
In the meantime, keep an eye on Japanese interest rates. When you see them starting to rise, you might want to start setting yourself up for the short opportunity of a lifetime.
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