I first warned about the impending bust of Japanese Government Bonds (JGBs) when I wrote “Abe Pulls Pin on JGBs” back in January of 2013. In that commentary I laid out the math behind a collapse of the Japanese bond market and economy stemming from the nation’s massive amount of government debt, combined with the Bank of Japan’s (BOJ’s) folly of pursuing an inflation target.
It was my prediction back then that a spike in interest rates was virtually guaranteed in the not-too-distant future. I also predicted that debt service payments would soon reach 50% of all government revenue, which would be the catalyst behind the rejection of JGB’s on the part of the entire global investment community. Sadly, that prediction should come into fruition during the next few months.
The Japanese Finance Ministry recently predicted that debt service payments would reach $257 billion (25.3 trillion Yen) during this fiscal year; up 13.7% from fiscal 2013. Also, revenue for this year is projected to be 45.4 trillion Yen. This means interest expenses as a percentage of total government revenue will reach 56%.
Therefore, it should now be abundantly clear to all holders of JGBs that since over half of all national income must soon go to pay interest on the debt, the chances of the principal being repaid in anything close to real terms is zero. A massive default in explicit or implicit terms on the quadrillion yen ($10 trillion), which amounts to 242% of GDP, is now assured to happen shortly.
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