Mount House of Cards
'One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question - and keep rates at zero'
Olivier Blanchard
Olivier Blanchard eyes ugly 'end game' for Japan on debt spiral
Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.
Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.
“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree,” he said.
Prof Blanchard said the Japanese treasury will have to tap foreign funds to plug the gap and this will prove far more costly, threatening to bring the long-feared funding crisis to a head.
Looming new debt sales also weighed on the bond market. The U.S. Treasury is scheduled to sell $24 billion of three-year notes Tuesday, $20 billion of 10-year notes Wednesday and $12 billion of 30-year bonds Thursday.
Money poured out of the country for the 16th consecutive quarter in the final three months of 2015, the longest streak of quarterly outflows since the five years through September 1999, according to central bank data. An increase in South Africans investing abroad followed a gradual relaxation of exchange controls almost each year since 1995, about a year after Nelson Mandela’s African National Congress won the first all-race elections.
Firms generated just enough operating profit to cover the interest expenses on their debt twice, down from almost six times in 2010, according to data compiled by Bloomberg going back to 1992 from non-financial companies traded in Shanghai and Shenzhen. Oil and gas corporates were the weakest at 0.24 times, followed by the metals and mining sector at 0.52.
Russian attack jets buzz US warship in riskiest encounter for years
A Russian jet came within 30ft of a US destroyer conducting exercises in the Baltic Sea in what the US navy described as a “simulated attack” – one of the closest and riskiest encounters between the two countries’ armed forces in recent years.
The US navy released photos and videos showing Russian SU-24 fighter jets flying low over the sea and “buzzing” the USS Donald Cook – a destroyer of the Arleigh Burke class – which carries guided missiles and which had just made a call at the Polish port of Gdynia.
According to the US European Command (Eucom) in Stuttgart, there were a number of such close encounters on Monday and Tuesday, involving both Russian fighter jets and helicopters, while the Donald Cook was in international waters in the Baltic Sea, off the coast of Poland. Those waters are also close to the Russian enclave of Kaliningrad.
Lt Col David Westover, a Eucom spokesman, said that in the closest pass, on Monday, a Russian SU-24 came within 30ft (9 metres) of the Donald Cook, at an altitude of 100ft, as the US navy was practising helicopter landings on the ship’s deck, and an allied helicopter was on the deck refuelling. The drills were stopped because of the danger presented by the Russian overflights, he said. Other reports said that helicopter involved in the aborted exercise had been Polish.
