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The economy grew a healthy 4.1 percent in the last quarter, and hopes are high revival will continue
-- a reversal that would be remarkable, following years of contraction and shaky growth. It's too much to believe for some. The recent gyrations in bonds may have been "something closer to a realization that for all the brouhaha of Abenomics ... the Japanese financial authorities are losing the plot," said Jonathan Rogers, a senior credit analyst for bond investing bible IFR Asia in a recent column. He said it may have been better for Japan to continue to muddle along. A rapidly aging society is shrinking tax revenue while lifting pension, health care and other social costs in coming years. Yet until the advent of Abenomics, the Japanese bond market had been stable with virtually no fear of a sell-off. Unlike other countries, the bonds are almost all owned by Japanese, mostly megabanks and other major financial institutions. Only 8.7 percent is held by overseas investors, according to the Bank of Japan. As a result, fears about a bond collapse have long been brushed off as overblown. Some analysts insist it will never happen. They say it's impossible for confidence in Japan to be shaken, which is what a bond collapse would signify. The government is planning to raise sales taxes to boost revenue. Japan could start growing robustly again, solving its problem once and for all. Defenders of Japan's strengths also point to its giant foreign currency reserves, much of them held as U.S. Treasurys, and its long record of trade and investment surpluses with the rest of the world. Those strengths have weakened recently as Japan's trade balance has sunk into the red.
Takuya Kanda, analyst at Tokyo research institute Gaitame.Com, believes the recent bond jitters were set off because only a tiny proportion of bonds are actively traded and so a slight reaction to Abenomics has major impact. "It's the old whale-in-the-pond phenomenon," he said. Mainstream Japanese investors share an understanding that they must hang on to their bond savings "out of patriotism," Kanda said. But he noted Japan may be borrowing beyond what common sense would dictate as normal. "No one can say it's 100 percent safe," said Kanda. Stocks may be safer than bonds these days, he said. Doomsayers, like Takeshi Fujimaki, a consultant and former Morgan trader, have been warning about a bond nose-dive for years. He said he dreads the day he might be vindicated and hopes his warnings will be heeded. The argument goes like this: Inflation proves a plus only for debtors. Rising prices, by definition, will bring down the value of debts. The biggest debtor of all is no one but the government. Yet solving its debt problem through inflation wreaks havoc on the banks and pension funds that bought government bonds. And if inflation spiraled out of control in what Fujimaki calls "hyperinflation," skyrocketing prices would send many people into instant poverty. Fujimaki, who has written books on his fears, including his latest titled "Helpless Japan," advises everyone to turn their assets into dollars. "It can come any day, even tomorrow. The balloon of bad debt is already inflated to its limit," he said.
[Associated
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