In retrospect, recent yen weakness was telegraphed. Japan, due to excessive government borrowing, was a financial tinderbox ready to ignite, and the recent riff with China regarding Taiwan was the match that set it off. The dispute led to cancelled tourist arrivals, cancelled seafood exports, and cancelled ministerial meetings, all sources of money for Japan; flows of money into Japan declined.
Despite constant monitoring, it is hard to predict catalytic events like the China-Japan riff. But investors can assess financial conditions. Etherfuse uses a model that assesses a country's "Need for Money" (NFM). The NFM model has three key variables: the Current Account (difference in money flowing in and flowing out), the Balance of Trade (value goods sold vs bought), and Government Debt to GDP (amount of borrowed money to value produced).
According to the model, if a country's NFM is growing, they have a couple of options, all of which are bad for investors; 1) they can print money (probably what Japan will do, causing inflation to go up) 2) they can sell assets (sell US Treasury holdings) 3) borrow more money 4) devalue their currency, allowing them to sell more goods and services to the outside world 5) they can raise interest rates to attract yield seeking investors.
At first glance, Japan's NFM looked pretty good: the Current Account (difference of money flowing in and flowing out) was consistently in positive territory, the Balance of Trade has been negative but only by a little, the real problem was Government debt to GDP.
Regarding debt to GDP, it seems investors put too much weight on direction of change; government debt to GDP declined from 258% in 2020 to 237% at end of 2024. Investors seem to have overlooked the absolute number, which at 237% of GDP ranks Japan number two in the world at Government Debt to GDP behind Sudan at 272% (Trading Economics).
It can be argued that a level over 230% is unsustainable. Such a stark directional improvement, 258% to 237%, may have made investors complacent.
So, what can we learn. First, in assessing data you must look at direction of change AND the absolute level. Second, the more analysis regarding a country's financial condition you can do the better. Third, follow politics, staying alert for any potential negative catalyst.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
