An enigma wrapped in mystery

Japan’s has the worst government debt and fiscal arithmetic among the developed economies. And yet government bond yields are around 1% and the yen is at its strongest against other major trading currencies. Can this last? We think not. The market will decide when.

Unless there is significant fiscal action, public sector debt will accumulate to astronomical levels. And eventually Japan will suffer a sovereign debt crisis. That would leave the Japanese government with the choice of default or monetisation and inflation. We’d be short JGBs and the yen.

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