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Economics

Kyle Bass: The End is Nigh for Japan

“I would like to live in a world where it’s all rainbows and unicorns, and we could make Krugman the President … And then reality sets in” ~ Kyle Bass

KYLE BASS founded and runs Hayman Capital Management, a Dallas-based hedge fund. He is a successful investor who is well known for predicting and profiting from the sub-prime mortgage crisis in 2008.

In the speech and Q&A above, which is from May this year (worth watching), Bass shares his views on the beginning of the end for Japan. He believes that Japan has about 2 years before its systemic economic problems manifest themselves in full force. Once this happens, he believes that the resulting implosion will require the West to completely redefine its economic orthodoxy.

Japan’s public debt to GDP ratio currently exceeds 200%, which makes the Japanese government more heavily indebted as a percentage of GDP than any other country in the world (including Iceland, Greece, and Italy). In the past, Japan survived due to a high national savings rate which allowed the government to fund fiscal excess by selling bonds to domestic savers.

Bass argues that the Japanese government will not be able to continue as it has in the past. He gives a number of arguments but one of the big ones is changing demographics. Almost a third of the Japanese population is now at least 60 years old. Pension funds, the largest holders of JGBs, are already becoming net sellers of the bonds in order to discharge pension liabilities. And the Bank of Tokyo Mitsubishi has reported that expected personal savings rates in Japan will become negative since there will be more people leaving the workforce than entering the workforce in coming years. With fewer people having babies, the population is also expected to shrink from around 128 million today to below 100 million in 2050.

Is the Japanese “Keynesian end point” fast approaching?

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