Earthquake Brings Japan’s Debt Crises Into View

March 14, 2011


source : WSJ

   The price for insuring against a default by Japan on its government debt–a
popular way to position for a financial crisis in Japan–has jumped to $103,000 per $10 million from $79,000 Friday.

  "Japan’s choices are very, very bad," says John Mauldin, president of
Millennium Wave Advisors. "Japan has an aging population, which is saving
less, their savings rate will go negative sometime in the next few years at
which point they will have to significantly reduce their spending, increase
taxes or print money or some combination of the three. In the grand scheme of things, does the earthquake technically move it up further? Yes, but they were already well down the path."

  Adam Fisher, who helps run Commonwealth Opportunity Capital, a $90 million
hedge fund in Los Angeles, owns CDS protection on a group of Japanese
companies, including Tokyo Electric Power Co. (9501.TO). The utility was hit
hard by explosions and concern over a possible meltdown at its nuclear-power
plants, whech saw the price of CDS rise to $240,000 from $40,700 on Friday. Fisher added “it shows how fragile that heavily levered nation is; there’s very little margin
for error."

  The bears share concerns about Japan’s government debt load, and aging
population and a stagnant economy, though their trades often are different.

  Mr. Bass and others are wagering against the yen and Japanese government
bonds. They also are buying options that pay off if volatility in Japanese
debt and currency markets increases.

  Even though Japanese debt rose in price on Monday, volatility increased, as
did cost of protecting the debt, helping Mr. Bass score a profit on the day,
according to a person familiar with the matter. Mr. Bass declined to

  Mr. Hendry’s bearish positions result from a view that Japanese companies
will be hurt as the Chinese economy weakens. He recently told conference
attendees that his trade has "cost me money." It isn’t clear if he profited
on Monday.

  "My trade presupposed that a slowdown in China could trigger a re-evaluation
of the preposterously low cost of corporate CDS in Japan," Mr. Hendry said
in an email. "The events of the last few days reinforce the premise that the
banking sector has massively miscalculated. My trade anticipates a
deflationary shock that jeopardizes the viability of the financial system."

“Some investors, like Commonwealth, have focused their bearish positions on
heavily indebted Japanese corporations that aren’t big exporters. Their
assumption: As Japan’s debt issues become more thorny, the yen would come
under pressure. That would help exporters, whose products become more
competitive, but hurt utilities and financial companies, which could have
trouble accessing financing markets.”


"Demographics are really the nail in the coffin as far I am concerned," says
Vishaal Bhuyan of Nariman Point LLC, which manages less than $20 million and
has put all its money on bearish Japanese corporate-bond trades.

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