Not much is being said about what is happening in Japan, and I believe we should be very concerned (or at least keep an eye on the country).

Historically, Japan has been one of the most indebted countries (% of GDP). If we exclude developing countries, we are talking about the most indebted developed country.

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Although we live in a world where it seems countries can incur infinite debt without any consequences, this is not the case. In fact, historically, all nations and/or currencies that have been devalued, leading the country to incur more debt than it could handle, have failed.

Generally, the same thing always happens: we believe we can expand debt without consequences, but then a domino effect occurs in a very short time.

To put things in context, the world is beginning to see the Japanese yen as a very weak currency due to the enormous debt the country has. This has logically been reflected in the exchange rate, where we have seen a 50% depreciation against the dollar over the last 13 years. Now, if you want to travel to Japan, this is the moment.

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The country has multiple alternatives, from my point of view, there are three:

  • Print more money: This would further devalue its currency and would likely lead the country into hyperinflation.
  • Raise interest rates: This would push Japan into a recession, but it is not a far-fetched idea.
  • Sell the US bonds it holds.

I will focus a bit on this last option, which I think is the most appropriate. Japan is the largest holder of US Treasuries in the world, excluding the US. It has $1.3 trillion.

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Obviously, now is a time when that money could benefit Japan to withstand the fiduciary crisis it is experiencing. If it does not manage to change course, imports will become increasingly difficult.

If this capital outflow occurs, combined with China also gradually selling US bonds, we could be facing a very significant systemic risk.

The US bond would increase significantly, and the US would have to deal with the sale of these bonds by all these governments. The only way it could do this is by printing more money, making life more difficult for all citizens.

This could trigger a very dangerous domino effect. In fact, this domino effect would be the most global ever seen, as well as having the highest level of debt.

Something to remember is that a country's currency is simply a unit of account, and this unit of account relies solely on the citizens' trust in it. If this trust is lost, the currency is doomed. If you go to Cuba, you will see that citizens prefer to accept dollars instead of their own currency.

This will mainly affect all those who have jobs dependent on the government or elderly people who need government assistance. The amount given to them will be the same, but their purchasing power will be much lower.

The big beneficiaries will be, as most of the time, those who have finite and tangible assets. The most common will be:

  • Real Estate
  • Precious Metals
  • Bitcoin
  • Holders of stocks, but be very careful with this. I think there will be businesses that benefit, but the global market would tend to have a very serious recession, although I believe it would be less severe than the currency printing.

This last point is very important; many times, we think that if the market falls 30% during Covid, it's a debacle. But what we don't understand is that if at that very moment, as it happened, 30% of the money in circulation is printed, our money has inherently also fallen by that amount, despite what citizens may think.

This is very important because I believe we are anchored to a number, and we need to have a broad enough perspective to understand that it is not always the worst when our assets fall. It will be the worst compared to a unit of account, but not compared to what I will be able to do with that money in the medium and long term.

I think that's enough for today. There's a lot to reflect on, and I encourage you to do so about the dangers I see in Japan.

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