This Country Is the World's Most Likely Candidate for Hyperinflation

By Tom Dyson

Mrs. Watanabe is dumping the yen.

According to a story from Bloomberg this week, Japanese businessmen, housewives, and pensioners are dumping the yen against foreign currencies, especially the Australian dollar, the New Zealand dollar, and the euro. Women control the family finances in the typical Japanese household, so the international media has nicknamed the Japanese individual investor "Mrs. Watanabe."

Bloomberg says Mrs. Watanabe is now short 153,326 contracts against the yen. That's 35 times the short interest on March 4, the day the dumping began.


There's so much excess saving in Japan, the country's interest rates are miniscule. Right now, the interest rate on a one-year CD is Japan is 0.25%. Compare Japanese rates to foreign rates: The Aussie dollar yields 3%. The Brazilian real yields 10.25%.

Bloomberg explains Mrs. Watanabe's rush out of the yen as "yield hunting." This explanation makes sense. Japanese investors can make 12 times as much interest in the Australian dollar. Plus, all the foreign currencies made huge falls against the yen last year... The Aussie dollar fell 40% against the yen last year, for example. So to the Japanese investor, they must look cheap.

Here's the thing: The Japanese government is broke and can't pay back its debts. I think the gargantuan fall in the yen comes when Mrs. Watanabe figures out Japan's government will never pay back the $7 trillion she loaned it.

Check out the table from the IMF's World Economic Outlook published last month... It shows the debt-to-GDP ratio for the world's industrial nations. Japan is clearly the world's most broke major government...

(Zimbabwe has the world's most indebted government with a 2008 debt-to-GDP ratio of 241%, according to the CIA World Factbook.)

General Government Gross Debt as % of GDP
2005 2006 2007 2008e 2009e 2010e
Canada 71% 68% 64% 64% 75% 77%
France 66% 64% 64% 67% 75% 80%
Germany 66% 66% 64% 67% 79% 87%
Italy 106% 107% 104% 106% 115% 121%
Japan 192% 191% 188% 196% 217% 227%
UK 42% 43% 44% 52% 63% 73%
U.S. 63% 62% 63% 71% 87% 98%
Euroland 70% 68% 66% 69% 79% 85%
Source: IMF World Economic Outlook, April 2009

Another way of looking at the indebtedness of a government is debt per capita. In the U.S., for example, Uncle Sam owes $11 trillion... $4 trillion more than the Japanese government owes. If you express the debt per capita, the U.S. government owes $36,700 for every American citizen. The Japanese government owes almost twice as much: $70,000 per Japanese citizen.

Not only has the Japanese government built the world's largest and growing debt, but its ability to collect tax income is about to take a big hit. Japan is in a deep recession, and its businesses aren't able to sell goods abroad right now. Plus, Japan's population is shrinking and aging at the same time. Tax revenues will plummet just as the government's social security liabilities are ramping up. The Japanese government is in a hopeless situation.
Because the Japanese government is broke, I think Japan is the world's most likely candidate for hyperinflation. When Mrs. Watanabe realizes her government's credit is irreparably damaged, she'll dump her government bond and currency holdings and seek tangible assets...

Mrs. Watanabe's yield hunting could be the trigger that sets off the inflationary fireball in Japan. Consider shorting the yen ETF (FXY) to play this trend. Also, don't expect inflation in America until you see it in Japan first. After 20 years of deflation, Japan is much closer to the turning point than America is...