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TheStreet Open House

Japan Crisis Pressures Deadbeat Debtors

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

VANCOUVER, Canada ( Bullion Bulls Canada) -- The sequence of catastrophes which has afflicted Japan can only fill us with empathy for the Japanese people. However, Western deadbeat debtors cannot afford to concern themselves only with expressing their official condolences to Japan. Rather, they need to be focusing on their own financial survival.

With Japan's era of near-zero interest rates now stretching into decades, Japanese citizens were forced (by their own government) to invest outside the country. Countless trillions of yen flowed into the economies of other nations (and were converted into those local currencies). With Japan facing a massive reconstruction effort , those trillions of yen are now required at home -- to attempt to mend the domestic economy, and the nation of Japan itself.

Over the short term, two trends dominate. One is general downward pressure on global asset prices as Japanese investors liquidate those foreign assets. The second is upward pressure on the yen as assets previously held in foreign currencies are converted back to yen -- causing a short-term spike in demand for this worthless paper.

We now have the peculiar situation where one of the worst of the deadbeat debtors -- Japan itself -- is seeing a spike in the (relative) value of its currency, despite the fact that over the longer term, the direction for the yen must be lower, not higher.

Japan was gripped with enormous structural deficits before these series of tragedies struck. Thanks to the horrific damage to infrastructure, Japan faces massive spending requirements, even as its capacity to generate wealth/income has been severely impaired. It highlights the unforgivable negligence and recklessness of Western "leaders" in creating these structural deficits in all of our economies -- with the consequence being that none of our economies is prepared to withstand any sort of major catastrophe in our own backyards.

The size of Japan's already huge deficits can only soar higher. This effectively cuts Japan off from international debt markets, as Japan's ability to even service these higher debt-loads is seriously in question. Longer term, debt-default now seems a virtual certainty for Japan. Thus, the only way Japan could engage in any foreign borrowing is through much higher interest rates (to compensate lenders for greatly increased risk). However this would drive up the costs of servicing Japan's existing debt by such an extreme amount that arguably any and every dollar which Japan could borrow would simply be consumed in rising interest payments.

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