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Credit Suisse: Sovereign Default Risks Aligning To Crush The Japanese Yen

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Serkadis

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Credit Suisse sees far too many reasons to short the yen these days, in a global equity strategy report from January 11th. First of all, they find the Yen nearly 25% over-valued on purchasing-power-parity basis (PPP) vs. the U.S. dollar. Secondly, they point to Japan's even more rapidly deteriorating government debt situation. Thirdly, they highlight recent political pressures to weaken the yen in a bid to help exports. It would also be a 'stealth default' on government debt obligations.

Then fourthly, they show the chart below. The credit default swap (CDS) market has lost a lot of confidence in Japan. Note how the credit default swap spread for Japanese sovereign debt has doubled since mid-2009, meaning the cost to insure Japanese government debt against potential default has soared.

Chart

Credit Suisse: The fiscal position is extremely poor: With gross government debt to GDP of 197% (net government debt is 105% of GDP) and real rates almost two percentage points above the trend real GDP growth rate (2.4% versus 0.5%), a primary budget surplus of about 3% of GDP is required in order for the country to avoid being on an explosive debt path. However, the government runs a cyclically-adjusted budget deficit of 5.4% of GDP. This implies that fiscal tightening of more than 8% of GDP is required to avoid being on an explosive debt path.

(Via Credit Suisse, Global Equity Strategy, Currency and equity investment implications, 11 January 2010)

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