In my favorite episode of The Simpsons, the family goes on vacation in Japan. Homer, being the usual simpleton, does not want to eat at a traditional Japanese restaurant, instead preferring to eat at America Town–a place serving American food and staffed by waiters who pretend to be American.
Lisa: [Looking at the menu.] Don’t you serve anything even remotely Japanese?
Waiter: Don’t ask me! I don’t know anything… I am a product of American education system. I also build poor quality cars and INFERIOR style electronics!
Homer: [Laughing hysterically] HAHAHAHAHA! You’ve got our number!
This episode was from 1999… not too long ago. It is amazing to think that since then, an American company has created the best consumer electronics devices ever. The South Koreans have caught up, too. It is the Japanese who now make “inferior style” electronics.
So I was not surprised at all to hear that Olympus conducted a scheme to hide losses. I suspect that Panasonic and other Japanese OEMs are misreporting their financial condition. Why am I singling out Panasonic? It’s the only Japanese company I really understand other than Sony. I started looking at their financial statements because I had no idea how this company could possibly be making money. I found that the company is taking measures that look desperate–like doing sale leasebacks of their facilities to raise cash.
If Japan has lost its competitive edge in electronics, what else do they have to rely on? You think about this and take what Kyle Bass has said about their fiscal situation and it is clear that the entire country is beyond the point of no return. The Japanese bondholders getting paid 1% are going to suffer huge losses.
Who owns Japanese government bonds? Specifically, who can I short that owns JGBs? Japanese life insurance companies. Look at the combined balanced sheet of 47 of Japanese largest life insurers:
3. Asset Distribution (month-end August 2011) in billions of yen
Cash, Deposits 2,738
Monetary Claims Bought 2,980
Money in Trust 1,996
(Government Bonds) 136,419
(Local Government Bonds) 12,486
(Corporate Bonds) 25,066
(Foreign Securities) 45,256
(Financial Loans) 40,064
Tangible Fixed Assets 6,696
Invested Assets 310,528
Total Assets 319,129
These 47 insurers combined own 136,419,000,000,000 yen worth of JGBs. That’s equal to $1.76 trillion! If Kyle Bass is right and the bonds will be marked down 80%, that creates a hole of more than $1 trillion! The stocks of Japanese life insurers would be worthless. Their bonds would be worthless.