Does a rush to the bond market, heartened by Noda’s message of a reduction of Japan’s deficts (reducing the debt is not a realistic prospect) send the stock market into a tailspin?
It’s a good question but there are massive contradictions to deal with here. While sending out a message that basically says “we’ll increase the tax base (eventually) to reduce the deficit”, Noda is signalling that he’s in favour of weakening the Yen. In any rational world the Yen should be going to hell, and yet somehow (hmm, what could it be?! An export economy, importing the majority of it’s raw materials priced in dollars, perhaps?) the Yen, along with the Swiss Franc, is stronger than ever. The FT reports today that the Yen is now 47% higher against than it was in 2008. Ouch.
It seems things are not entirely reality based. The US and Europe are in a desperate race to the bottom, and Japan really can’t compete in the financial armageddon stakes. My guess is that Noda will be forced to live with a strong yen, and a high debt level. Meanwhile something with force of the PIIGS into a default, bondholders will (with bad grace) eat their loses, and lash out, bring down all sorts of mayhem on all our heads. At the end of all this Japan will still owe it’s citizens a bunch of money, but not much else will change there.
The adage about the futility of betting against the Yen is likely to hold a little longer…