If Japan faces a funding crisis, a rescue will be very unlikely

9 May 2011 by Jim Fickett.

Even lending to cover one year's worth of maturing debt rollover would be beyond the capacity of the IMF. When the bond market revolts on Japanese debt, money printing is very likely to be the only way forward.

I have mentioned before that even at current, very low interest rates, interest on Japan's national debt is 23% of the government budget. That leaves little margin of safety; if investors start to worry about Japanese solvency, and interest rates rise, the government would face a funding crisis very quickly.

What would the options be then? The typical situation, following historical precedent and hence quite likely, would be for the central bank to give in to pressure, or be bypassed, and the budget to be covered by printing money. In that scenario, inflation, price controls and limits on foreign exchange would probably quickly follow.

Since loss of value in JGBs and high inflation would probably lead to bank failures and much more severe global supply chain issues than currently, there would be talk of an international rescue. Could such a thing be pulled off? Of course the interest rates on most outstanding bonds are already fixed, and the current year budget deficit could be eliminated by emergency measures, so the crisis issue that would top the list in a rescue would be the rollover of maturing debt.

According to the most recent Ministry of Finance quarterly newsletter, 108 trillion yen in Japanese Government Bonds will come due in fiscal 2011.

Without getting into specific scenarios, that at least gives the scale of a necessary bailout. ¥108 trillion is about $1.3 billion, or about €932 billion.

Legislative action to contribute directly for a bailout of Japan will be politically impossible in most countries, so it would have to be done indirectly, meaning the IMF. But this is far beyond the IMF's lending capacity. After the IMF promised to contribute €30 billion to the bailout of Greece, in May 2010, their remaining lending capacity for the year was €215 billion.

Bottom line: when the bond market revolts on Japanese debt, money printing is very likely to be the only way forward.