Japan is slowly creeping closer and closer to a debt crisis. Some in the currency markets have noticed as the dollar has strengthened somewhat sharply against the YEN in the last few weeks. The Fukushima nuclear disaster has obviously not helped the struggling Japanese economy. The country has massive cleanup and rebuilding costs to take care of due to the tsunami and related flooding of the reactors. This is driving the Japanese debt load even higher than it was before. It is estimated that in the next year, the debt to GDP ratio will be an astonishing 230% up from a little under 220% this year. Compare this to the United States whose debt to GDP ratio is now a little over 100% and you can see why you should be concerned about Japan. Even Greece’s debt to GDP ratio is lower at around 160%. Granted Greece is a lot smaller economy than Japan and they have tax collection problems among others.
How To Invest With This Concern
This really isn’t an easy answer. Japan does have several strikes against it including a very old and aging population and a shrinking tax-paying workforce, however the global economy seems to be improving so this could delay the inevitable for who know how long.
You can see a possible train wreck coming, it’s just a matter of when. I knew we were in an internet bubble back in the late 90’s but I didn’t know when it would burst. I just avoided internet and most technology stocks. I knew we were in a housing bubble in the mid 2000’s but I didn’t know when or how it would end. I just didn’t own housing or related stocks.
I figured they both would burst at some point but wasn’t smart enough to know when to short them. As they say the market can stay insane longer than you can stay solvent.
What I am doing with regards to Japan is adding it to my checklist when I look at stocks for my long term portfolio. The big thing is to avoid companies that have a decent amount of sales to Japan or reliant on Japan. While a crisis could be years off and these stocks could still go up for now, it’s a risk I’d rather take off the table.
I know there will be a problem at some point, I just don’t know when or what will trigger it. It’s best not to try to time it and short Japan, rather to just be cognizant of companies that have sales or risks associated with Japan.
by Ben Hoben