Japan on the road to ruin: Warburg

The consequence for financial markets was a quot;sell Japanquot; scenario, starting with equities, then bonds and finally the Japanese yen. quot;The hole is so deep right now that it8217;s becoming very difficult to think of a positive risk case for Japan,quot; Warburg8217;s senior forex/interest rates strategist Cameron Umetsu said.

Monetisation8217;, the process of printing money to cover the flood of government bond issuance, was now inevitable, although would be introduced gradually, Umetsu said. quot;It8217;s a question of when, not if,quot; he said.

quot;They are heading towards a major shift in the policy regime which is essentially yen negative.quot; The yen went into reverse on Tuesday after Japan policy-makers publicly encouraged a weaker currency and acted to ease a glut in the government bond market.

The dollar stood at 118.10/20 yen on Wednesday, compared with 118.65/70 yen in New York late on Tuesday. The dollar surged more than three yen in New York overnight, its biggest one-day gain in a month, to reach 118.90 yen, its highest point since December 9, when it traded at 119.45 yen.

In an interview with Reuters Television on Tuesday, ministry of finance official Eisuke Sakakibara said the G7 would also accept a weaker yen as a result of the BOJ8217;s credit easing last Friday. quot;Sakakibara8217;s comments yesterday certainly suggest that reality is biting,quot; Umetsu said.

However, the policy change carried major dangers in raising the risk of capital flight, a sovereign debt downgrading and stagflation. quot;The whole idea of a 110-120 comfort zone for dollar-yen has gone out of the window,quot; Umetsu said.

quot;It8217;s very dangerous to assume that the yen in a monetisation scenario will weaken gradually. This will reinforce the perception that dollar-yen is a one-way bet North.quot; Depreciation of the yen would also take the pressure off policy makers to restructure the Japanese economy to stimulate consumer demand. quot;The whole question of structural reform is off the table again,quot; Umetsu said.

Okazaki said monetisation offered the easy way out for the Japanese government, whose economic stimulus measures, concentrated on wasteful public works spending, had backfired.

He predicted the government would resort to massive tax hikes after the next general election, sending the economy into a long and deep recession. quot;The current policies are not going to lead to an autonomous recovery,quot; Okazaki said. quot;Japan is like the Titanic. You can keep pouring in fuel, but the boat is still going to sink.quot;