Tuesday, December 06, 2011
One of the primary arguments for holding gold and silver as a monetary substitute rather than the fiat currencies in mainstream use today is the unlimited money printing by governments. In Japan, the world’s most indebted developed economy, debt to GDP is staggering at over 200%. Japan’s current annual budget commits nearly 50% of spending on just servicing debt. How Japan’s currency and bond market has not yet faced the wrath of bond vigilantes has been a topic in financial circles for decades. The notable feature that separates Japan from other countries with large debt burdens has been its ongoing trade surplus. However, many still speculate that it will be only a matter of time before Japanese finances succomb to a European-like meltdown.
In a very interesting development, Japan is using gold and silver coins to entice buyers of its bonds. Bloomberg reports that “investors who buy 10 million yen ($129,000) of reconstruction bonds with a 0.05% return, and keep it for three years, will receive a gold commerative coin weighing 15.6 grams (0.55 ounces).” Obvioiusly a 0.05% return is miniscule, but the 15.6 grams of gold is worth about $948 dollars.
The article adds that “Silver coins weighing 31.1 grams, or 1 troy ounce, valued at 1,000 yen will be distributed to those who own more than 1 million yen of the bonds, the government said. The coins will be offered for debt going on sale in March. ”
Combining paper from arguably the government with the most flagrant abuse of its fiat currency printing with gold and silver is novel. It further suggests that perhaps perceived demand for Japanese government debt could be waning, and that such inducements are needed to keep Japanese borrowing costs near zero. If Japanese yields were ever to encounter a sustained increase, the debt servicing cost would quickly swamp Japan’s tax base. All investors should keep on eye on Japanese debt yields going forward. This latest development of gold and silver inducements to buy such debt has consequential implications.
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