Last Updated : 29 October 2012 at 11:25 ISTWhile reports arrive that Japan's Cabinet has approved of a $5.3 billion stimulus measure—arguably a drop in the ocean—the same reports also mention of a fiscal cliff issue that is typically Japanese and not American.
Japan is also expected to run out of money and a resulting shutdown of its economy if political bickering there prevents the Japanese government from enacting a bill that would raise the current debt ceiling.
About 40% of the current year fiscal spending rests on the hope of Japanese government getting the bill to be passed into a law even as opposition parties demand the government to reciprocate with a snap election if they were to cooperate. One of the Houses in the Japanese two-tier Parliament is 'owned' by the opposition. The government invariably requires their support.
Last year too, Japanese PM Naoto Kan had to step down with opposition pegging the passing of bond bill to his removal from ministerial chair.
The current PM, however is refusing to bow before the pressure induced by opposition.
Consequences to commodity markets
Japan is the third biggest economy in the planet and is undergoing a recession followed by the tsunami of 2011 and the resulting Fukushima nuclear reactor hazard.
Reports suggest that the country has already curtailed some spending.
Reports Wall Street Journal:
"The Japanese government has already taken the unprecedented step of suspending some spending, and if parliamentary gridlock over the bill isn't resolved in a month, it would have to suspend bond offerings, starting with either an auction of two-year Japanese government bonds on Nov. 27 or 10-year bonds on Dec. 4, analysts said. That would be the first cancellation ever for a two-year tender and the first for a 10-year sale in 25 years, ministry officials have said."
Now, if this turns out to be real, then Japan will see a drop in bond yields for the short-term as investors eager to secure their investment would rush to these bonds. But over the long term the fiscal cliff issue would undermine the confidence of global investment community and may provoke rating downgrades by the agencies, pushing up the bond yields to uncomfortable levels. (Fitch had downgraded Japanese debt rating in May to A plus, and said further downgrades were possible due to political gridlock.)
This could in turn provoke a bullion rally as uncertainty mounts and investors channelise what they had invested in bonds to gold, silver and the like.
"Foreign investors including hedge funds may sell off JGB futures due to a loss of fiscal governance and the ensuing risk of rating downgrades, and that eventually could make domestic players reluctant to buy cash bonds," said Jun Ishii, chief JGB strategist at Mitsubishi UFJ Morgan Stanley Securities;reported Wall Street Journal.
And the primary dealers in bonds have their concerns:
"Several brokers expressed their concerns about a downgrade," Hidenori Suezawa, chief bond strategist at SMBC Nikko Securities, told reporters after attending the meeting. "One ratings agency has already downgraded Japan. If we get another downgrade, this could invite foreign selling of Japanese debt," he said.--Business Recorder quoted Reuters.
If the US fiscal cliff is not a bad news enough to create some chaos, then this certainly is.
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