Wednesday, July 4, 2012

Today's Major Market Move: Japanese 5 Year Credit Default Swap Declines 35% Year to Date

Sovereign default risk has dropped nearly universally in 2012, with 23 out of 25 sovereign 5 year credit default swaps dropping in price. The largest drop has occurred with the Japanese 5 year which is down almost 35%. Here's the top 10:

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The price on the 5 year CDS began to drop in earnest back in January when the new Japanese Prime Minister announced a proposal to double the sales tax to deal with the expanding debt burden.

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This was from Channel News Asia back in January when the proposal was first announced:
TOKYO : Japan's prime minister told parliament on Tuesday he will move to double sales taxes, warning that the future of the world's third-largest economy depends on turning the rising tide of public debt.

Yoshihiko Noda has staked his premiership on the issue and in his policy speech opening the new session of the Diet said he would submit legislation by the end of March that will ramp up the cost of everything from rice to Rolexes.

However, underlining the huge task ahead, the Bank of Japan also on Tuesday lowered its growth forecasts for the economy, predicting a contraction in the year to March 31, and slower growth than first tipped in fiscal 2012.

Less than five months into the job, Noda is trying to sell the deeply unpopular tax rise to a sceptical public, and avoid becoming the sixth prime minister in as many years to disappear beneath the waves of Japan's factional politics.
The tax bill recently cleared another hurdle when it passed the lower house last week. This is the latest news from Bloomberg Businessweek:
Noda’s bill, which passed the lower house of parliament last week, calls for increasing the 5 percent tax to 8 percent in April 2014 and to 10 percent in October 2015. He has said that raising the levy is necessary to contain the country’s debt and welfare expense. The International Monetary Fund and the Organization for Economic Cooperation and Development have both urged Japan to be more aggressive in reforming its finances.

An aging population and two decades of low growth have left Japan with a debt pile projected to exceed 1 quadrillion yen next year, the biggest in the world.
The Japanese economy continues to remain between a rock and a hard place. The debt problem cannot be ignored forever but dealing with it will stunt already anemic growth. GDP growth prior to the proposal was already projected to be slightly above flat for the next 3 years and equities continue to wallow in a quagmire.

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