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Finance & Economy

Bond wars: Chinese advisor calls for Japanese bond dump


China is actively considering “using its power as Japan’s biggest creditor with $230bn (£141bn) of bonds to “impose sanctions on Japan in the most effective manner” and bring Tokyo’s festering fiscal crisis to a head.” Meaning: dump Japan’s bonds en masse.

Should this stunning recommendation be enacted, not only would it be the first time in world history that insurmountable credit is used as a weapon of retaliation, it would mark a clear phase transition in the evolution of modern warfare: from outright military incursions, to FX wars, to trade wars, culminating with “bond wars” which could in the span of minutes cripple the entire Japanese fiscal house of cards still standing solely due to the myth that unserviceable debt can be pushed off into perpetuity.

Further complicating things is that Japan has no clear means of retaliation: it owns no Chinese bonds of its own it can dump as a containment measure. Instead, Japan is at best left with the threat of damages incurred on the Chinese economy should Japan be lost as a trading partner. It appears, however, that to China such a gambit is no longer a major concern:

Mr Jin said China can afford to sacrifice its “low-value-added” exports to Japan at a small cost. By contrast, Japan relies on Chinese demand to keep its economy afloat and stave off “irreversible” decline.

“It’s clear that China can deal a heavy blow to the Japanese economy without hurting itself too much,” he said. It is unclear whether he was speaking with the full backing of the Politburo or whether sales of Japanese debt would do much damage. The Bank of Japan could counter the move with bond purchases. Any weakening of the yen would be welcome.

Ironically, this terminal bond war escalation would also mean that Japan’s last ditch alternative is to threaten the US with dumping America’s bonds in turn if the US i) does not step up on behalf of Japan and ii) if Japan is forced to promptly convert debt from one denomination into another. The fallout effect would be most dramatic.

It is unclear if China will proceed with this “scorched bond” step: should this happen there is likely no turning back as it would force a market test of the entire developed world.

ZeroHedge

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Discussion

2 thoughts on “Bond wars: Chinese advisor calls for Japanese bond dump

  1. Reblogged this on Chindia Alert: forewarned is forearmed and commented:
    I sincerely hope this is mere ‘sabre rattling’ as nobody knows what the unintended consequnces of such a move would trigger. WW3? Total global economic meltdown? Who knows!

    Like

    Posted by keeper @ chindia-alert | September 21, 2012, 5:06 pm

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  1. Pingback: “Tough on China” or: The Biggest Story No One Cares About « Kingdom of Sharks - October 19, 2012

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