Black Swan Hits Japan
Ron DeLegge, Editor
March 11, 2011

SAN DIEGO (ETFguide.com) – Everybody knows Japan’s government is in deep financial trouble, but what we didn’t know is that a deadly 8.9 magnitude earthquake would strike. And the timing of this particular disaster for the debt saddled Asian country couldn’t have been worse.

The iShares MSCI Japan Index Fund (NYSEArca: EWJ) which follows an index of Japan’s top publicly traded companies was down around 2% in U.S. trading.

Japan’s dubious fiscal situation is well-illustrated by the credit opinions of Moody’s Investors Service and Standard & Poor’s, where roughly half a dozen Japanese corporations now have a higher credit score than the long-term bonds issued by the Japanese government.

Put another way, there’s not much faith in the creditworthiness of Japan’s long-term ability to pay its debts. And it’s not hard to see why.

Japan’s government debt is projected to reach 210% of GDP in 2012, making it the highest level among developed market nations tracked by the Organization for Economic Cooperation and Development. The U.S. by comparison, has debt that’s 101% of its GDP.

The cost of reconstruction because of the Sendai earthquake will be huge and Japan already has a budget deficit of around 10% with an aging workforce. Whatever financial wiggle room it had before has been erased. 

It’s in this context, we raise a few uncomfortable questions:

What kind of damage would a Black Swan event like a natural disaster or unexpected catastrophe cause to debt riddled states like California and others? What about the federal government? And despite the severely diminished credibility and believability of credit ratings issued by major credit rating agencies, could we see an environment where U.S. corporate bonds (NYSEArca: LQD) one day carry a higher credit rating than the U.S. government (NYSEArca: TLT)?

In summary, what’s happening in Japan could easily happen elsewhere, including right here in the U.S.