Kyle Bass

It’s standard practice for short sellers to kick dirt on their targets, and Kyle Bass is doing just that by asserting that Japan’s economy is on the verge of a financial crisis. In a talk on May 3, he said that Japan’s demise is imminent. So far, though, Bass has been wrong – and he has his detractors, who are far less certain of Japan’s destiny.

Bass is the founder of Hayman Capital, a Dallas-based hedge fund. He was featured prominently in Michael Lewis’ book, The Big Short, for profiting from investments during the sub-prime crisis, which he accurately predicted. He spoke at the Strategic Investment Conference in Carlsbad, CA, which was sponsored by Altegris Investments and John Mauldin.

Bass reiterated the same points he made in a talk he gave at the University of Virginia in November last year and which he has given on other occasions, including a speech at Jim Grant’s conference a month ago.

Bass’ predictions have not been accurate, at least so far. In his UVA talk, Bass said Japan was “already in checkmate” without policy options and that a crisis would unfold in the next 18 months. Now, six months later, Bass said “the beginning of the end has begun in Japan.” He again stated that it will be 18 months to two years before a full crisis unfolds.

You can read my earlier account of Bass’ UVA talk to understand why he thinks Japan is doomed. Let’s now look at why others – many of whom spoke at the Strategic Investment Conference – think he may be mistaken.

Nouriel Roubini

Nouriel Roubini, an economist and professor at NYU, laid out a scenario whereby Japan would avert a crisis. He said that a five-part plan would be necessary:

  1. Aggressive monetary easing through 2014.
  2. Fiscal stimulus this year, followed by some austerity in the next two years to stabilize deficit growth.
  3. An agreement within the next four years to increase wages and boost domestic demand.
  4. Structural reforms, which he said would be announced in June, to deregulate its economy.
  5. The Trans-Pacific Partnership, which would boost trade and productivity.

If all five strategies are implemented, Roubini said Japan could benefit from a weakening yen, a rising stock market, an end to deflation and stabilization or modest GDP growth. But if all five are not implemented – for example, if the first two steps are taken (which Roubini said were easy) but the others postponed – then Japan “will eventually have a disaster,” he said.