Via Zero Hedge.
For all I know, Keynesians might be even right in thinking policy makers can fiscally jolt economies back to life, allowing them to recover back to their ‘default mode.’ But their assumption is that ‘default mode’ is positive growth. But what if it isn’t? What if the ‘default mode’ is falling output because the population is declining? Japan might just have spent the best part of twenty years trying to fiscally stimulate its way out of a demographic compression. If this is correct, and population decline has blown the hole in Japan’s government balance sheet there’s still plenty of damage in store because the demographic compression isn’t over yet.
A bankrupt government implies default via inflation, which isn’t what people think when they think of Japan, but who expected such deflation 20 years ago? But the problems should first show up in the JGB market. A potential ‘grey swan’ with unforecastable timing argues for insurance, but there’s no point buying insurance unless it’s cheap. The chart below shows ATM swaptions on the 10y yield 10y forward. They’ve spiked recently because of Ozawa’s manoeuvres but at 60bps still seem reasonable to me.