The Japanese Financial System Is Beginning To Spin Wildly Out Of ControlMichael Snyder In a desperate attempt to revitalize the economy and reduce the debt burden, the Bank of Japan decided a few months ago to start pumping massive amounts of money into the economy. At first, it seemed to be working. Economic activity perked up and the Japanese stock market went on a tremendous run. Unfortunately, there is also a very significant downside to pumping your economy full of money. Investors start demanding higher returns on their money and interest rates go up. But the Japanese government cannot afford higher interest rates. Without super low interest rates, Japanese government finances would totally collapse. In addition, higher interest rates in the private sector would make it much more difficult for the Japanese economy to expand. In essence, pretty much the last thing that Japan needs right now is significantly higher interest rates, but that is exactly what the policies of the Bank of Japan are going to produce. There is a lot of fear in Japan right now. On Thursday, the Nikkei plunged 7.3 percent. That was the largest single day decline in more than two years. Then on Monday the index fell by another 3.2 percent. And according to Business Insider, things are not looking good for Tuesday at this point In post-close futures trading, the Nikkei has dropped by another couple hundred points, and has dropped below 14,000. As Japan has indicated, when bonds start to plunge, its not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7% despite the Bank of Japan funneling $19 billion into it to hold things together. This is what it looks like when a Central Bank begins to lose control. And whats happening in Japan today will be coming to the US in the not so distant future. you think the Fed is not terrified of this, think again. The Fed has pumped over $1 trillion into foreign banks, hoping to stop the mess from getting to the US. As Japan is showing us, the Fed will fail. Investors, take note the financial system is sending us major warnings If you are not already preparing for a potential market collapse, now is the time to be doing so. And all of this money printing is absolutely crushing the Japanese yen. Since the start of 2013, the yen has declined16 percent against the U.S. dollar, even though the U.S. dollar is also being rapidly debased. Just check out this chart of the yen vs. the U.S. dollar. It is absolutely stunning What the Bank of Japan is doing right now is absolutely unprecedented. It has announced that it plans to inject the equivalent of approximately $1.4 trillion into the Japanese economy in less than two years. As Kyle Bass recently discussed, that dwarfs the quantitative easing that the Federal Reserve has been doing What theyre doing represents 70% of what the Fed is doing here with an economy 1/3 the size of ours The big problem for Japan will come when government bond yields really start to rise. The yield on 10 year government bonds has been creeping up over the past few months, and if they hit the 1.0% mark that will set off some major red flags. Because Japan has a debt to GDP ratio of more than 200 percent, the only way that it can avoid a total meltdown of government finances is to have super low interest rates. The video posted below does a great job of elaborating on this point It really is very simple. If interest rates rise substantially, Japan will be done. Investor Kyle Bass is one of those that have been warning about this for a long time Theres a fatalism, he says, in everyone he talks to in Japan. Their thinking is changing, and the way they talk to him about debt is changing. They already spend 50% of tax revenue on debt service. If rates go up, its game over. The financial problems in Cyprus and Greece are just tiny blips compared to what a major financial crisis in Japan would potentially be like. The Japanese economy is larger than the economies of Germany and Italy combined. If the house of cards in Japan comes tumbling down, trillions of dollars of investments all over the globe are going to be affected. And what is happening right now in Japan should serve as a sober warning to the United States. Like Japan, the money printing that the Federal Reserve has been doing has caused economic activity to perk up a bit and it has sent the stock market on an unprecedented run. Unfortunately, no bubble that the Federal Reserve has ever created has been able to last forever. At some point, we will pay a very great price for all of the debt that the U.S. government has been accumulating and all of the reckless money printing that the Fed has been engaged in. So enjoy the calm before the storm while you still can. It wont last for long. This article first appeared here at the Economic Collapse Blog. Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here. linkwithin_text=Related Articles: 