Japan Secretly Selling Smuggled $US bonds?

I need to be very clear before writing this post that it is highly speculative, if not fanciful. As such, I would caution readers to view the post as some wild speculation.

The cause of the speculation is an article on Bloomberg, as follows:

June 12 (Bloomberg) -- Japan is investigating reports two of its citizens were detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland.

“Italian authorities are in the midst of the investigation, and haven’t yet confirmed the details, including whether they are Japanese citizens or not,” Takeshi Akamatsu, a spokesman for the Ministry of Foreign Affairs, said by telephone today in Tokyo. “Our consulate in Milan is continuing efforts to confirm the reports.”

An official at the Consulate General of Japan in Milan, who only gave his name as Ikeda, said it still hasn’t been confirmed that the individuals are Japanese. “We are in contact with the Italian Financial Police and the Italian Public Prosecutor’s Office,” Ikeda said by phone today.

The Asahi newspaper reported today Italian police found bond certificates concealed in the bottom of luggage the two individuals were carrying on a train that stopped in Chiasso, near the Swiss border, on June 3.

The undeclared bonds included 249 certificates worth $500 million each, the Asahi said, citing Italian authorities. The case was reported earlier in Italian newspapers Il Giornale and La Repubblica and by the Ansa news agency.

If the securities are found to be genuine, the individuals could be fined 40 percent of the total value for attempting to take them out of the country without declaring them, the Asahi said.

The Italian embassy in Tokyo was unable to confirm the Asahi report.

I placed a comment against my last post on first reading the story, in which I speculated on what might be going on, and suggested the following:

If the bonds are genuine (unconfirmed), the big question is who might have such a large sum? The only logical answer is a nation state, and with the individuals being Japanese, that would suggest Japan.

The second question is why they are smuggling them?

I have been speculating on this subject and have come up with some wild scenarios. I would like to emphasise that these are 'wild'.

However, the best answer that I could find is that the Japanese government wants to dump US bonds on the quiet. As such, they sought to transfer them to Switzerland, where they could then sell them, and disguise the point of origin of the selling.

In doing so they would avoid spooking the markets by making a Japanese sell-off of US bonds visible. As a large holder of US debt, any significant sell-off would potentially commence a $US rout.

This might make sense, but why would the smugglers go via Italy?

This is all wild, wild speculation, and it is still unconfirmed that the bonds are genuine.

However, if the bonds are genuine, I can see no other logical explanation. In the (unlikely) event that such speculation were correct, it really would be the start of the end of the $US.

I had picked up the article about the smuggling in my regular trawl through the financial news. A short while after writing the comment, I found an article reporting on the G8 meeting.....which is located in Italy.

This means that senior Japanese financial officials are in Italy, and these are the very people who might wish to undertake the quiet dumping of bonds. I was unable to find out who was attending from Japan, but it is a certainty that it would include all the necessary key players necessary for this kind of undertaking.

Regarding the matter of whether the bonds are genuine, this from the Asia News:

Italian authorities have not yet determined whether they are real or fake, but if they are real the attempt to take them into Switzerland would be the largest financial smuggling operation in history; if they are fake, the matter would be even more mind-boggling because the quality of the counterfeit work is such that the fake bonds are undistinguishable from the real ones.

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money.

Please note that these size of securities are only used in state to state transactions. The problem then arises as to why any counterfeiter might forge such instruments? It is not like forging a $US 100 bill, where it might pass off in a shop. In this case, if you try to use this kind of forgery, then whoever accepts it is going to want to know 100% for certain that it is genuine. They will certainly want to know a lot about it, and no forgery is therefore likely to be of any value whatsoever. As such, why forge such an instrument?

In the meantime, the Japanese have suddenly started talking up the prospects for the $US:

June 12 (Bloomberg) -- Japanese Finance Minister Kaoru Yosano said his government is confident about the outlook for U.S. Treasuries, signaling the second-biggest foreign holder of the securities will keep buying them amid record sales.

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending a Group of Eight meeting of finance ministers starting today in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

It could be argued that this public statement contradicts any secret selling of US bonds. However, if you are about to dump a large amount of US bonds into the market, the best way to cushion the impact might be to boost the value by suggesting that there is a strong buyer in the market. The fact that the alleged buyer is in fact a seller will not be known until much later. In the meantime, Japan gets brownie points from the US administration.

In all of this, it should be remembered that Japan is the world's second largest holder of US treasuries. Any public selling by Japan would therefore result in a $US crash, and would wipe out the value of much of the value of Japanese reserves. Back in January, I was discussing the $US dilemma for the major creditors of the US as follows:

The trouble is that, with so many countries holding these $US reserves, most of whom have their own economic problems, it is likely that everyone is having the same thoughts, and confronting similar problems. What you have is a situation in which there is something like a Mexican stand-off. As soon as one starts selling, then everybody must start selling. They are all, at the same time, terrified of selling, because in doing so, they destroy the value of what they are selling. It is a time bomb just waiting to go off.

Selling the bonds without appearing to sell them would be an excellent solution to the standoff. On the one hand you can sound positive, continue to make purchases, reassure the market, and meanwhile offload ever more of the dangerous (toxic) assets through the back door.

Normally, such massive amounts of assets would be impossible to move without regulators noticing, and without alarm bells going off. However, if it is the government and central bank acting, there is no reason why the alarm bells might not be switched off.

For the moment, let's assume that this wild speculation about the story is true. If it is the case that the men who have been arrested are acting in order to commence a sell of US bonds, it is quite likely that they will either be government finance officials, or members of the Naicho (Japanese intelligence service - reports to the prime minister). If it is the former, then a link can be made to the government but, if the latter, then it will be difficult to ever establish a connection.

In the meantime, how will the US and Japan handle the situation, if the bonds are real?

The important point is that it is not in the interest of either country to admit to the operation. For the US, if they point the finger at Japan, they will need to admit that one of the largest holders of bonds is dumping them, and this will cause a run on the $US. For the Japanese, their interest in not revealing what they have been up to is self-evident. If the bonds are genuine, it will need one or both of the governments to confirm that they are genuine. It is in the interests of both governments to deny that this is the case. The most likely story will be that it is a North Korean counterfeiting operation, as they are well known for this kind of activity.

Meanwhile, the Italians will be unable to prove the case one way or another. Without confirmation of the authenticity of the bonds from the US or Japan, how might they establish the truth one way or another? In addition, it is unlikely that the Italians would want to upset the US by pushing the matter.

In short, whether the bonds are genuine or not, I would be very surprised to see that this story goes much further.

The underlying story, if this wild speculation were to be true, is that the Japanese are dumping the $US. If this were the case, then the $US is finished, and we can expect to see it collapse in the very, very near future.

As I have said, this is all wild speculation. However, it does have a kind of painful logic. If the Japanese are, like the Chinese, increasingly dubious about holding $US reserves, then this would be a way of unloading the position whilst gaining the maximum value from the holdings. I have long argued on this post that $US bonds are largely worthless, the Chinese suspect that this may be the case, so why not the Japanese? As another example, Peter Schiff is discussing the absurdity of Japan having faith in the $US.

Once again, I can only emphasise that what I am writing is highly speculative. I have no evidence either way, but can see no other explanation of this rather extraordinary story. If anyone has a less fanciful explanation, then I will welcome comments. This is all very odd, and I do feel that my 'take' on it is quite questionable. It really is moving into the realms of James Bond movies....questions to answer, in particular are...; Is there any reason why anyone might want to forge the bonds? Who, and how might they pass them off? What mechanism might they use to sell the forgeries?

Over to you, the readers, for alternative considerations....