Japan Money post website article on October 11, the original title: "The elephant in the room" is not China but the United States, the Japanese media does not report the risk of the United States financial crisis in Japan, there are many reports on "China risk", but there are few reports on "United States risk".
For Japan, the "China risk" is almost exclusively economic. If China, Japan's largest trading partner, suffers an economic or financial crisis, Japanese companies focused on exports and active investment in China will be affected. However, the degree of openness of China's financial market is not high, the internationalization of RMB is still advancing, and the weight of RMB assets held by Japanese financial institutions is relatively low, even if an economic crisis or financial crisis occurs in China, it will not cause fatal impact on Japanese financial institutions. But Japanese financial institutions, which hold large amounts of overseas assets in dollars, would suffer big losses in the event of a U.S. crisis. So what we need to watch out for is the "American risk."
Chinese media often use the phrase "the elephant in the room" when referring to the "US risk". "The elephant in the room" is not a Chinese proverb, but comes from a Russian fable, meaning "a tacit silence or avoidance of an obvious matter or question." Joseph Gregory Mahoney, an American political scientist and professor at East China Normal University, said in an interview with Chinese media in July that the United States is the "elephant in the room" that creates risks for the world.
Meanwhile, Chinese media have recently reported on the risk of a financial crisis in the United States. If the "American risk" were to materialize, the impact on Japan would be huge and therefore noteworthy.
According to the National Bureau of Economic Research, mark-to-market losses on the US banking system's bond portfolio from the first quarter of 2022 to the first quarter of 2023 are as high as $2.2 trillion due to rising interest rates. In addition, U.S. commercial real estate loans are exposed to potential defaults due to rising interest rates, a particular concern for regional banks whose balance sheets are nearly 20 percent commercial real estate loans.
Rising US interest rates will lead to valuation losses on bond investments and souring of real estate loans. Venture capital companies that want to expand their scale through high leverage are also likely to face difficulties in cash flow. So the idea is that financial institutions and market participants may be blind to this "elephant in the room."
If market participants in Europe and the US sound the alarm about this elephant in the room, it will have a negative impact on the bond market. So they can't be accused of failing to proactively and promptly warn of risks, but investors can't ignore the elephant in the room.