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Japan Needs More Than QE
05/06/2013 9:45 am EST
Aging population, too much debt, and a falling yen is likely to put a damper on the Nikkei’s rise, no matter what mountains the Bank of Japan moves, says Peter Schiff of Euro Pacific Capital.
For the better part of 20 years, successive Japanese governments and central bankers have been trying, unsuccessfully, to use quantitative easing strategies to pump up a deflated asset bubble.
For the last 20 years, Japan has offered a "zombie" economy characterized by low growth, stagnation, and exploding government debt. The Japanese government now owes approximately $12 trillion, a figure representing more than 200% of GDP.
The IMF expects that this figure will reach 245% by the end of this year. This gives Japan the unenviable title of having the world's highest government debt-to-GDP ratio.
But Shinzo Abe, the newly elected Prime Minister of Japan, and Haruhiko Kuroda, his newly-appointed Governor of the Bank of Japan, feel much, much more debt needs to be issued to turn the economy around.
Between May and November 2012, the Nikkei traded within a range of 8,200 to 9,400. By April 2, the Nikkei stood at 12,003 points. Then, on April 4, BOJ Governor Kuroda made good on Abe's dovish rhetoric and announced a plan to end years of mildly declining prices by doing whatever necessary to create 2% inflation. To achieve its goals, the government is prepared to double the amount of Yen in circulation.
Stocks immediately rallied, and in less than a week the Nikkei had breached 13,000 points, taking the index to a 4 1/2-year high. But the rally will be costly.
The Japanese government already spends 25% of tax revenue to service outstanding debt (compared to 6% in the US). Ten-year Japanese government bonds now pay less than 0.6%, and five-year yields are now a little more than 0.2%. A rise to 2% rates would triple long -term borrowing costs. Given the size of its debts, increases of such magnitude could hit Japan with the force of ten Godzillas.
Japan has an aging demographic, and as more time goes by, the pool of potential bond buyers continues to shrink. There is evidence to suggest that Japanese savers are increasingly considering overseas sources of yield for protection from the inflation.
As the Nikkei has moved upward, the Japanese Yen has taken the opposite trajectory, falling more than 20% against the US dollar since the beginning of 2012, and nearly 12% since the beginning of this year.
Earlier this year, the falling yen issue sparked a full-fledged headline war. On February 16, participating members of the G20 issued a statement, clearly aimed at Japan, warning against competitive devaluations and currency wars.
For now, it seems the international powers have fallen in behind Japan. The prevailing opinion seems to be that weakening a currency should not be considered manipulation as long as it's done to revive a domestic economy, not specifically to harm competitors. Such an opinion qualifies as a great moment in rhetorical shamelessness.
The Liberal Democratic Party has called for over $2.4 trillion worth of public works stimulus over the next ten years. This spending represents approximately 40% of Japan's current GDP. Adjusted for population, it would be the equivalent of nearly $600 billion annually in the United States.
It should be obvious to anyone with even half a brain that Japan's prior experiments with ever-larger doses of quantitative easing have failed. The boldness of Abe's plans should provide the rest of the world with a crash course in the ability of debt accumulation to jumpstart an economy.
The good news is that the effects should not take too long to be seen. I believe that we will be treated with a stark lesson on the limitations of inflation as an economic panacea.
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