Most of the world, except India, is Japanese now!

Dec 5, 2014

In this issue:
» Be prepared for a halt in asset appreciation
» Are India's banks prepared to fuel GDP growth?
» Should Air India be privatized?
» ....and more!

Much has been written about the 'lost decade' in Japan. This was when the massive asset price bubble in the country burst plunging it into a deflationary spiral. Indeed, the term originally was meant for the period between 1991 and 2000. But Japan failed to recover in the subsequent decade as well. And so the entire period between 1991 and 2010 is now being coined as the 'two lost decades'. Whether another decade of subpar growth will be added to this remains to be seen. But four years since 2010, Japan is nowhere closer to a meaningful recovery.

The Bank of Japan (BoJ), just like its counterparts in the West, has remained as unoriginal as ever in tackling this problem. Taking a leaf out of the US Fed's book post the 2008 global crisis, the Japanese central bank introduced massive stimulus measures. But this hardly did anything to spur growth. Infact, latest GDP figures cite that the Japanese economy has slipped into recession. Not that the BoJ is discouraged. In its recent decision, the BoJ intends to increase the scope of its quantitative easing measures to pull Japan out of deflation and increase inflation. And we will not be surprised if once again such aggressive QE measures fail to achieve the desired result.

Japan is not the only one. Bill Bonner, in the Daily Reckoning, has many a time written about how the US is also following in Japan's footsteps. Billions of dollars worth of bond purchases since the 2008 crisis has not made the US economy any stronger. Although the bond buying has been paused for now, interest rates continue to hover around zero. A 'lost decade' for the US too seems very much on the cards. What more, the Eurozone is not far behind. Bloated government debts, loose monetary policies and poor GDP growth have been afflicting this region as well.

But monetary easing is not just restricted to the developed world. Japan's radical policies are having far reaching consequences in the Asian region as well. Since the Yen has weakened, this has spurred currency wars in the region. Countries such as China, South Korea, Singapore and Thailand among others are also introducing loose policies to ensure that their currencies do not appreciate against the Yen. This is to ensure that they do not lose trade competiveness.

All in all, it is a melee out there and Nouriel Roubini very aptly states in an article in the Mint, that "in a sense, we are all going Japanese now" .

Where does India stand in all of this? Thanks to the prudent policies of the RBI, India can certainly boast that it is not going the Japanese way. No doubt, India's growth has also slowed down in the last couple of years. But the RBI has very clearly stated that the onus of bolstering growth does not lie with the central bank alone. The government will have to do its bit as well. Thus, the Modi government will have to implement reforms and ramp up infrastructure in the country for growth to pick up. In other words, growth will have to be productive. The good thing is that the Modi government, more than any other government in the past, seems to be on the right path in this regard.

But the rest of the world still has a long way to go. Rather than aping each other, it is high time that central banks in the US, Europe and Japan learn some lessons from our very own RBI!

Do you agree that India is the only country that is not going the Japanese way? Let us know your comments or share your views in the Equitymaster Club.

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Bill Gross of Janus Capital also agrees that central banks around the world will need to do something more than just money printing. More importantly, he is of the view that monetary and fiscal policies must work side by side. This for the time being does not seem to be the case. So, in the Eurozone for instance, on one hand you have the European Central Bank (ECB) resort to stimulus measures. While on the other hand, you have Germany impose austerity measures on errant countries in the region. Japan is another example. On the one hand, Japan is introducing radical monetary policies while on the other hand it introduces consumption tax which is hurting growth.

Ultimately, all of this money printing has only piled on more debt and done nothing in terms of creating wealth. It has only created a false 'wealth effect' led by surge in global asset prices. Real wealth can only come through productive measures such as public investment and infrastructure spending. It is a big question mark as to when central banks will finally realize this. At some point in time, such policies are bound to result in a crisis of bigger proportions. And because the rise in asset prices rests on shaky grounds, Bill Gross opines that investors need to be prepared for the likelihood of a halt in asset appreciation in the future.

While India may indeed stack up favorably to much of the funny economics that is going on in most of the developed world, make no mistake, we have our own set of demons to battle too. The Economist points out in a recent report that Indian firms are heavier borrowers, measured by debt to equity ratios, than those in most other emerging markets.

If this is the case, then one of our biggest worries should be to do with how our banks will be able to fund fresh capital expenditure plans of companies. With so many projects in the infrastructure, power and metal sectors being rife with problems, Credit Suisse estimates that it has put about US$ 40 bn of debt at risk.

It is further estimated that Indian banks would need another US$ 40 bn of fresh capital by 2018 to comply with international regulations. But with the gaping hole left by the rise in bad debts, this is going to be a herculean task indeed. Under such circumstances, banks being capitalized well enough for them to be able to fund India's ambitions of higher GDP growth rates is going to be quite a challenge over the next few years.

 Chart of the day
The government is planning to form a committee within the next two weeks which will comprise bankers, aviation experts and technocrats to help turn around Air India. It will also consider whether to privatize the airline or not. Indeed, some big names are being roped in to be part of this committee. A report in the Mint newspaper points out that the mandate of the committee will likely be to look at making the airline better by cutting costs and increasing revenues before it is privatized.

Would this be the right way of going about things? No we would say. For this is not the first attempt to turn around Air India - an endeavor that has had a terrible track record. We believe that the government must straightaway start working on ways and means of privatizing Air India with no delay whatsoever. Why? It is no secret that government run companies tend to be much less efficient when it comes to a comparison with privately run companies. And while this is usually not that big a problem, the reason it has become such a big predicament in the case of Air India is because the airline industry is one of the most difficult industries in the history of capitalism.

Estimates peg that every year the government has been pumping in Rs 60 bn to keep the airline flying, which the latter then promptly goes ahead and burns all of. We see absolutely no hope for the government to be able to do anything constructive in an industry so brutal. The ideal solution, perhaps the only solution, is an immediate privatization of the airline we reckon. Until that happens, taxpayer money will continue to burn.

To give you a glimpse of just how bad this industry can be for the owners of businesses in it, we present to you today a chart of the return on assets (ROA) for the airline industry over the last decade.

10 years down the drain for airline owners

The Indian stock markets were trading close to the dotted line through the day today. At the time of writing, the BSE-Sensex was trading marginally lower by about 30 points. Gains were largely seen in FMCG and realty stocks.

 Today's investing mantra
"Price is what you pay. Value is what you get." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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7 Responses to "Most of the world, except India, is Japanese now!"

RV Govind

Dec 7, 2014

By keeping interest rates high, Government is keeping its own industry in deep distress. The only "industry" that makes money is the banks. All of us know what your tie clad banker delivers for you.....zilch. Banks take money from one hand, lend it to another, make some 7% in the bargain (NIM = 7% - "expenses).
The Governmemt, in collusion with the most profound RBI, is decapitating the nation and industry. No wonder all infra projects are in doldrums. And now Govt is talking about "development" projects getting funds at low rates. Why can the Government not have fixed bank rates for all, instead of constantly fiddling with "sectorwise" rates and so on? Remember, he Government is funded by all of us, the individual gets the worst deal out of all this. They take money from us, lend it, to say, to ICICI bank at 8% (repo rate), and the bank charges 14% plus "charges (and pays the Government again too through taxes). How is this different from the predatory Pathan money lenders of yesteryear?


Prakash Basrur

Dec 6, 2014

Since 1970 "Finance" has dominated over "Production" to such an extent that the enthusiasm of engineers has diminished to the lowest level ! In fact brilliant engineers migrated to MBA(Finance) in hoards ! Also , as far as India is concerned , the other reason for this downfall was the dominance of workers' labour unions on the shop floors ! Together the above two causes reduced the "Productivity" in the manufacturing sector of India is very low and so the "core" sector has suffered greatly in terms of efficiency and quality ! The oft repeated saying that "without marketing & finance production cannot survive" has boomranged on the industry ! After all both Marketing & Finance are the "outer covers" of the "core real economy" of the "Production" sector and if the latter suffers due to lack of incremental productivity growth then any amount of brilliant "Marketing" or "Financial Modelling" will not help ! Both Japan & China have suffered the same fate ! Both economies were built up on their "Production" strengh developed between 1945 and 1970 but then the "Finance" & "Marketing" , which was built on top of their strong "Production" bases , had its dominance from 1970 onwards ! Germany is a good example of its well known "strong quality products" and proportionate "marketing & finance" to add to it ! There was no exaggeration of "financial modelling" sitting on top of the German "core sector" and one can see how robust German economy is !



Dec 5, 2014

What applies to the western world will not apply much to India due to demographic difference. West has a huge problem of aging so has China and Japan. QE will succeed partially. QE is like a drug an addicted person takes. Every time he needs a higher dose to get the same level of hype.
India has only 50 per cent chance of succeeding as pera study. we are a complex country like none other. But India slightly better placed than many western countries mainly due to its young population. But we have to be careful and not promise moon to the people like it has been done by Modi.


abhay dixit

Dec 5, 2014

The bigger question is what will RBI do if Rupee starts appreciating? How will RBI fight the currency war?


Shrinivas Moghe

Dec 5, 2014

Perhaps yes! India has a distinct advantage of having its own strong manufacturing and consumer sector. Many communities from India have been of enterprising nature. Creation of Capital, followed by production, and various products being sold and consumed by the people of our country, forms a strong base of our economy. Risk taking and shock absorbing nature of our people is unmatched. A well organised SSI sector has proved to be a back bone of our ability to remain unaffected by global disturbance. However, we have to develop a strong mechanism to curb formation of new NPA accounts, to ensure efficient use of our every resource.
Shrinivas Moghe


Mukesh Kale

Dec 5, 2014

The consumption mode and the growth defined in monetary terms has failed severely, all it could do was make the banks stronger. With a dozen monetarists having won the Nobel, may be in waiting is a guy theorizing virtues of negative interest rates. Because, monetarism is still an experiment.

India could have been Japanese if INC would have been in power. But BJP has own ideas, strong and almost isolatedly Nationalitic, and may not blindly follow western model.Since they view India as unique in their perspective, India won't go Japanese. I think BJP are Right Wing Communists.



Dec 5, 2014

India went Japanese first. In the last 2 years the rupee depreciated from 45 to the US$ to 68 and only after that it has appreciated to 62 levels. NPL's are increasing in India and growth is not showing any pick up even after 6 months of Modi Govt. Investment cycle is not showing signs of revival.Current account deficit is rising even after imposing 10% duty on gold.let us see what is on offer in the Budget? expectations are very high from the new high as they can be. if they are not met in the budget then we can see Sensex crash by 5,000 points and then we will realise that we went japanese first.

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