Kamikaze Finance

Nov 20, 2014

New York, New York

Dear Diary,

No action to speak of in US markets yesterday.

So, let us turn to what is bound to be the funniest...and scariest...story in the financial world.

Once again, our hat is off to the stalwart, intrepid...and perhaps half-mad...Japanese. They are going where no respectable economist would go...no responsible public policy should go...and no one with his wits about him would want to go.

We begin with the latest news: Nippon is in a slump. The numbers from the 3rd quarter confirm that the feared 'triple dip' recession is here, with output falling at a 1.6% annual rate, rather than rising at the 2.2% rate that was the consensus forecast.

This is bad news for Shinzo Abe's bold program. He lets fly his arrows. They end up sticking in his own derriere. The idea, if you can call it that, was to stimulate inflation, growth, and job creation. How? Easy. You print more money!

For the last 20 years, the Japanese government has been borrowing the retirement savings of its long suffering salarymen and spending the money on bailouts and boondoggles, often involving vast amounts of concrete that now covers half the country.

--- Advertisement ---
LIVE NOW: The Wealth Building Master Series With Mark Ford

Don't Miss It. Join Now!

(Remember, you also get to claim FREE gift worth Rs 872!)
---------------------------


If that weren't enough - and it obviously wasn't - the Bank of Japan invented QE to add some monetarysteel to the fiscal cement. The Bank of Japan became the largest buyer of the government's debt.

What did all this feverish building get the Japanese people - apart from 5 times as much government debt? Absolutely nothing. The index of Japanese industrial output was at 96.8 in 1989. Today, it is still at 96.8. In other words, all this stimulus has stimulated not a single electron, proton or neutron. The real economy has not grown by a single yen. Nor has a single new job been created.

Nothing succeeds like failure. Per acre, no nation has ever been abused by so much monetary and fiscal failure. You'd think the Japanese would have had enough of it by now. Instead, like a woozy customer just before closing time, they call out for more. Or, at least they elect Shinzo Abe who promises more. Especially more QE. Instead of buying a piddly 65% of Japanese government debt, the BOJ will buy all of it.

We hold our breath. We reach for the back of a chair to steady our staggered legs. Could we have read that right? Yes, it was widely reported that the BOJ may buy up all Japan's government bonds, if necessary.

    And now the scam comes into focus. The real purpose is not to stimulate the economy - it's too late for that. The hidden agenda is to bring down Japan's enormous government debt - nearly 250% of GDP -- and stiff retirees and other bondholders in the process.
Abe's plan was to announce an ambitious program of foolhardy meddling. This, he reasoned, would send the yen down...and make Japanese exports more attractive on world markets. It's an old trick; Japan would gain market share by undermining its currency.

But it didn't work. Output is falling. Household earnings are dropping too. Japan doesn't just export; it imports too. The yen dropped 35%. It may have made Japanese labor cheaper, but it made it more expensive for domestic manufacturers to import oil and other raw materials. And it reduced the purchasing power of the typical Japanese household too. Real household income has fallen 6% since the beginning of 2012

In the past, Japan has relied on two things to finance its deficits - the profitability of its industries and the thriftiness of its savers. But the fall of the yen increased the costs of imports so much that the trade surplus has turned into a large trade deficit. Instead of a 5 trillion yen surplus, in 2010, Japan has an 11 trillion yen deficit in 2014. And instead of a 10% savings rate the nation enjoyed in 1990, it now has a 3% savings rate, sinking towards zero.

Good work, Abe.

But that's not the end of the story. Now, there is no hope of growing the economy faster than the debt. Tax receipts have been flat for 20 years, while the population ages and shrinks. And now, with a trade deficit and disappearing savings, Japan can only hope to cut its debt down by inflating it away.

Stick with the Trade of the Decade: buy Japanese equities; sell Japanese bonds.

And stay tuned... the Kamikaze finance story is just getting started.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Get 'India's Big Government' at Just Rs 199 Now October 18, 2017
Vivek's latest book is now available at a rare discount. Grab a copy now.
Our Plan to Save the Ranch October 18, 2017
How to increase fertility in the kingdom of cows.
Nobody Honks in Bali - Lessons for Indian Tourism October 17, 2017
Things India can learn to promote tourism from this small island.
We Rode Out... Unarmed October 17, 2017
Money is the tape measure for the carpenter economy.

Equitymaster requests your view! Post a comment on "Kamikaze Finance". Click here!