Skip to comments.Japan taking big gamble with QE program
Posted on 06/08/2013 9:41:04 PM PDT by TexGrill
Responding to a decade of depressed consumer demand, Haruhiko Kuroda, governor of the Bank of Japan, announced this spring a program of quantitative easing of about $1.4 trillion by 2014 to boost the island nation's economy.
The amount followed and even exceeded the relative size of Ben Bernanke's prior QE for the U.S. economy.
The Japanese Yen, along with the euro, is a secondary international reserve currency held by major investors including central banks as a form of risk diversification away from dollars. There is little doubt that if Kuroda's gamble fails, it will have major international repercussions, possibly heralding a global currency crisis.
Recent volatility in Japanese financial markets indicates growing concern.
Japan emerged from Word War II economically broken. Like Germany, Japan received reconstruction aid from the Allied powers. Armed with a high, Germanic work ethic and preparedness to embrace modern technology, Japan's economy became second only to that of the United States.
Unlike Germany, however, Japan's politicians shared with the Allied powers a Keynesian belief in public debt. As a result, Japan enjoyed phenomenal economic success in the 1960s and early 1970s. That burst in the early 1990s, leading to a decade of economic stagnation, strangely similar to that which infected the United States and European economies about a decade later.
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The effects of their QE are various bubbles that will burst in some order, maybe together, but probably not. The first bubble is foreign speculation using Japanese credit which is taking place in various economies that are mostly marginal. The basic idea is that the main goal of the QE is to depress the value of the Yen. When the Yen looks as though it has reached bottom (a highly subjective decision point) the money will flood back into the Yen which will pop the various foreign investment bubbles. The Yen will rise and the Japanese economic outlook will fall.
The second bubble kicks in as the Yen drops, The QE will have hijacked the normal pricing of default and inflation risk in Japanese sovereign debt. Their debt ratios are significantly higher than ours, their demographics are poor, and their ability to maintain their social spending while paying back their bonds is questionable. That bubble, overpricing of debt, can only collapse when interest rates are allowed to float freely.
We have created that latter bubble to a larger extent here. Our ability to pay future entitlements along with our debt principle (or even the interest) is questionable. So Bernanke has painted himself into a corner. There is no way he can stop buying US debt. There is also no way he can keep buying it without massive inflation. Sooner or later he will have to decide and then we will default probably with some inflation first. The Japanese will end up in the same situation. The longer we and they pursue these insane policies the worse the outcome will be.
In the short term, the problem is unemployment. so long as there is unemployment, wage inflation is very low or nonexistent. Wage inflation is required to produce the general and theoretically manageable inflation rate desired.
Manageable inflation that will devalue at a desired rate is not massive inflation . Theory and practice are not the same however.
I don’t see these low rates leading to greater employment. I get refinance offers on a regular basis from Citiibank. I took one about a year ago, but I still get more. Did that lead to greater employment? I doubt it. Also the carry trade of cheap dollars to shaky economies does not lead to lasting strength and imports from the US. They go on a spending binge and when it is over they are worse off than before. Binge economics died in 2007-8 and it’s not coming back until rates go up and the currency can be relied upon. The only way I would invest in a small business right now (mine or someone else’s) is to have some confidence that my money isn’t being undermined while it is tied up.
Don`t see it as a gamble as much as a forced entry into the currency war, aka WW III, started by obama/soetoro.