News in Japan has been particularly grim. Industrial production has plummeted, exports are in free fall and banks are simply not lending as excess reserves pile up. As a result, Japanese share prices threaten to revisit lows that bring the country back to 1981 prices. Japan is in Depression. The question is what to do about it. Rates are already near zero. The answer that I believe will be found by Japanese policy makers is what is known in economic policy circles as quantitative easing, a hifalutin way of saying printing money.
One can see the implications of all this in a recent missive from the well-regarded Japan Economic Pulse where they say the BoJ will go unorthodox like the Fed has done and start funding companies directly instead of waiting for banks to supply the liquidity. That means buying up commercial paper and corporate bonds. Moreover, Japan Economic Pulse suggests that the government may want to buy shares in the market to prop up prices — and to eliminate writedowns by financial institutions which own those shares. (Japan’s fiscal year end is March and banks want to present a good face to the market when it comes time to show their numbers).
Now, I should add that the Federal Reserve and the Bank of England are both turning to the printing presses – although the Fed says it is focusing on the asset side of its balance sheet. And the ECB is now expected to follow suite – dragged kicking and screaming to this policy choice.
What are the likely implications? Here is my list:
- The Japanese Yen, which I saw going to 85 to the U.s. Dollar, may end up being a lot weaker than anticipated.
- We are seeing the makings of a competitive currency devaluation here. China is also a major player in this, being the Alpha producer of choice in Asia. I warned that I see the potential for unilateral protectionist actions if these types of activities continued.
- Underlying inflationary pressures are building worldwide. If you look at M2 in the U.S., it is exploding. The only reason we are not seeing inflation in the U.S. right now is deleveraging in the financial sector. The same is true in the U.K. and the Eurozone to differing degrees.
- This is a very bullish scenario for gold and commodities when reflation takes hold. As I have mentioned in the past, I expect deflation followed by high inflation when the economy turns.
- This is NOT a bullish scenario for government bonds. This is the major reason you won’t see me advocating buying treasuries here despite my belief they will go higher. Ultimately, treasuries are a bubble that will burst and there is a lot of downside risk in that trade given the factors enumerated above.
Those are my views here. Feel free to add your two cents.
Related articles
Tokyo shares end 2008 42% lower – BBC News
Toyota closes domestic factories for 11 days – Guardian
Japan: New auto sales plunge 23.3% in December, 6.5% for 2008 – Japan Economy News & Blog
China cuts rates for fifth time as Japan suffers record exports drop – Independent.ie
Mitsubishi UFJ to Book 288 Billion Yen Loss on Stocks – Bloomberg.com