[Kyoto, Japan] – I think I hear the sounds of helicopter engines warming up in Tokyo.
Newly elected 2nd time Prime Minister Shinzo Abe has officially tapped Haruhiko Kuroda as the next head of the Bank of Japan and the financial markets here seem quite pleased.
Since rumours of his nomination surfaced in conjunction with Shinzo Abe’s election campaign last November, the Nikkei has risen nearly 30%. But the Nikkei’s rise is based on little more than hope and ‘Abenomics’ – which is not unlike US markets that have risen with each new infusion of Bernanke Bucks.
Unfortunately, disappointment is the more likely outcome when reality sets in.
It’s not that there is anything wrong with Kuroda-san. He’s aggressive and has a solid track record as president of the Asian Development Bank. Like many here he wants to ease monetary policy even further to stimulate the Japanese economy out of the hole it’s dug for itself over the past 23 years.
I just question what ‘else’ he possibly can do to fix it.
Even More Stimulus for the Japanese Economy
Interest rates, which are a primary monetary policy tool here like they are in the United States and Europe, are already staggeringly low with benchmark 10- year rates at 0.678%, according to the Ministry of Finance’s website. Kuroda can’t take them much lower. Zero is still zero any way you cut it.
Like a long truck backed into a tight alley, he’s got very few options at his disposal.
Speaking of which, Abe made a big deal out of setting higher inflation rates on the campaign trail last year. Not surprisingly, the Bank of Japan acquiesced in a 7-to-2 vote to double the official inflation target to 2% up from 1%.
Considering the bank’s official inflation target for 2014 is 0.9%, and the Japanese economy has been unable to hit even 1% despite 23 long years of trying and 8 to 10 failed stimulus plans (depending on how you count them), this is a big deal made all the more critical on the heels of three straight quarters of economic contraction.
Further, as my colleague Martin Hutchinson recently observed, moving the needle to 2% would require a massive bond purchase scheme of about $1.2 trillion by January 2014, plus another $150 billion per month after that. Bernanke’s madcap plans are presently running $85 billion a month, to put that figure into context.
As Martin points out, ‘that’s nearly twice the size of Ben Bernanke’s stimulus program for the United States, and Japan’s economy is only one-third the size of the US economy.’
Plus, if interest rates actually increase by as little as 2%, the Japanese economy has another problem. The nation will have to spend its entire current budget servicing debt. Its entire budget.
There’s also been talk of Kuroda buying so-called ‘exotics’, like gold, corporate bonds and various ETFs. He is, after all, known for thinking outside the box, but I think he’s unlikely to get the kind of support needed here to pull that off.
Besides, even if he does, there simply isn’t the kind of liquidity he needs in the global market to absorb Japan’s purchases without sending prices haywire.
Kuroda could also decide to purchase foreign currency bonds. However, in doing so he risks the unthinkable – a 1930s style currency war that would sweep through global markets faster than one of Berlusconi’s so-called bunga-bunga parties.
Following a Dangerous Path
I believe, though, that Kuroda will do his best to steer clear of the more radical solutions being proposed even though they do potentially address the biggest thorn in his economic side – deep structural imbalances in everything from demographics to productivity.
For example, Seiko Noda, a Japanese legislator who’s served since 1993 and in several cabinet level positions, recently suggested banning abortions as a means of improving the birth rate and raising a productive workforce.
That might strike you as extreme, but she’s not kidding and she’s not a fringe lunatic. The Japanese have one of the world’s lowest birthrates, and it’s placing serious strains on the financial system at a time when Japan literally can’t afford to have this happen.
As I have noted many times previously in Money Morning, this translates into a decreasing pool of productive, taxpaying workers while simultaneously draining both health care and retirement programs, further decreasing productivity and hampering recovery efforts.
Taro Aso, Japan’s Finance Minister who also serves as Deputy Prime Minister, stands at the other end of the spectrum. He drew fire recently for suggesting that Japanese seniors should hurry up and die.
Callous? You bet, at least to Western ears, but he’s not that far off either, numerically speaking and human costs aside.
Seniors make up more than 25% of Japan’s population and the number of ‘silvers’ is increasing dramatically. Estimates suggest that the number of seniors will outnumber those 15 and younger 4 to 1 in less than 20 years.
For investors, lighten up on Japanese companies, using each rally to move up trailing stops and harvest winners. I don’t believe Kuroda is going to be able to achieve anything markedly different from his predecessors despite lots of big talk and aggressive posturing.
That means somebody is going to be left holding the bag: don’t let it be you.
There is one final thought, albeit a very disturbing one – what’s happening in Japan now is a look into the USA’s in the not-too-distant future.
Our leaders would be wise to study what’s happening here very carefully or risk subjecting the US to the same kind of ‘recovery’ that’s plagued Japan’s economy for the last 23 years.
Keith Fitz-Gerald
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)
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