Investment Contrarians

Why Japan’s Aggressive Money Tree Is Disastrous

By for Investment Contrarians |

Japan’s Aggressive Money Tree Is DisastrousThe world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!

And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.

Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.

I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.

Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.

The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise of more spending.

I remain negative on Japan. The country’s gross domestic product (GDP) growth was a surprise 0.2% in the fourth quarter, following an initial estimate that called for a contraction of 0.4%, according to the country’s Cabinet Office. The result lifted the Japanese market and drove optimism toward the possibility of the country getting out of its long coma. While this could happen, it hasn’t in the past.

Japan could escape from its economic dormancy, but it’s going to take plenty of money and a massive build up of national debt to achieve that goal. Just like in America, Japan will create an even worse national debt situation in order to save the day. The problem is that down the road, the offloading of the national debt and its associated issues will impact the country.

Imagine the massive national debt load to be created by Prime Minister Shinzo Abe’s stimulus strategy, which calls for $2.4 trillion over the next 10 years to try to drive Japan’s GDP growth. The problem is that just like America, Japan has no money in the coffers. The Bank of Japan will do the easy thing and print money, just like the Federal Reserve, the European Central Bank, and others. My concern is that Japan’s current national debt levels represent some of the highest in the world, and this is before the new stimulus. In 2011, Japan’s national debt as a percentage of GDP was a colossal 208.2%. (Source: International Monetary Fund, last accessed April 5, 2013.) The U.S. was at 102.9% in 2011. Greece is in between.

While I’m not calling for a financial Armageddon just yet, the continued use of printed money will not end up well. My advice: move your money to bonds and short stocks once interest rates begin to rise and the national debt situation becomes even more unmanageable.

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  • mike

    QE3 was the signal of the end

  • http://www.facebook.com/senn.landscapes Senn Landscapes

    I might suggest moving to another planet prior to the global financial meltdown…