Investment Contrarians

Can America Learn Important Lessons from the Japanese Economy?

By for Investment Contrarians |

Can America Learn Important Lessons from the Japanese EconomyThis weekend, I will have my eyes turned toward Japan and the Japanese economy, as the nation holds its elections on Sunday. The reason for my interest is that the Liberal Democratic Party, led by Shinzo Abe, has repeatedly called for an ultra-hyper monetary stimulus package to be used in attempting to kick-start economic growth within the Japanese economy.

The Japanese economy has been mired with lackluster economic growth for decades, even though monetary stimulus has been applied. The problem, according to the Liberal Democratic Party, is that monetary stimulus has been too weak, and the tap needs to be opened to flood the system by printing more of its currency, the yen.

However, not all economists believe this monetary stimulus plan will lead the Japanese economy to higher economic growth levels in the future. Stephen Roach, the esteemed Yale University senior fellow, stated on CNBC, “I don’t think it’s going to work. QE (quantitative easing) is good at containing the downside, addressing crisis and disruptive markets, but it definitely doesn’t give you traction in regenerating demand in the real economy.” (Source: “Aggressive Easing Wrong Medicine for Japan: Roach,” CNBC, December 13, 2012.)

It’s easy to fall into the habit of looking toward easy monetary stimulus as a way to kick-start economic growth. This is one problem with America’s crop of politicians who are expecting the Federal Reserve to continue monetary stimulus as a way of generating economic growth, as opposed to applying real structural reforms to the economy.

At the very least, America has made some improvements in its economy over the last five years. Banks are far better capitalized, and many firms have restructured. In fact, generally speaking, U.S. corporations have never been stronger, with record levels of cash and large profit margins.

The problem for America is that its political system is causing so much uncertainty that businesses can’t forecast what the future will bring. For any businessperson, future changes to regulations and taxes are extremely important when developing a business plan.

For the Japanese economy, while economic growth would be boosted by a weaker yen, monetary stimulus will do nothing to restructure its corporations and make the necessary reforms to the Japanese economy that are needed for long-term economic growth.

Once again, politicians are pandering to the public for votes instead of making difficult but much-needed structural reforms. The latest Bank of Japan “tankan” survey shows just how pessimistic businesses are about the future of the Japanese economy. Even with this leading politician calling for increased monetary stimulus to generate economic growth for the Japanese economy, the tankan business sentiment survey decreased to -12 from negative three last month, which indicates gloom and doubt for the fourth quarter. (Source: “Japan tankan survey shows sentiment worsening,” MarketWatch, December 13, 2012.)

While export-oriented businesses will favor additional monetary stimulus, long-term economic growth for the Japanese economy needs to start with structural reforms. However, the current global political climate is one in which voters want quick fixes for every problem.

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