Investment Contrarians

Money Printing: Is it Taking Over the World?

By for Investment Contrarians |

Money PrintingWith the lack of economic growth around the world, more nations are looking at expanding their monetary policy strategies in an effort to kick-start their economies. The latest country showing a decrease in economic growth is Japan.

Reports out of Tokyo indicate that economic growth, as measured by the country’s gross domestic product (GDP), declined at an annual rate of 3.5% in the third quarter. This follows a revised second-quarter decline in economic growth by 0.1%, indicating the nation is in a recession. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)

An important date for Japan is December 16, which is when the next election for that nation will be held. The leader of the main opposition party in Japan, Shinzo Abe, currently leading in the polls, has repeatedly stated that if elected, he will demand a massive increase in monetary policy to try to stimulate Japan’s economic growth. He has called for unlimited monetary policy easing, meaning endless money printing. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)

Many companies in Japan have been hurt by the country’s strong currency, the yen; increasing monetary policy would be a step toward decreasing the value of the currency. This is yet another example of the race to the bottom in currency devaluations around the world.

Japan has been mired with decades of deflation. While many people fear inflation, deflation is extremely dangerous. Many are calling for the Bank of Japan’s inflation targets to be increased from one percent to the range of two to three percent. In either case, much more monetary policy action will be required to generate inflation and erode some of the value in the Japanese currency.

Japan is a good lesson in how generating economic growth purely from monetary policy is extremely difficult. Japan has had many issues in trying to generate economic growth over the past several decades, one of which was the Bank of Japan’s enactment of monetary policy that was too weak and ineffective. This has led to poor, and even negative, economic growth over the past two decades, as deflation has set in.

The current U.S. Federal Reserve Chairman, Ben Bernanke, has studied the Japanese problem and is trying to prevent such a disastrous outcome for America. The problem with his monetary policy initiatives is that perhaps too much is being done in attempting to kick-start economic growth, which might end up hampering long-term GDP potential due to over-stimulation, causing unintended consequences down the road.

Regardless of what one thinks of the prospects for Japanese economic growth in 2013, if the election ends with Abe becoming prime minister, I would look for his nomination for a new Bank of Japan Governor who is extremely concerned with increasing monetary policy easing, which should put downward pressure on the Japanese yen.

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