The Bear’s Lair: Japan Reaching The End Of The Road

The Bank of Japan last week capped the yield on Japan Government Bonds at zero, thus allowing it to increase bond purchases beyond the current enormous amount if yields rise. Prime minister Shinzo Abe has begged Britain to minimize the effect of its “Brexit” from the European Union, and has begged the U.S. Congress to ratify the Trans-Pacific Partnership treaty. When you look at the statistics of Japan’s economy, one thing becomes abundantly clear: Japan is now very near the point at which the whole house of cards collapses. This Gotterdammerung of Keynesianism will be fun to watch – until it affects the rest of the world.

There are marginal signs that Abe may attempt to shake up the Japanese labor market, though his main recent initiative is yet another “stimulus” program of public spending. At this point however it is too late. Abe has been in power for almost four years, with repeated election victories, and at this point the markets don’t believe he will accomplish anything. The yen that he has tried to weaken has strengthened by 25%, from 125 to the dollar in June last year to 100 now. The Nikkei 225 stock index is down 20% in the past year, at a time that other world stock markets have been generally strong. Japanese prices have declined by 0.4% in the year to July 2016, while the Bank of Japan has been printing over a trillion dollars trying to push inflation up to 2%. The Japanese government is expected to run a budget deficit of 5% of GDP in 2016 in spite of record low interest rates; that will only add further to the country’s grossly excessive debt.

Most ominous Japanese productivity, which held up remarkably well in the long quasi-recession from 1990 to 2007, beating U.S. productivity over that period, is down 2.4% in the past year. That’s an extraordinary result. In spite of continuing technological innovation, a legendarily diligent and well-educated workforce, and an abundance, even a superabundance of cheap capital, Japan is actually able to produce 2.4% less per unit of labor in July 2016 than it was in July 2015. At that rate, by 2057 Japan would be entirely unable to produce anything at all, but would simply exist in a stasis, its workers’ hands poised forever stationary next to the machine tools.

Good God, how many decades is it going to take for Japanese policymakers to realize that Maynard Keynes was an incompetent charlatan? Must we really coat Japanese factories in eternal permafrost before their governments abandon this destructive mania?

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere).

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