Sunday, April 7, 2013

Adjusted For GDP, Japan's Stimulus Will Be Twice the Size of America's!

I just read some more alarm bell ringing over at Zerohedge. Please refer to "Protecting Yourself From Japanese Insanity":

Sayonara to Japan 

First to Japan. You've got to love mainstream media, investors and stockbrokers. The Japanese central bank's plans to end deflation have been widely greeted as having surpassed expectations. They're described as "bold", "inventive" and just what Japan needs after sitting on its hands for 20 years. Nowhere have I seen words such as "stupid", "insane" or "half-witted". Because anyone with a brain can tell you that Japan's plans will have terrible consequences, whether they succeed or not.  
First, let's look at what Japan intends to do:
  • It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets.
  • It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bondholdings to seven years, from the current three years. 
  • It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. More specifically, the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
  • The BoJ put a timeline of two years on its prior promise to achieve 2% inflation. 
To put this into some context, Japan's stimulus of US$81 billion a month compares to the U.S.' own US$85 billion program. But Japan's economy is much smaller than the U.S.. Adjusted for GDP, Japan's stimulus will be twice as large as America's. (Emphasis mine).

I am very pleased to see enough people really starting to get the message; we are heading for a disaster, folks. In the article above, though, the writer does not mention what happened right here in Japan the last time this sort of money printing and Keynesian nonsense was tried in the 1930s.

Look folks, it's common sense that we cannot create wealth out of thin air just by printing money; if we could, then why doesn't the government just print a million dollars and give it away to every citizen of the country? That should make us rich, right?

Well... It won't. Forget what the economists say; this is common sense. Anyway, as I said, the writer above forgets to mention what happened in Japan the last time this was tried. So, for that, I thought I'd reprint this past post in full for you to read again. Here you go!

Cyprus is the Opening Act for Japan's Coming Calamity: Government Debt to GDP in Japan is Now 245%!

I sit and read about the disaster befalling the people of Cyprus. I've been wondering when this is going to hit Japan. It will.

I was discussing this banking crisis and the tax on savers with my wife. It seems the Japanese are still firm believers in the sanctity of their savings in banks. 

I like taking my girlfriend to drink and see the flowers

I really wonder why they think this. It wasn't that long ago that the banks of Japan closed one day, and when they reopened, their money had been massively devalued. My wife even said to me that she remembers her grandfather telling her,

"One day the banks all closed and when they reopened, 100 yen was no longer worth 100 yen. It was worth 10 yen."

I gawk when my wife tells me this. I've heard this story from other older Japanese too. But still, the younger people today seem oblivious to what is coming. Savings in the bank seem sacred... (Even though the interest on those savings is some absurd rate of something around one-percent...)

The last time Japan had a "bank holiday" like Cyprus is having now - and many other countries are now considering - very bad things happened as a result of it.... One thing was a little incident folks do remember well until this day... You might have heard of it? It was called "The Second World War." 

Wikipedia says:

The Japanese economy shrank by 8% during 1929–31. Japan's Finance Minister Takahashi Korekiyo was the first to implement what have come to be identified as Keynesian economic policies: first, by large fiscal stimulus involving deficit spending; and second, by devaluing the currency. Takahashi used the Bank of Japan to sterilize the deficit spending and minimize resulting inflationary pressures. Econometric studies have identified the fiscal stimulus as especially effective.[67] 
(Effective? Ha! Keynesians editing Wikipedia! - Mike)

The devaluation of the currency had an immediate effect. Japanese textiles began to displace British textiles in export markets. The deficit spending proved to be most profound. The deficit spending went into the purchase of munitions for the armed forces. By 1933, Japan was already out of the depression. By 1934, Takahashi realized that the economy was in danger of overheating, and to avoid inflation, moved to reduce the deficit spending that went towards armaments and munitions.

This resulted in a strong and swift negative reaction from nationalists, especially those in the army, culminating in his assassination in the course of the February 26 Incident. This had a chilling effect on all civilian bureaucrats in the Japanese government. From 1934, the military's dominance of the government continued to grow. Instead of reducing deficit spending, the government introduced price controls and rationing schemes that reduced, but did not eliminate inflation, which would remain a problem until the end of World War II.
A few paragraphs above you can see where some nutcase wrote that the Keynesian economic policies were "effective." Yep. Real effective. You can read the results of these policies in the next paragraphs: deficit spending on munitions resulting in a 'boom bust cycle' that lead to a coup de etat and, eventually, World War Two. Yeah. Real effective. 

I am of the impression that things are really falling apart and going to hell in a handbasket here in Japan. 
I wrote about that in Japan: The End of an Era and last year in Here's Why A Weak Yen Will Destroy Japan:  
The clowns in the LDP think a weak yen will rescue Japan's faltering economy by making exports cheaper... Sounds good... That is, if there anyone to buy Japanese goods.  I fear that the weaker yen will be the last straw in breaking the Japanese Economy. Here's my reasoning why... 

China and Japan are in a row over islands. Boom! Down goes exports to Japan's biggest trading partner. Please refer to the NY Times article, "Japan Trade Suffers as China Ties Deteriorate":

"Shipments to China, which is Japan's biggest trading partner, tumbled 14.1 per cent as demand dropped for Japan-branded products..."

Also refer to Japanese Car Sales Plunge Amid China Rage.

Europe is in no condition to be big spenders on anything as Euro states are already in deep recession.

The USA isn't in good shape either as it is in recession too and Japanese cars aren't selling well due to Fukushima and other issues.

Gee? So what will a weak yen certainly buy for Japan? Answer: How about a 10% increase across the board on energy imports?

Recent figures show Japan's trade deficit hitting new records. 
Japan's trade deficit in February jumped to ¥777.5 billion. Exports dropped "unexpectedly" by 2.9% from prior year, despite Abenomics. Imports surged 11.9%. Eighth monthly deficit in a row, worst since 1979... This year in January, the trade deficit hit a new record of ¥1.63 trillion, and now ¥777 billion.  
When things start to deteriorate, they begin to unravel quickly. Just this morning on ZeroHedge, I found a writer who makes my skepticism seem like I am the eternal optimist! 
Please refer to quotes from: Forget Cyprus, Japan is the Real Crisis:
Forget Cyprus. A much bigger story in the coming weeks and months will be in Japan, where one of the greatest economic experiments in the modern era is about to begin. A country where government debt even dwarfs those of Europe's crisis-ridden nations, Japan will attempt to inflate its way out of a 23-year deflationary spiral.

It's widely expected that the BoJ will expand its 101 trillion yen (US$1.06 trillion) asset buying program by more than 10 million yen. Also, it will start buying Japanese government bonds with remaining maturities of up to five years by scrapping the upper limit of three years by the end of April.

Why Japan will fail
The subtitle indicates where I stand on the matter. Given its over-indebtedness, Japan has few good options left. But the policies being pursued by Shinzo Abe will fast-forward a major debt and currency crisis. It's a matter of when, not if.

Government debt to GDP in Japan is now 245%, far higher than any other country. Total debt to GDP is 500%. Government expenditure to government revenue is a staggering 2000%. Meanwhile interest costs on government debt equal 25% of government revenue.

There's no way that Japan will ever repay this debt. It has two main options: either go through extraordinary pain by cutting back on government expenditure or print substantial money to inflate some of the debt away.
Japan is choosing the second option, as are most governments around the world. It would rather print money than cut spending and doom the economy to a substantial contraction. The choice to print money though will result in an even more painful and drawn-out outcome.

It's inevitable that the yen will fall further from here, potentially much further. I've previously said that the yen at 200 or 300 on the dollar would not surprise. This could prove optimistic.

It also seems inevitable that Japanese interest rates will rise and bonds will sell off. Yields have to rise to just 2% for interest costs on government debt to take up 80% of government revenue. The jig will be up well before that though.

Currency wars to begin in earnest
Talk of currency wars has been on the backburner for a few months. Expect that talk to heat up and become a reality as Japan ramps up stimulus in the next two weeks.

The likes of South Korea and Taiwan are already suffering from the sharp fall of the yen. They, and many others such as Germany and emerging countries, aren't going to sit by and watch their exporters get priced out of the market by the Japanese. They'll retaliate with currency depreciations of their own and the currency wars will be on in earnest. But the question is whether these countries will be able to keep up with a hyper-inflating Japan. I highly doubt it.

The yen at 200 ~ 300 per one US dollar? And "that could prove to be optimistic?" Wow! 
I've got two things to say about that. One is the February 26th Incident that was already mentioned in the Wikipedia reference earlier in this article. 
Specifically about the February 26 Incident, Wikipedia says:
The February 26 Incident (also known as the 2-26 Incident) was an attempted coup d'état in Japan on 26 February 1936. It was organized by a group of young Imperial Japanese Army (IJA) officers with the goal of purging the government and military leadership of their factional rivals and ideological opponents.
Although the rebels succeeded in assassinating several leading officials and in occupying the government center of Tokyo, they failed to assassinate Prime Minister Keisuke Okada or secure control of the Imperial Palace
Wikipedia also says about one of the factions involved in this coup:
The Kōdō-ha emphasized the importance of Japanese culture, spiritual purity over material quality, and the need to attack the Soviet Union 
There's that nasty talk about war again. 
And the second comment I want to make about this entire mess isn't really a comment, it is an observation and a fact. Here is a small 5 gram gold bar... In 2008, this 5 gram bar of gold sold for ¥8,900 yen (at today's rate, that is about $94 USD)... As of yesterday, March 23, 2013, it sold for ¥27,924 (about $295.68 USD). That's a 313% increase.

Today the Japanese yen and US dollar rate is at 94.5 yen to one dollar.
This isn't rocket science, folks. The Japanese government has publicly announced inflationary policies and actions to devalue the currency.
In 5 years, gold - priced in yen terms - has tripled*... Now, reading the above is there any reason to not expect that this sort of climb is unreasonable to expect over the next 5 years? If the amount of money doubles in the next year or so, isn't it reasonable to assume that the price of gold will do the same?

We are heading for some very serious troubles folks. Prepare yourself as best you can. 


Got Gold or Silver? Where to Buy Physical Gold or Silver in Tokyo or try what my friend Mark recommended:

Rob also chimes in and recommends these two shops: &

*Thanks to my friend, Jeremy Irwin


Anonymous said...

The people who really run the country (Keratsu/MITI/NIKKEI, BOJ, politicians) see bond issuance and money printing as a necessary means of feathering their own nest.

They view it as a necessary means of gaining, or at least maintaining global participation, the slackening of which would threaten to expose the economic, budgetary, and social ponzi schemes that are keeping the Japanese people sedated and pacified while they are being in turn impoverished, worn out, and gradually replaced.

Anonymous said...

Trading on the Japanese Bond Market has halted two days in a row for the first time in history. We could be witnessing the real-time collapse of a major industrial power's currency right in front of our faces. - Len W.

Marc Sheffner said...

"Trading on the Japanese Bond Market has halted two days in a row for the first time in history".

Len, where? When? Links? And why trading halted? Insufficient buyers?

Marc Sheffner said...

Oh, Mike's already written about it:
Japanese Yen to ¥200 ~ ¥300 to the US Dollar? The Slow Motion Destruction of the Japanese Yen and so has Zero Hedge:Japan Bond Market Halted for Second Day in a Row