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Japan Shows QE Exit Is Easier Said Than Done
It's likely that Japan can do little more than persist in the policies that have failed it for more than 15 years.
Howard L. Simons     

Japan's long-running experience with near-0% interest rates, lackluster economic growth, dismal long-term stock market returns punctuated by extravaganzas such as 2013's 28.23% return in USD terms, and spectacularly low long-term interest rates accompanied by breathtakingly negative short-term real interest rates poses the question as to when it all will be over.​
 
Are Those Real?
 
First, let's take a look at those negative rates and how they have changed so far in 2014.  Even though these rates are far more negative now than they were at the start of the year, a surefire sign that the supply of yen has been growing faster than the demand therefor, the yen itself has gained 3.82% against the dollar and 6.9% against the Chinese yuan.  It is also a surefire sign Japanese investors have increased their demand for cash balances -- a disinflationary development.
 

 
Eleven Years After

Those very same risk-averse investors are willing to pay the Japanese government for the privilege of lending it money.  Remember, Japan's ratio of debt to GDP is approaching 250%, but once those numbers cross 100%, they become increasingly meaningless.  I have to marvel at US deficit scolds' continuous warning that our debt will have to end in ruinous inflation and higher interest rates when Japan's public debt has led to persistent deflationary pressures and those negative real rates noted above. Lost in translation, I guess.
 
If we map 10-year Japanese government bond yields since Japan first went to its zero interest rate policy (ZIRP) in February 1999, we see how they moved down to 43.8 basis points in June 2003, doubled from that level by July 2003, and after several years of meandering, entered their present downtrend in the second half of 2008.  They are trading just under 60 basis points as I write.
 

 
Given this environment, can Japan do anything other than persist in the policies that have failed it for more than 15 years?  I doubt it; Japan tried to renormalize short-term rates in the spring of 2006 only to back away as yen carry trades around the world unwound.  If the yen is rising in the face of falling real rates now, what would it do if the supply of yen started to diminish?  And if growth is weak now, what would it look like if the government's debt service costs started to rise?
 
I think Japan is trapped. Worse, I think we have wandered into the same tar pit and will encounter the same problems if and when we start to renormalize interest rates.
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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Japan Shows QE Exit Is Easier Said Than Done
It's likely that Japan can do little more than persist in the policies that have failed it for more than 15 years.
Howard L. Simons     

Japan's long-running experience with near-0% interest rates, lackluster economic growth, dismal long-term stock market returns punctuated by extravaganzas such as 2013's 28.23% return in USD terms, and spectacularly low long-term interest rates accompanied by breathtakingly negative short-term real interest rates poses the question as to when it all will be over.​
 
Are Those Real?
 
First, let's take a look at those negative rates and how they have changed so far in 2014.  Even though these rates are far more negative now than they were at the start of the year, a surefire sign that the supply of yen has been growing faster than the demand therefor, the yen itself has gained 3.82% against the dollar and 6.9% against the Chinese yuan.  It is also a surefire sign Japanese investors have increased their demand for cash balances -- a disinflationary development.
 

 
Eleven Years After

Those very same risk-averse investors are willing to pay the Japanese government for the privilege of lending it money.  Remember, Japan's ratio of debt to GDP is approaching 250%, but once those numbers cross 100%, they become increasingly meaningless.  I have to marvel at US deficit scolds' continuous warning that our debt will have to end in ruinous inflation and higher interest rates when Japan's public debt has led to persistent deflationary pressures and those negative real rates noted above. Lost in translation, I guess.
 
If we map 10-year Japanese government bond yields since Japan first went to its zero interest rate policy (ZIRP) in February 1999, we see how they moved down to 43.8 basis points in June 2003, doubled from that level by July 2003, and after several years of meandering, entered their present downtrend in the second half of 2008.  They are trading just under 60 basis points as I write.
 

 
Given this environment, can Japan do anything other than persist in the policies that have failed it for more than 15 years?  I doubt it; Japan tried to renormalize short-term rates in the spring of 2006 only to back away as yen carry trades around the world unwound.  If the yen is rising in the face of falling real rates now, what would it do if the supply of yen started to diminish?  And if growth is weak now, what would it look like if the government's debt service costs started to rise?
 
I think Japan is trapped. Worse, I think we have wandered into the same tar pit and will encounter the same problems if and when we start to renormalize interest rates.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Japan Shows QE Exit Is Easier Said Than Done
It's likely that Japan can do little more than persist in the policies that have failed it for more than 15 years.
Howard L. Simons     

Japan's long-running experience with near-0% interest rates, lackluster economic growth, dismal long-term stock market returns punctuated by extravaganzas such as 2013's 28.23% return in USD terms, and spectacularly low long-term interest rates accompanied by breathtakingly negative short-term real interest rates poses the question as to when it all will be over.​
 
Are Those Real?
 
First, let's take a look at those negative rates and how they have changed so far in 2014.  Even though these rates are far more negative now than they were at the start of the year, a surefire sign that the supply of yen has been growing faster than the demand therefor, the yen itself has gained 3.82% against the dollar and 6.9% against the Chinese yuan.  It is also a surefire sign Japanese investors have increased their demand for cash balances -- a disinflationary development.
 

 
Eleven Years After

Those very same risk-averse investors are willing to pay the Japanese government for the privilege of lending it money.  Remember, Japan's ratio of debt to GDP is approaching 250%, but once those numbers cross 100%, they become increasingly meaningless.  I have to marvel at US deficit scolds' continuous warning that our debt will have to end in ruinous inflation and higher interest rates when Japan's public debt has led to persistent deflationary pressures and those negative real rates noted above. Lost in translation, I guess.
 
If we map 10-year Japanese government bond yields since Japan first went to its zero interest rate policy (ZIRP) in February 1999, we see how they moved down to 43.8 basis points in June 2003, doubled from that level by July 2003, and after several years of meandering, entered their present downtrend in the second half of 2008.  They are trading just under 60 basis points as I write.
 

 
Given this environment, can Japan do anything other than persist in the policies that have failed it for more than 15 years?  I doubt it; Japan tried to renormalize short-term rates in the spring of 2006 only to back away as yen carry trades around the world unwound.  If the yen is rising in the face of falling real rates now, what would it do if the supply of yen started to diminish?  And if growth is weak now, what would it look like if the government's debt service costs started to rise?
 
I think Japan is trapped. Worse, I think we have wandered into the same tar pit and will encounter the same problems if and when we start to renormalize interest rates.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
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