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Japan’s policymakers are having a terrible time of late. The economy remains blighted by low growth and deflationary pressures which means that the country’s extraordinarily large debt mountain continues to grow. While the US has the highest level of government debt in absolute terms at just over $19 trillion, this represents around 108% of GDP. In contrast, Japan’s public debt to GDP is running at over 240%.

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The trouble for Japan is that it just can’t manage to lift inflation towards its 2% target or boost growth by any appreciable degree. This means that the debt situation can only deteriorate, particularly given the country’s dire demographics. Japan has an ageing population as years of a declining birth rate and an antipathy towards immigration means that an increasing number of pensioners are being supported by a declining percentage of people of working age.

Prime Minister Shinzo Abe was elected on a promise to turn the country’s fortunes around. He introduced Abenomics soon after coming to power back in December 2012. This was the “three arrows” of fiscal stimulus, monetary easing and structural reform. These measures should have gone a long way to weakening the yen which would ensure that Japanese exporters remained competitive. And initially they did. The USDJPY rose from around 80.00 at the end of 2012 to 125.00 by the summer of 2015. Unfortunately, the yen has strengthened ever since and now the USDJPY is hovering around 101.00

At the end of last month the Bank of Japan announced another round of monetary stimulus while Mr Abe signalled the government’s intention to provide 28 trillion yen ($275 billion) of fiscal spending. Unfortunately, the markets were unimpressed believing that both the BOJ and Mr Abe could have come up with more. As can be seen from the chart above, the USDJPY continues to head lower as the yen strengthens.

The trouble is that there is a downside to unleashing large dollops of monetary and fiscal stimulus. Debt has to be repaid (or inflated away) but there’s always a danger it won’t work. Certainly, the experience of Japan since 2001 (when it first adopted quantitative easing) and everyone else since the financial crisis, suggests this danger is very real. This is one reason why the chatter about “Helicopter Money” (where the central bank directly monetises government spending) has died down to some extent.

So, it looks possible that the USDJPY could fall further – despite all the speculation of Fed tightening this year. This would be disastrous for Japan’s exporters. So the closer it gets to 100, the more speculation there will be of unilateral intervention to push the yen down again.

David: The trouble is that there is a downside to unleashing large dollops of monetary and fiscal stimulus.

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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