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By Marin Hutchinson
For two years now, Japanese Prime Minister Shinzo Abe has been trying to stimulate the Japanese economy into growth, mostly by getting the Bank of Japan to print money on a truly epic scale through buying government bonds. His policy isn’t producing much growth, nor is it even re-kindling inflation (bizarrely, another policy objective).
But it is having one effect: it’s causing the yen to fall steadily against the dollar, from a peak of around 80 yen to the dollar two years ago to 121 yen to the dollar now. That has an important implication for our Pacific Wealth portfolio, and is why our Japanese holdings are concentrated entirely in exporters.
Japan’s main problem is excessive public spending. It embarked on a quarter of a century of witless Keynesian “stimulus” programs that have raised public spending from 30% of GDP to over 40%, and have left the country with the world’s largest public debt, at around 240% of GDP, edging out Greece for the title of most indebted nation. (By comparison, the U.S. is around 80%.)
Even this year, with Japan’s debt at truly dangerous levels, Abe proposed extra spending of some $30 billion in a supplemental budget.
The Economist magazine’s team of forecasters estimates Japan’s budget deficit this year at 6.9% of GDP, more than double the U.S. level and more than eight times the 0.8% real GDP growth the team estimates for Japan this year. Meanwhile the central bank is buying 80 trillion yen ($660 billion) of bonds annually, a “stimulus” more than double the Fed’s peak level of quantitative easing, in relation to the economy.
This will all end in a crash, but not yet. In the meantime, the one success of the Bank of Japan’s stimulus is in driving down the value of the yen. The yen decline will probably accelerate, especially if the Bank of Japan follows IMF advice and increases its “stimulus” bond buys further. With growth running around 1% annually, there’s not much to go for in Japan’s domestic economy, but the future is bright indeed for Japan’s exporters.
Abe’s policies probably won’t produce much growth in Japan, but the Bank of Japan’s huge monetary stimulus is likely to push the yen down further. Away from the government’s foolish policies, Japan still has about the best technological endowment in the world and a manufacturing capability that is second to none, so in buying Japanese exporters we are tapping into a truly superior economic sector.