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Japan’s Topix entered bear market territory primarily on concerns about the dismal U.S. jobs report, Europe’s debt crisis and China’s deepening slowdown.But Gary Shilling, president of A. Gary Shilling, said investors should be keeping an eye on Japan as well.
In a Bloomberg View column, Shilling said the 4.1 per cent Q1 GDP growth could be attributed to greater government spending, but that it wasn’t sustainable.
Shilling is worried about the Japanese economy because it is ‘monetizing debt’. The phrase is taboo among central bankers who think the practice of buying debt to help the government borrow is dangerous:
“More recently, the BOJ announced a 2 trillion-yen to 5.5 trillion-yen boost for its loan program for high-growth sectors, such as renewable energy, medical treatment and nursing care. The program, introduced in June 2010, will run until March 2014 and lend to private banks for one year at 0.1 per cent interest. As part of the total, the BOJ will offer 1 trillion yen in U.S. dollar-denominated loans.
…Clearly, the independent BOJ is acting in concert with the government to stimulate the economy, but some believe it’s also buying government securities to finance huge deficits. “Monetizing the debt” in this way is taboo among major central bankers because it can encourage profligacy. Yet it’s being done under one guise or another in the U.S. with recent quantitative easing and, more recently, in the euro area, where the European Central Bank loaned 1 trillion euros ($1.2 trillion) to at least 800 banks at 1 per cent interest for three years. The banks, in turn, used much of the money to buy their governments’ sovereign issues. Through the end of this year, the BOJ plans to spend 38 trillion yen in its asset-buying program, roughly equal to all the planned new government bond issues.”
Shilling is also surprised by the yen’s strength given Japan’s nearly two decades of deflation. He attributed the yen’s strength to four key things:
- Japan’s mercantilist foreign-trade policy that promotes exports but severely limits imports thereby creating a trade surplus.
- Japan is considered a safe haven
- Japanese currency interventions aimed at weakening the yen aren’t very effective
- Yen has been “the darling of the carry trade” (when an investor sells a currency with low interest rate and uses the funds to buy another currency that yields a higher interest rate).
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