In January, Kuroda’s Bank of Japan (BOJ) joined the NIRP (Negative Interest Rate Policy) club. It was not well flagged, which suggested it was possibly a last ditch attempt to help stimulate the ailing economy.
The concept of making financial institutions pay the BOJ 0.10% for parking excess funds with the central bank, coupled with aggressive bond buying was meant to weaken the Yen. A weaker Yen was expected to help make Japanese exports more competitive, which in turn would stimulate the Japanese economy.
But the Yen rose – rather defiantly too (+10%).
After the Second World War, Japan was broken. For the ensuing 40 years, they worked hard to become a producer economic state. Everyone gave up short term goals in order to catch the US economy. The workforce became well educated, companies became large (very large), and had the support of the political system. The goal became market share, not short term profits, and industrialists, banks, and trading companies worked together to this end (Keiretsu).
By the late 80’s/early 90’s, Japan had completed an unprecedented economic feat, growing from an insignificant base to becoming the second largest economy in the world (in 1995). Japanese companies were seen as best in class, and invested their billions in offshore real estate ventures and companies.
However, the economic miracle was under pressure from the immense weight of (corporate & bank) debt. Japanese banks needed to be recapitalised to avoid failure, and the Government obliged. The economy stuttered, and eventually recorded zero nominal GDP growth as asset prices deflated. Japanese productivity suffered, and the demographics of an aging population and shrinking workforce took its toll.
Fast forward to today, and the effects of the lost decade/s are obvious. By comparison, the US economy grew three-fold in those 2 decades, and China soared.
Japan’s growth has still not fully recovered, and the policy of Abenomics¹ appears to have had little effect other than increasing government debt. Decades of next to no growth, and high government spending has left the Japanese tax payer nursing one of the largest public debts in the developed world, at nearly 2.5 times the economy.
Japan’s economy is likely to record negative growth for the first half of 2016, which when matched with negative growth in the final quarter of 2015 amounts to a technical recession.
The BOJ is fast running out of bonds to buy, the currency won’t play ball, and demographics is no friend either. Japan’s population continues to age, which shrinks the workforce by around 1% each year. As they age, they tend to save, hurting domestic demand… making the economy more reliant on exports…
The BOJ is running out of options.
Perhaps PM Abe might just apply for a helicopter license at his next budget, and resort to dropping money on the population?
¹ PM Shinzo Abe’s 2012 plan to combine 3 arrows of stimulus – monetary, fiscal & structural reforms
