There is a popular American military term called a "last stand", which is
meant to describe a situation where a combat force attempts to hold a defensive
position in the face of overwhelming odds. The defensive force usually sustains
very heavy casualties or is completely destroyed, as happened at Custer's
Last Stand. General Custer, misreading his enemy's size and ability, fought
his final and fatal battle of Little Bighorn; leading to complete annihilation
of both himself and his troops.
The Japanese government is now partaking in a truly incredulous measure to
expand its QE program in a desperate attempt to de-value its currency and re-inflate
asset bubbles around the world. In other words, Japan is constructing its own
version of a "last stand".
In a final attempt to grow the economy and increase inflation, Japan announced
a plan to escalate its QE pace to $700 billion per year. In addition to this,
Japan's state pension fund (the GPIF), intends to dump massive amounts of Japanese
government bonds (JCB's) and to double its investment in domestic and international
stocks. All this in a foolish attempt to increase inflation, which Japan mistakenly
believes will spur on economic growth. But these failed policies have now caused
Japan to enter into an official recession once again, as GDP fell 1.6% in Q3
after falling 7.1% in the previous quarter.
Japan is now guaranteed to be successful in the total destruction of its currency,
the complete destruction of its economy and the collapse of the markets it
is attempting to manipulate around the world. To fully understand its misguided
reasoning, we have to explore how Japan got here in the first place.
Coming out of WW II, Japan enjoyed a three-decade period referred to as its "Economic
Miracle". This "miracle" was instigated by a booming post-war export economy
helped by prudent fiscal policies, which was meant to encourage household savings.
Japan's standard of living soared among the highest in the world. Japan sailed
into the 1980's on the wave of robust economic growth. However, if we have
learned one thing after all these years, it's Government's insatiable need
to meddle with the free market, even when they don't need to. Accordingly,
the 1985 Plaza Accord was sought to weaken the U.S. dollar and German Deutsche
Mark against the yen. The Bank of Japan, in an attempt to offset the rising
yen, drastically reduced interest rates. The BOJ's loose monetary policy in
the mid-to-late 1980s led to aggressive speculation in domestic stocks and
real estate, pushing the prices of these assets to astonishing levels. From
1985 to 1989, Japan's Nikkei stock index tripled to 39,000 and accounted for
more than one third of the world's stock market capitalization.
By the late 1980s, Japan had transitioned from a "miracle" economy to its
infamous bubble economy, in which stock and real estate prices soared to stratospheric
heights driven by a speculative mania. Japan's Nikkei stock market hit an all-time
high in 1989, then crashed, leading to a severe financial crisis and long period
of economic stagnation that Japan is still entrenched in. It has now become
known as Japan's "Lost Decades."
Shortly after the bubble burst, Japan embarked on a series of stimulus packages
totaling more than $100 trillion yen--leaving an economy that was once built
on savings to eventually be saddled with a debt to GDP ratio that now exceeds
240%--the highest in the industrialized world. Making matters worse, the BOJ
has more recently engaged in an enormous campaign to completely vanquish deflation,
despite the fact that the money supply has been in a steady uptrend for decades.
At the end of 2012, we were introduced to Abenomics, which is Premier Shinzo
Abe's plan to put government spending and central-bank money printing on steroids.
His strategy is crushing real household incomes (down 6%) and caused GDP to
contract 7.1% in Q2.
With the rumored delay of its sales tax, Japan is clearly making no legitimate
attempt to pay down its onerous debt levels. Therefore, one has to assume this
huge addition to their QE is an attempt to reduce debt through devaluation
and achieve growth by creating asset bubbles larger than the ones previously
responsible for Japan's multiple lost decades. This will not return Japan back
to the days of its "economic miracle", where the economy grew on a foundation
of savings, investment and production.
The sad reality is that Japan is quickly surpassing the bubble economy achieved
during the late 1980's. Its equity and bond markets have become more disconnected
from reality than at any other time in its history. The nation now faces a
complete collapse of the yen and all assets denominated in that currency.
This is clearly Japan's last stand and there is no real exit strategy except
to explicitly default on its debt. But an economic collapse and a sovereign
debt default on the world's third largest economy will contain massive economic
ramifications on a global scale. Japan should be the first nation to face such
a collapse. Unfortunately; China, Europe and the U.S. will also soon face the
consequences that arise when a nation's insolvent condition is coupled with
the complete abrogation of free markets by government intervention.
