Japan: Monetary Madness in Times of Unsustainable Deficits?

Unsustainable debt. Depression-era fiscal policy. Monetary madness. Welcome to Japan. You may not live or invest in Japan, but your investments may well be affected by what is unfolding in the Land of the Rising Sun. Be prepared.Japan’s government has vowed to end deflation by pursuing both depression-era fiscal policy and aggressive monetary policy. We recently analyzed implications of Japan’s planned fiscal policies for the yen (see “How Low Will the Yen Go: Depression-Era Policies”). Since then, Bank of Japan’s (BOJ) new governor Haruhiko Kuroda has warned Japan’s debt is not sustainable. Indeed, the only reason why Japan’s debt has been sustainable may be because deficits have historically been financed domestically. However, Japan’s current account balance has been deteriorating: in our assessment, dynamics will be radically different once foreigners are expected to help finance the budget deficit. Already we can see that the yen no longer fulfills the role as a safe haven; that is, whereas the yen was a great beneficiary of the “flight to safety” in 2008, the currency’s status has been eroding in tandem with the country’s current account balance (for more on the yen as a safe haven, see our analysis “Is the Yen Doomed?”)As domestic investors may not be able to support the country’s deficit any further, and international investors may be unwilling to, the BOJ could step in and buy bonds to help finance the deficit. The valve then, in our assessment, has to be the currency. As the debt is monetized, there could be grave consequences for the yen.

While the yen has weakened of late, we may not have seen anything yet. That’s because unlike the BOJ’s reputation, the central bank there has actually been rather modest in its “quantitative easing” programs in recent years. Here is a chart comparing the amount of money select central banks have been “printing” (the colloquial term for monetary easing, even if no banknotes are physically printed)

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Is the Yen Doomed?Japan


3 thoughts on “Japan: Monetary Madness in Times of Unsustainable Deficits?

  1. I was watching a produced clip on Sodom & Gom. where the city(s) were under Judgment and people were still commenting crime including thief. I understand this was just a clip of what might been, it seems very fitting of the subject!
    Yes, life as we knew it is over until the Perfect Monarch reigns !

  2. Pingback: thursdays daily news headlines April,4/2013 | count down to zero-time

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