Japan’s 10-year bond yield doubled from 0.45 percent to 0.93 percent in the two months between April 4 and May 30.
Japanese Prime Minister Shinzo Abe’s unlimited quantitative easing has led to massive capital outflows and an all-time high trade deficit in January.
If the US Federal Reserve’s withdrawal further pushes up the interest rates, smart investors might rush to sell their Japanese equities, triggering enormous volatility and sparking a stock market crash worldwide.
Japan never recovered after the yen bubble burst in the early 1990s.
Soon after the 2011 Fukushima Dai-ichi nuclear disaster, which nearly ruined eastern Japan, Abe went crazy printing money to stimulate domestic consumption and exports. He turned a deaf ear to the fact that printing money without the required structural changes cannot sustain a real recovery. Adding liquidity alone is merely adding market volatility.
Japan cannot directly replicate the US model of increasing liquidity, because the world trusts US global dominance, while Japan is only a subset of the system.
Moreover, Japan’s public debt is double that of the US. Smart investors prefer Obama’s structural reforms over Abe’s bushido and samurai seppuku.
The US jobless rate, consumer confidence and personal consumption are improving, and GDP is picking up.
The US is stabilizing, but China is weakening and Germany is falling. Figures from the US Bureau of Labor Statistics in April show the US Consumer Price Index for all items excluding food and energy increased 1.7 percent over the past 12 months.
The food index rose 1.5 percent, while the energy index declined 4.3 percent.
The S&P Case-Shiller house price index (Composite-20, SPCS20R) has returned to the 2003 level and it is more than 70 percent of its mid-2006 peak.
In addition to the sharp de-leveraging following the 2008 subprime turmoil, the massive low-cost liquidity by Europe and Japan have strengthened the US dollar. The US is regaining momentum.
However, Japan’s bold attempt might bring back volatility.
From October last year to last month, the Nikkei 225 index climbed 73 percent.
Investors are getting too bullish about Japan’s quick revitalization after decades of losses.
“Our economy is on a steady path to recovery” Bank of Japan Governor Haruhiko Kuroda said.
Shinzo Abe is launching another round of stimulus measures very soon. This has exaggerated the demand of Japan’s aging population.
Japan is the oldest among the world’s top 10 economies. Its median age is 45.4 and the aging population outpaces growth of younger generations. There are huge public debts for the new generation to repay yet.
In short, only drastic, massive and fundamental structural reforms can revitalize Japan’s debt-ridden stagnant economy.
“Zombie bank” problems have to be cleared and deteriorating productivity must be rebuilt. The Japanese mind-set has to change.
Jack Yeung is a business lecturer at the Community College of Hong Kong’s City University.