The third largest global economy is taking reckless steps to
jumpstart its languishing economy.
Specifically, Japanese Prime Minister Shinzo Abe is taking
unprecedented monetary action in an effort to reduce the value of
The near-term effects may be positive for the weak Japanese
economy. But the global economic impact could be disastrous for
Asia … and the rest of the world.
Japan has just kicked off a dangerous regional currency war,
and there is no end in sight. Even investors here in the U.S.
must take note, because the global economic impact could be
Recently, the G20 warily approved Japan's new economic
The plan calls for the country to
its monetary base … and then continue to pump more money into the
system until the country reaches an inflation rate of at least
Taken in a vacuum, this move is understandable. Japan has
suffered through two decades of economic doldrums. While there
are many reasons for the malaise, the chief culprit is Japan's
deflation that has persisted since the 1990s.
With deflation, goods cost less tomorrow than they do today -
so no one spends anything. As a result, economic activity grinds
to a halt.
So in that context, Japan's actions make a lot of sense. The
yen has been too strong for a long time now - and the only way
Japan can get out of its 20-year rut is to force the yen
But this presents a few major problems.
The first problem is that Japan has a staggering amount of
debt - well over 200% of GDP. As inflation increases, bond yields
will rise to keep pace. And when bond yields go up, Japan will
have to pay higher and higher interest on its debt.
In other words, within a few short years, Japan's economy will
be choked by interest payments alone. And don't even think about
the country managing to pay off the principle!
This might sound bad enough.
But the second problem is actually much worse.
There have been several currency skirmishes since the
financial crisis of 2008. The Euro has yo-yoed … China gets
accused of currency manipulation every year or so…and America has
raised eyebrows and whitened knuckles with each new round of
But this is different. Japan's monetary plan dwarfs all the
quantitative easing the U.S. has done since the financial crisis
… by an order of magnitude!
Consider this … by 2015, Japan's monetary base will have
ballooned to almost 50% of GDP.
By comparison, after all the quantitative easing in the U.S.,
America's monetary base is still less than 20% of GDP. The
Eurozone's base- even with all the bailouts of all the underwater
countries - has grown to only about 15% of GDP.
I've just never seen this much money flood a developed nation
And this, more than anything else, could be the opening salvo
of a new currency war. While the G20 approved Japan's plan,
numerous members are privately concerned that this is an
aggressive move to devalue the yen above all else … and may need
a response in kind.
In short, there's no upside to this move for an investor. This
latest wave of monetary easing highlights the considerable risks
in government issued debt.
I'll continue to monitor this unfolding story in Japan, and
plan to keep you abreast of the latest news. There are many new
downside risks, and you'd be wise to avoid the mess of government