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On Japan, Stimulus, Currency Depreciation and Inflation

I have heard a lot of doomsday predictions regarding Japan over the last twenty years. None of them have panned out as yet. This year, we are hearing a lot more as a result of the Japanese Central Bank’s intention of ‘monetizing’ the government’s debt and because of the government’s high level of debt relative to Japan’s GDP. Is any of this stuff sensible investment advice?

The short answer here is no, it is not good investment advice . And the reason the doomsday scenarios are wrong is because they hinge on a faulty model of the monetary system and its implications for inflation.

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It IS now clear that Abe wants to go full bore on fiscal and monetary stimulus. As an investor, you have to see that as bullish because it means that the Japanese government is prepared to add net financial assets to the private sector in order to meaningfully boost employment and growth such that private spending can start to fill in the gap and push the economy out of deflation. This supports growth and given the negatve impact on real interest rates of reflation, it is bearish for the yen. What Mr. Abe wants is for his policy to spark private sector spending and credit growth, causing Japanese real interest rates to decline from decreased deflation or outright inflation. And this is the only way he’s going to get it. Because the Bank of Japan controls interest rates, there will be no affect on nominal rates and corporate rates could fall if the policy is successful in reflating the economy.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.