peakprosperity.com / by Gregor Macdonald / Monday, February 18, 2013, 5:05 PM
For a successful technology, reality must take precedence over public relations, for nature cannot be fooled. ~ Richard Feynman
Waiting for Japan’s economy to make a strong recovery has been an ongoing game since 1990. Shall we play that game one more time?
There have been many false dawns in Japan over the past 20 years. Struggling with a combination of crushing debt and deadly demographics, Japan’s economy has stubbornly refused to make progress, despite numerous government efforts that range from currency devaluation to endless public works projects.
None of this was enough, however, to prevent further declines in the country’s fertility rate, for example, which only exacerbated deflationary pressures on the economy. Nor were the collective set of policy measures enough to boot capital flows away from the bond market, as Japan’s savers simply kept on saving.
For the past twenty years, value investors have probed the individual names in the Nikkei for cash rich insurance companies, debt-free manufacturing companies, and for rock-bottom low P/E names, all in the hopes of riding a broader recovery higher. Alas, no sustainable recovery in Japan’s economy or stock market has ever unfolded.
One can only smile at the reaction that more senior, experienced Japan recoverists must now be feeling as they watch a new generation succumb to the excitement of the latest resurrection of Japan’s economy. That the Nikkei is up by 25% in just 90 days has triggered all sorts of congratulatory commentary, even from Nobel Prize winners like Paul Krugman, who also is swept up in the latest round of recovery fever:
Krugman explains that one of the problems with modern central banking is that people believe they’re too credible in their desire to stamp out inflation when it starts to pick up. So in other words, the Central Bank may say it will let growth and inflation run hot for awhile (so that nominal GDP can catch up to trend) but nobody believes that they’ll actually do that. What Japan may be in the process of doing — by having the Bank of Japan take orders from the Ministry of Finance and the new Prime Minister — is solve this problem, by having the bank commit to being irresponsible.
Thankfully, Japan’s latest attempt to recover by aggressive devaluation is almost assured to provide resolution to its generational quagmire. But the outcome will not look anything like recovery.
Instead, Japan has entered the terminal phase of its long, reflationary road.
Culturally, the frustration and exhaustion at the country’s lack of progress has unsurprisingly led to this important juncture. The Japan recoverists are correct that the latest round of monetary policy “is not like the others.” However, the results are likely to provide a real-world test case of the limits of Keynesian policy at a time when the world faces scarce resources.
This final chapter will be spectacular. So in a lurid sort of way, we should be thankful that Japan has now crossed the threshold and is ready to proceed to its denouement.
