More on Japan’s Ponzi Monetary Approach
I was on Fox Business News earlier today discussing Japanese monetary policy and the outlook for Japan in general. It’s always hard to get the full argument in on these short segments, but here’s the basic summary of my position on Japan and what the BOJ is doing:
- The BOJ is targeting nominal wealth via stock prices.
- While the BOJ can drive stock prices higher in the short-term, their policies must ultimately impact the underlying cash flows of the actual companies that comprise the equity indices that have been driven higher.
- If the BOJ is unable to create a sustainable impact on the fundamental corporations then the policy simply distorts the market by creating a disequilbrium between what investors expect from corporate cash flows and what they can actually deliver.
- The “race to the bottom” is a modestly effective short-term strategy, but ultimately cannot be expected to succeed in an environment where all central banks are trying to devalue.
- Japan’s long-term economic outlook remains challenging. If you’re going to allocate your portfolio to Asia I have to ask myself – “why invest in a bad house in a good neighborhood”?
If you want to see the full piece see below:
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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12 Comments
* Some readers on twitter note that I probably shouldn’t blame just the BOJ here. That’s probably a more pragmatic approach as it’s really Abe who is politicizing the BOJ. So I am probably more accurate blaming the Japanese govt rather than just focusing on their central bank….
** I should also note that I do not emphasize shorting Japan nor am I necessarily uber bearish on Japan at these levels. I didn’t have the time to explain how I think Japan is facing lont-term challenges that make it a difficult environment in which to make long-term equity plays. As I’ve long stated – Japan’s demographic and structural problems make it a difficult environment and there are better options from which to choose.
I get your point, but I do think ponzi is a strong term.
Great interview. I wish you’d had more time to expand on your points. And India? WTF?
I think if the BoJ creates an intermediate opportunity for speculation, effectively putting a floor under the market, it might be worth pursuing, regardless of the long term effects or other fundamentals. I want to make money, not policy
As for the policy itself, is there even proof that the supposed “wealth effect” works? Personally, I’d rather have my money riding in the stock market while it’s being ballooned up by the government than invest* in some uncertain venture or spend on consumption. I suppose others have less aversion to debt.
Looking at the DXJ chart I find that it, like most foreign ETF, has pretty huge gaps. Easy to get stopped out at a crappy price and there are no options one could use for protection (EWJ has options but I think it doesn’t hedge currency exposure).
* I mean invest in the strict sense of the word. Of course there is not a lot of opportunity for small fish like me to invest.
Oh, but very unfortunately they have no choice. It is just the next step of what we are doing.
Besides calling this a ponzi, which, as we already discussed, is incorrect, could you propose a sustainable course of action for Japan to return to “normal”. Which, of cause, we should define, and i think it would be debt/GDP of 30%-50%; real interest rates of 1%-2%; nominal GDP growth of 4%-5%, and unemployment of 5%-6%. And, (again of cause), no loss of quality of life….
i’d like to know if Fed is doing anything differently than BOJ.
http://www.zerohedge.com/news/2013-02-15/greenspan-ignore-economy-only-stock-market-matters
The Nikkei has been a great short-term trade ever since mid-November. Especially the dollar-yen hedged etf DXJ has done well right up to and including today’s market. Cullen, it seems your argument is that Japan’s government and CB can achieve nominal domestic stock market gains only for the short-term. It is bound to reverse once investors see that it is not translating into real economic sales and profit gains for the likes of Toyota, Honda, Sony, and other large Japanese companies. But in the short term the weak yen and very strong euro probably WILL result in sales losses for German auto makers and sales gains for Japan’s big three (Nissan, Toyota, Honda). Bad news for Volkswagen?
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I recall reading that Japan’s public sovereign debt is about 135 per cent of GDP, the very large remainder being QE and internal trust balances. Has any sovereign ever aggressively pursued devaluation at that level of existing sovereign debt to the public and had its currency survive? Either Kyle Bass or Paul Krugman will likely be proven correct in the next couple of years on Japan.
I believe Japan’s public debt went up to about 200% at the end of 2012. Some of the MMT crowd keeps pointing to Japan when trying to make a case for their views, or at least when trying to offering convincing arguments that the U.S. government debt levels are nothing to worry about now. Both the MR and MMT crowds mention Japan as a major economy with a monetary system very similar to the USA — and those comparisons seem to be valid.
After reading (and re-reading) much of Cullen’s work over the last few years (and some of Mosler’s MMT stuff), I can do a pretty good job explaining the basics of MR, at least at a cocktail party. My knowledge falls short when I’m asked just how much debt will be too much (especially when the future Medicare and Social Security obligations are part of the conversation). Beyond stumbling through something about not spending too much beyond our productive capacity, I’m don’t have an answer. I know there’s no magic ratio number.
http://seekingalpha.com/article/1203761-the-bond-bubble-might-surprise-you
Cullen, you and your “street fight” adversary seem to actually be on the same page on a lot of points. BTW, have you make other appearances on Fox Business? I was great to see you in a non-garbled sounding interview. San Diego harbor in the background I presume? Did you end up going to a local Fox studio or something? How did that work?