The Nikkei Stock Average closed down 5.2% today, hitting a four-week low (but up 30.7% so far this year.) The market there has been on steroids ever since the launch of Abenomics: an aggressive easing program to rid the world’s third-largest economy of over 15 years of deflation. Its goal? To get inflation up to 2%.
But how much can a central bank do? Its 10-year bond yield is already sub 1% and debt-to-GDP ratio is expected to hit 245% this year. Its probably got the world’s worst demographics: average age is around 47 years… and shrinking: the fertility rate is 1.4 children per woman, vs 2.1 that is needed to maintain a stable population.
In fact, Japan’s economy collapsed into deflation just as its demographics ‘rolled over’ in the mid-1990s.
Back in 2010, Dylan Grice had predicted Abenomics:
So the path of least political resistance will presumably be to keep yields at levels which the Japanese government can afford to pay, and to stabilise JGBs at levels which won’t blow up the financial system. This will involve the BoJ buying any/all bonds the market can no longer absorb, probably under the intellectual camouflage of a quantitative easing program aimed at breaking Japan’s deflationary psychology. Economists might applaud such a step as finally showing the BoJ was getting serious about Japan’s problems. In fact, it will be the opening chapter of a long period of inflation instability.
Grab a box of popcorn, the show is just getting started.
Source:
Rethinking Abenomics
Dylan Grice on Japan
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