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Japanese style Deflation Strikes Global Bond marketsGary Dorsch The US-economy has not experienced sustained deflation since the Great Depression of the 1930’s, when consumer prices fell 10% between 1929 and 1933. But Japan has been battling falling prices since 1995, – triggered by the bursting of the Nikkei-225 equity bubble, and a unrelenting slide in land prices. Central bankers and macro-economists from all corners of the earth have been studying Japan’s descent from its giddy economic prosperity in the 1980’s, and into the deflation trap in the 1990’s, that Tokyo’s financial warlords have still been unable to remedy. Nowadays, central bankers must be watchful, - not only against the traditional worry of inflation, but also to defend against the devil of deflation, - well before inflation dwindles to zero-percent. That’s because deflation is more debilitating to economies - and harder to overcome - than inflation. In Australia, Brazil, China, Chile, Israel, India, and Peru, central bankers have tightened their monetary policies this year to control inflation. However, in England, Japan, and the United States, and to a lesser degree in the Euro-zone, central bankers are engaging in the radical scheme of “Quantitative Easing,” (QE), in order to fend-off the threat of deflation. Recently, several Federal Reserve officials have been openly expressing their fears that the US-economy could stumble into a Japanese style deflation trap. And as Japan’s experience suggests, deflation can increase the financial pain of a traditional recession. When deflation strikes, lower sales prices cut into business profits and in turn, prompts companies to trim payrolls. That undermines consumers’ buying power, leading to a vicious cycle of more pressure on profits, jobs, and wages, - and cutbacks in purchases of new equipment. Worse yet, if deflationary psychology begins to take hold among consumers, they’ll often wait for still lower prices, before buying, and adding to the deflationary trend. All these factors feed on one another, setting off a downward price spiral.Fed chief Ben Bernanke figures the central bank has the tools to stop a deflationary spiral, - namely – a technology called an electronic printing press. “Sufficient injections of money will ultimately always reverse a deflation,” Bernanke said in 2002. Japanese style Deflation, - post Nikkei225 Bubble Since the Fed formally adopted the radical QE-scheme, - injecting $1.75-trillion into the coffers of the Wall Street Oligarchs, through the purchases of mortgage securities and Treasury notes, traders have been debating whether this super easy money policy would lay the groundwork for higher inflation, or rather simply act to prevent a deflationary spiral, that could deepen an economic slump. So far, the massive QE liquidity injections supplied by the Fed, the Bank of England, and Bank of Japan, have been mostly channeled into high grade corporate and junk bonds, and municipal and federal government bonds. The tidal wave of liquidity has pushed shorter term 5-year note yields in England, Japan, Germany, and the US-credit markets, to all-time or multi-decade lows, - indicating that the scales of market mania are tipping in favor of Japanese style deflation.
For the past two-decades, Japanese fixed income investors, - controlling 16-Trillion yen of savings, have been forced to accept ultra-low interest rates for their safe money. It’s hard to believe that 20-years ago, Japanese yen Libor deposits were offered at interest rates of 8.50-percent. Today, 3-month yen Libor rates are pegged at 0.25%, and haven’t yielded more that 1% for the past 15-years. Will American fixed income investors face the same nightmare of ultra-low interest rates, spurred by Japanese style deflation in the decade ahead? Japan’s nightmare with deflation originates with the spectacular rise and fall of the Nikkei-225 bubble between 1986 and 1992. During the boom years, through the end of 1989, the Bank of Japan (BoJ) conducted an easy money policy, designed to offset the deflationary impact of a soaring yen. The US-dollar had plunged from 251-yen at year-end 1984, to as low as 122-yen at year-end 1987. The BoJ pegged its discount rate at 2.50% from February 1987 until May 1989. Japan’s trade surplus, had grown from $56-billion in 1985, to a peak of $96-billion in 1987, before its declined because of the yen’s rapid appreciation to $64-billion in 1990. The BoJ allowed the M2 money supply to grow at more than +10% /year, much faster than its economy which grew between +4.8% and +5.9% between 1987 and 1989, in order to slow the yen’s surge against the US-dollar. The Tokyo Stock Exchange (TSE) indexes responded with a powerful rally. Even the “Black Monday” stock market crash on Wall Street, in October 1987, couldn’t dent the wild enthusiasm for Tokyo shares. During the stock market boom of the late 1980’s, the TSE surpassed the value of the NYSE to become the world’s largest. The TSE’s market value peaked at $4.26-trillion at the end of 1989, compared to $2.9-trillion for the NYSE. However, by the end of 1991, the TSE’s market value had declined to $3-trillion, compared to the NYSE’s $3.7-trillion.
The Japanese bubble economy was not limited to the stock market. Sharp price rises were also seen in real estate markets, beginning in 1986, where prices more than doubled in four-years. Prices were highest in Tokyo’s Ginza district in 1989, with choice properties fetching over 100-million yen ($1-million) per square meter ($93,000 per square foot). The BOJ finally began to act against the land and share price bubbles, when it hiked the official discount rate in May-1989, the first hike in nine-years, from 2.50% to 3.25 percent. Despite the rate hike, the Nikkei continued to climb to new record highs. By the end of August-1989, the Nikkei-225 had topped 35,000, and continued in this range through October-1989, when the BOJ raised the discount rate again to 3.75%, following rate hikes by the Bundesbank and other central banks. Ten-year JGB yields rose 175-basis points over sixteen months to 6.75% in November-1989. But the Tokyo stock markets ended 1989 on a buoyant note, with unemployment falling to a historic low of 2.3% during the fall of 1989. The Nikkei-225 index closed at 38,970 in Dec-1989, and appeared poised to soon hit the psychological 40,000-level. However, inflation was also racing ahead, rising sharply from a miniscule +0.2% in March 1988, to as high as +4.2% in April 1990. To read the rest of this article, click on the hyper-link below: http://sirchartsalot.com/article.php?id=141 ### Gary Dorsch 321gold Ltd |
