Following the Setting Sun

Japan is way ahead of us, and we should notice.  The Japanese central bank broke trail in 2001 and locked itself into the mentality that a Zero Interest Rate Policy (ZIRP) would be the solution to their economic woes.  Bernanke and the Federal Reserve followed suit with their reaction to the meltdown of 2007 and 2008.  Liked hand-clasped lovers, Japan’s central bank and the Federal Reserve head for the “lovers leap” of the ill fated financial romance that is ZIRP.

The United States and the central planning Federal Reserve do indeed have the luxury of Japan’s lead time.  The ramifications of the ZIRP in Japan are forewarnings to anyone who follows their course.  The recent economic numbers out of Japan should continue to be a precursor for the United States.  Janet Yellen, take note.  Here are the recent fruitions of Japanese ZIRP.

  • Japan's current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.
  • Japan's economy grew by 0.7% in 2013, down from an initial estimate of 1%.
  • Japan's trade gap also rose to a new record last month, increasing by 71% to 2.79tn yen in January, official figures showed.”
Additionally….

  • “An 18.1 percent jump in imports helped widen the deficit to the biggest ever for the month.

At the same time, the Japanese currency’s 19 percent drop since Abe came to power in December 2012 has boosted import values, contributing to 21 straight monthly deficits

The deficit quadrupled from a year earlier to 1.45 trillion yen ($14.1 billion), larger than a 1.08 trillion yen projection by economists. On a seasonally adjusted basis, the deficit grew to 1.71 trillion yen.

Consumer confidence fell in March for a fourth straight month to 37.5, down from 45.7 in May last year -- the highest point during Abe’s current term as prime minister.”

And does this sound familiar?

“The Bank of Japan is forecast to add to already unprecedented easing to cushion the economy from the sales-tax increase and keep inflation on track to its 2 percent target.”

Finally…

“Japan's core consumer price index (CPI) rose 1.3 percent in April from a year earlier for the 10th straight month of expansion chiefly due to higher prices of energy and certain home appliances, the government said Friday."

Meanwhile, Tokyo's consumer prices jumped 2.7 percent from a year earlier, the biggest increase in 22 years.”

No country has extricated themselves from a ZIRP policy.  Japan seems locked into a head over heels belief in this ill-advised unrewarding trap of economic theory.  Japan is about 7 years ahead of the United States Federal Reserve in following this policy. Can we see now what the future, what Japan’s future, foretells?

Missing in all of this is benefit of the economic engine of a consumer, armed with disposable income via a fair return on their money.   It seems the governments of the United States and Japan would rather withhold that fair return via a no interest rate policy.  It's not working and if Japan is a harbinger, it won't work.  Let go the hand before the cliff.

Japan is way ahead of us, and we should notice.  The Japanese central bank broke trail in 2001 and locked itself into the mentality that a Zero Interest Rate Policy (ZIRP) would be the solution to their economic woes.  Bernanke and the Federal Reserve followed suit with their reaction to the meltdown of 2007 and 2008.  Liked hand-clasped lovers, Japan’s central bank and the Federal Reserve head for the “lovers leap” of the ill fated financial romance that is ZIRP.

The United States and the central planning Federal Reserve do indeed have the luxury of Japan’s lead time.  The ramifications of the ZIRP in Japan are forewarnings to anyone who follows their course.  The recent economic numbers out of Japan should continue to be a precursor for the United States.  Janet Yellen, take note.  Here are the recent fruitions of Japanese ZIRP.

  • Japan's current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.
  • Japan's economy grew by 0.7% in 2013, down from an initial estimate of 1%.
  • Japan's trade gap also rose to a new record last month, increasing by 71% to 2.79tn yen in January, official figures showed.”

Additionally….

  • “An 18.1 percent jump in imports helped widen the deficit to the biggest ever for the month.

At the same time, the Japanese currency’s 19 percent drop since Abe came to power in December 2012 has boosted import values, contributing to 21 straight monthly deficits

The deficit quadrupled from a year earlier to 1.45 trillion yen ($14.1 billion), larger than a 1.08 trillion yen projection by economists. On a seasonally adjusted basis, the deficit grew to 1.71 trillion yen.

Consumer confidence fell in March for a fourth straight month to 37.5, down from 45.7 in May last year -- the highest point during Abe’s current term as prime minister.”

And does this sound familiar?

“The Bank of Japan is forecast to add to already unprecedented easing to cushion the economy from the sales-tax increase and keep inflation on track to its 2 percent target.”

Finally…

“Japan's core consumer price index (CPI) rose 1.3 percent in April from a year earlier for the 10th straight month of expansion chiefly due to higher prices of energy and certain home appliances, the government said Friday."

Meanwhile, Tokyo's consumer prices jumped 2.7 percent from a year earlier, the biggest increase in 22 years.”

No country has extricated themselves from a ZIRP policy.  Japan seems locked into a head over heels belief in this ill-advised unrewarding trap of economic theory.  Japan is about 7 years ahead of the United States Federal Reserve in following this policy. Can we see now what the future, what Japan’s future, foretells?

Missing in all of this is benefit of the economic engine of a consumer, armed with disposable income via a fair return on their money.   It seems the governments of the United States and Japan would rather withhold that fair return via a no interest rate policy.  It's not working and if Japan is a harbinger, it won't work.  Let go the hand before the cliff.

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