Japan’s Extraordinary Experiment
The Bank of Japan is creating money and buying up Japanese Government Debt on an unprecedented scale. Thus far, the BOJ has bought up 40% of all Japanese Government Debt – and that percentage is increasing with every month that passes. This is a truly extraordinary experiment in monetary policy.
So far, the results of this experiment have been overwhelmingly positive:
1. Interest rates have fallen,
2. The economy has strengthened,
3. The stock market has climbed to a 21-year high,
4. The government’s interest expense has been reduced, and
5. Perhaps, most important of all, 40% of Japanese government debt has been effectively cancelled, greatly reducing the risk of a fiscal crisis in the future.
If this policy continues to boost economic growth in Japan, while at the same time effectively reducing Government Debt and the risk of a future fiscal crisis, it means that other countries could also boost their economic growth through a combination of aggressive fiscal and monetary policy as Japan has done.
It would mean that the world is capable of generating much higher levels of economic growth and general prosperity than it currently is.
Therefore, this is an experiment of historic importance – and one that policymakers in the rest of the world can’t afford to ignore.
Meanwhile, there are also important investment implications. Over the next two years, the BOJ seems likely to continue printing aggressively, while the ECB tapers and then ends its QE program and the Fed tightens monetary policy through a radical policy of Quantitative Tightening. All of this suggests the Yen should weaken. That should be good news for Japanese corporate profits and stocks.
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