The Bank of Japan is sticking to its policy of fiscal stimulus to try to stoke inflation, and that's rattled markets worldwide.
There are short-term signs of economic recovery such as an increase in consumer spending and in manufacturing.
But longer-term, Money Morning Chief Investment Strategist Keith Fitz-Gerald told CCTV, "there has never been an instance in history where stimulus has worked. So the question really is when, not if, this will break down."
How to Profit From Japan's New Lost Decade
An old Japanese proverb notes "ura niwa ura ga aru" which means the reverse side has a reverse side.
Japanese markets have come a long way in the past 8 months rising an additional 4.94% in wild trading on Monday alone. Yet there are real long-term dangers to all this volatility.
First and foremost, when (not if) Japan collapses it will affect every investor, in every major market, regardless of your exposure to Japan.
Are Japanese Stocks a "Buy" with the Nikkei on the Rise?
Anyone invested in Japanese stocks took notice when the country's minister of state for economic and fiscal policy, Akira Amari, said at a Yokohama meeting that he hopes the government takes steps to push shares of the Nikkei 225 up about 17% to 13,000.
"I would like the government to take successive steps to push share prices higher,"Amari said Saturday. "Higher share prices work to improve corporate earnings. It is important for the government to show that it will work hard to aim at having the [Nikkei 225] index hit 13,000 by the end of the fiscal year in March."
Amari also noted the Nikkei was up more than 2,000 points since former Prime Minister Yoshihiko Noda announced the dissolution of the Diet in November. In fact, the Nikkei 225 Stock Averagelast week closed at its highest since September 2008 after a 12-week advance that was the longest such streak since 1959, according to Nikkei Inc.
Articles in the English-language press misidentified Amari as minister of finance - a position held by former Prime Minister Taro Aso - making the comments seem more like official government policy.
Of course, no one in the government of Prime Minister Shinzo Abe will be upset if Amari turns out to be correct. Higher share prices are good for the economy and for achieving the government's aim of ending the deflationary spiral in Japan - and good for anyone who owns Japanese stocks.
Bank of Japan Policy is Doomed to Failure
The Bank of Japan (BOJ), Japan's central bank, bowed to government pressure this week by adopting a 2% inflation target and accepting responsibility for achieving that goal "as early as possible."
The BOJ announced today (Tuesday) that it will begin a program of "unlimited easing" beginning in January 2014 following the end of the central bank's current asset-purchasing program in December.
In a statement announcing the results of Tuesday's Monetary Policy Committee meeting, the Bank of Japan said it anticipates purchasing 10 trillion yen in Treasury notes and 3 trillion yen in Japanese government bonds (JGBs) each month beginning in January 2014.
The statement also indicated the central bank's balance sheet will expand by about 10 trillion yen by the end of 2014 as a result of the purchases. No further expansion of the BOJ balance sheet is anticipated thereafter.
Can the Japanese Economy End Deflation With These Steps?
Japan's newly elected Prime Minister Shinzo Abe is taking aggressive measures in an attempt to end the deflationary spiral that has plagued the Japanese economy for more than twenty years.
The return of Abe's Liberal Democratic Party (LDP) to power in a landslide election victory last month is seen as a mandate to do whatever it takes to revive the flagging Japanese economy.
One of the first policies likely to be put into place is the passage of a massive supplementary budget for fiscal 2012 (the year ending March 31, 2013). Depending upon how you count it, the budget ranges from 10 trillion yen ($112 billion) to 20 trillion yen ($224 billion).
Observers have expressed concern over the size of the stimulus and what impact it might have on Japan's sovereign credit rating and on the Japanese government bond (JGB) market, plus what it could do to the U.S. economy.
Let's take a look.
Arm Twisting the Bank of Japan
The supplementary budget is nothing but good, old-fashioned pork barrel spending; the kind of money politics the LDP was known for when they governed Japan for more than 50 years.
What is new and different about Prime Minister Abe's approach to reviving the Japanese economy is his strong arm tactics against the Bank of Japan (BoJ), Japan's central bank.
BoJ independence was enshrined in law only in 1999. Abe has run roughshod over the intent of the law by demanding that retiring BoJ Governor Masaaki Shirakawa sign a written document agreeing to do whatever is necessary-generally considered to be "unlimited easing"-to achieve an inflation target of 2% over the medium-term.
At its last Monetary Policy Committee (the equivalent of the Federal Reserve's Open Market Committee) meeting, which took place just after Abe's landslide election victory, the BoJ agreed to review its policy goals and come back in January with updated policy recommendations. The next Monetary Policy Committee meeting takes place over two days on Jan. 21 and 22.
Press reports indicate that the BoJ will roll over and do pretty much whatever Abe wants - and here's why.
Japanese Stocks Are Up, But Don't Fall for the Trap
Japanese stocks hit a new 2012 high today (Wednesday) and the yen weakened to a 20-month low against the U.S. dollar as Shinzo Abe was installed as Japan's 96th prime minister.
Abe, who served as prime minister in 2006-2007 but stepped down due to health issues, has vowed to pursue aggressive monetary easing to end deflation and get the Japanese economy growing again.
But the long-term implications of Abe's policies aren't as rosy as the short-term stocks boost.
"The hope is that Abe's promises of fresh stimulus, unlimited spending and placing a priority on domestic infrastructure will be the elixir that restores Japan's global muscle," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "As a veteran global trader who actually lives in Japan part time each year, and who has for the last 20+ years, let me make a counterpoint with particular force -don't fall for it."
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Why Japan's "Lost Decades" Are Headed to America in 2016
It's only been a little more than a week since Shinzo Abe won election as Japan's latest Prime Minister in a landslide-election victory and the pundits are already lining up telling investors to "buy Japan" because it's "dirt cheap."
The hope is that Abe's promises of fresh stimulus, unlimited spending and placing a priority on domestic infrastructure will be the elixir that restores Japan's global muscle.
As a veteran global trader who actually lives in Japan part time each year, and who has for the last 20+ years, let me make a counterpoint with particular force - don't fall for it.
I've heard this mantra eight times since Japan's market collapsed in 1990 - each time a new stimulus plan was launched - and six times since 2006 as each of the six former "newly elected" Prime Ministers came to power.
The bottom line: The Nikkei is still down 73.89% from its December 29, 1989 peak. That means it's going to have to rebound a staggering 283% just to break even.
Now here's the thing. What's happening in Japan is not "someone else's" problem. Nor is it something you should gloss over.
In fact, the pain Japan continues to suffer should scare the hell out of you.
And here's why ...
The so-called "Lost Decade" that's now more than 20 years long in Japan is a portrait of precisely what's to come for us here in the United States.
Perhaps not for a few years yet, but it will happen just as we have already followed in Japan's footsteps with a "lost decade" of our own.
The parallels are staggering.
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These Three Iconic Japanese Brand Names Are On My "Short List"
[Kyoto, Japan] - Many investors have piled into Japan lately reasoning that somehow this will be "the year" Japan turns around and there will be lots of money to be made.
I don't disagree - only the big profits are on the short side, especially when it comes to these three iconic Japanese tech brands.
As I quipped earlier in the year, it's more likely that Godzilla will walk out of Tokyo Bay again than it is that Japan will suddenly rebound.
I am well aware that's not a popular thought and that it will likely earn me my share of wrath on the Internet. Save your breath and your keystrokes. Having spent more than 20 years in country, I am intimately familiar with the arguments.
For example, value-oriented investors consistently remind me that the Nikkei is "dramatically undervalued." I am also well aware of the "construction boom" that was supposed to follow the tsunami and nuclear crisis.
And I still continually hear from the statistically motivated that the Japanese economy just "has to turn around" because it's exceedingly rare that an economy remains in the doldrums after 20 years.
The Nikkei remains 75.5% off its December 29, 1989 peak for a reason. That means it's going to take a 308.19% gain just to get to break-even based on where it's trading as of this writing.
If you think that's a sure thing, I'm happy for you but wish to point out that business conditions now are hardly conducive to the kind of growth that got the Nikkei there in the first place. The entire society is deleveraging. Consumers are tapped out and the government is a wreck.
As for the construction boom, that's a misconception. As I noted in a flurry of interviews following the terrible events of March 11, 2011, only a few companies are going to enjoy any sort of revenue expansion whatsoever. Sure, there might be a short-term pop, but the majority would experience significant drops in revenue and exports resulting from production losses and a post-quake strengthening of the yen that will compound the efforts to regain lost ground.
And finally, as for the notion that markets simply don't stay down for this long...says who?
It was inconceivable in 1990 that Japan would lose a decade -- let alone three. Nine failed stimulus programs and 22 years later, the Japanese economy has just lurched into another technical recession this week. The rules of the game have changed.
Clearly, the markets can, as the old saying goes, remain illogical far longer than investors can remain solvent.
Here's the Reader's Digest version of my thinking:
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Investors Who Own Japanese Stocks are About to Get a Nasty Surprise
[Kyoto]-September's anti-Japanese protests in China over the disputed Senkaku/Daioyu Islands may have come and gone in the Western press, but the real damage is only just beginning for investors who have piled into Japan in recent years.
With their focus on the U.S. fiscal cliff and ongoing EU banking problems, many investors just don't understand how interlinked trade between China and Japan has become, nor the breadth of the damage this strained relationship can do to their portfolios.
But they're about to.
The breaking news here in Japan is that Honda cut its full-year net profit forecast by 20% following a 40% drop in September sales. That marked a 16-month low in sales that is directly related to nationalistic friction between the two nations.
That's adds up to a 95 billion Yen hit. To put this into perspective, Honda's net profit last year was only 211.4 billion Yen, so we're talking about a nearly 50% drop in the company's bottom line.
Under the circumstances, I would be very surprised if Nissan and Toyota, both of which also have significant operations in China, don't follow with similar results when they report next week. While I haven't seen estimates from Nissan yet, Forbes reports that Toyota sales are off a staggering 49% over the same time frame.
That's the biggest drop in a decade.
That's not inconsequential considering that Chinese-Japanese trade accounted for more than $340 billion USD in 2011. Japan is China's fourth-largest trading partner after the EU, the U.S. and the ASEAN nations respectively. It accounts for approximately 10% of China's total annual gross trade volume according to Xinhua.
On the other hand, China is Japan's largest trading partner and has been since 2007 when Japanese corporations dropped the U.S. market like a hot potato. China is also Japan's single largest export destination, accounting for nearly 25% of total export volume as well as the single-biggest source of its imported goods.
The damage won't be limited.
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Investing in Japan: Three Choices One Year after the Disaster
Like it has been for other Japanese families, this past year has been a tough one in my household, too.
Perhaps not surprisingly, Sunday's one-year anniversary brought long-buried emotions to the surface 12 months to the day after the horrific earthquake and the tsunami it spawned devastated Japan.
The tragedy haunts it still. I don't know a single Japanese who isn't affected.
And I still struggle to process the enormity of what's happened in a country where I've spent much of the last twenty years as a businessman, a husband, and a father.
How do you explain a 9.0 earthquake or a 65-foot high wall of water moving at 80 miles an hour?
Or come to terms with the friends and families who were literally wiped from existence
I couldn't explain that to my youngest son, Kazuhiko, when we visited Kamigamo Jinja, our ancestral family shrine to pray shortly after the disaster.
He wanted to know how the spirits of those departed would find their way home each August for Obon, a more than 500-year-old annual celebration when ancestral spirits make their way back to family altars.
My wife, Noriko and our boys, Kunihiko and Kazuhiko, return home to Kyoto this Friday so we'll see if they've made peace in their young lives as so many other children have.
It is through their young eyes that the future does indeed live, as is the case in so many cultures.
The Aftermath of the Japan DisasterTo that end, I'm sure you've seen the many before and after pictures of Japan making the rounds in recent days.
They're staggering and impressive.
But at what cost?
So far Japan has scraped millions of tons of debris from disaster-hit areas into monstrous piles. Only 6% has been burned or otherwise disposed of. You don't hear about that from U.S. news sources.
Nor do you hear about the additional 130 million to 150 million cubic meters of soil that have yet to be scraped, processed or otherwise remediated to eliminate everything from toxic chemicals to radioactive contamination.
That's enough to fill the Empire State Building floor-to-ceiling 143 times.
In the aftermath, only two of Japan's 54 nuclear reactors are online and running. The rest are down for "inspections" and disaster preparedness drills.
There is a good probability that many may never be restarted, especially with anti-nuclear protests building not only in Japan but around the world as a result of this mess. Most are decades old and of questionable design given what we know about nuclear power safety today.
While I used to be a staunch advocate of nuclear power, today I am now firmly against it.
Cleaning up Fukushima is especially problematic on a couple of levels and estimates suggest it may be 40-50 years before the plant is completely decommissioned.
Not only does the Japanese government have to figure out how to contain the mess, but things are so badly mangled on the ground that the Tokyo Electric Power Company (TEPCO) isn't even sure it can locate the melted nuclear fuel rods at the moment!
An estimated 100,000-275,000 people remain in temporary or modified housing according to various sources. The Japanese government is telling people that it may be a decade or more before they can return home -- if ever.
To its credit, the government has gone to great lengths to keep neighbors and families together as a means of preserving the cultural groupism that has played such a vital role in Japan's society for more than 1,000 years.
Separating people would have broken that bond and weakened recovery efforts.
So what now?...
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