Uncontrolled gov't spending creating risk of Japan interest rate surge
Ideas
Japan has fallen into the trap, unfortunately like other countries, of spending more and more as a way to solve their economic problems. Maynard Keynes, the father of spending to improve economies, never wanted spending to be long term considered it a short-term tool to help an economy improve.
But Japan, whether positive or negative, has turned government spending into an art form, as they have included numerous ways to spend on many things not important for the Japanese economy.
Not when they really need to spend to help Japanese households and Japanese businesses they have one of the highest, if not the highest debt to GDP ratio among advanced economies in the world.
Not knowing everything exactly about the Prime Minster and her goals, she is going to do whatever is needed to help the Japanese economy grow, which may or may not include a sizable amount of government spending.
Japan's fiscal health has been a challenge for a very long time, maybe decades, but to be fair, its seems like, as this time that the Japanese economy is still a very stable economy even though it might a stagnant economy that needs some government injections to get it moving again.
A rate increase by the back of Japan, can be both a positive and a negative, depending if you are a Japanese exporter or a Japanese importer, or a Japanese household or a Japanese small company.
What might be good for some in the economy might not be so good for others in the economy as an economy has many sectors and they all don't respond the same way to what the Bank of Japan does or what government spending does.
An increase in the key rate by a central bank is a strategy used to lower inflation as businesses will borrow less, consumers will use their credit cards less, and potential homeowners will not borrow for a new home as all if helps or supposed to help lower the inflation rate in an economy.
Deflation has been a major challenge for the Japanese economy of a long time, There again, there are positives and negatives to deflation, as lower prices of course help consumers but hurt businesses and the potentially they can't grow, can't increase wages, can't spend as needed on capital improvements.
An economy is a very complex puzzle as might be needed to help one part of an economy could help another part of an economy, as is the case with Japan, as a weak Japanese yen helps Japanese exporters but hurt Japanese importers. And as prices in the domestic economy continue to increase due to the weak yen, companies might be passing on their costs to the next in the supply chain including the final retail customer.
And then there is the idea of wage increases by companies due to the supposed labor shortage, as Japanese workers know they can get a higher wage if they look around and companies who need workers or need to keep workers have increase wages.
And then those same companies will increase prices to pay for the wage increases so prices in Japan continue to increase for consumers, which all has a domino affect with wages increasing prices, increasing, and inflation continuing in the Japanese economy.
Its difficult to determine if deflation is really over in Japan as most likely some or many companies are still lowering prices on some products due to low consumer demand, even though there is evidence of inflation due to companies passing-on their costs to the next in the supply chain.
Yes the economic environment has definitely changed in Japan from 19 years ago when prices seemed reasonable for the average Japanese consumer.
Back then even hotel prices were reasonable and tourists could easily stay for a week in a Japanese hotel and the hotel price wouldn't kill their budget, and still leave them with enough income for shopping and dining out.
The Bank of Japan is very conservative and the one thing they don't want to do is upset the financial markets, domestically or even globally, and at the same time they don't want to do any harm to the Japanese economy. With that they might not increase the key rate if they think it's going to cause too many problems.
But then again, who knows exactly what is going to happen with the Japanese government, but again, the new Prime Minister is a fiscal dove, which means she might want to see the key rate a little lower and not a little higher, and also she might want to see more government spending to help the economy.
For the most part, the blog doesn't comment on issues related to investing in the stock market or even investing in bonds as this is not an investor related blog.
But yes, while many country's bonds are owned externally in Japan most bonds are owned internally not like in Greece in 2010 or in Britain recently. As a result Japan is not going to suffer of the same situations that both Greece did or even Britain did.
While not a good idea, the Bank of Japan can always print more money and or issue more bonds as needed to help the Japanese economy.
Yes sell-offs can be a risky situation as, while not the best example, just see some of the movies related to the 2008 global financial crisis where there were sell-offs on wall street.
The same can happen to countries too but countries can control the situation much better than companies even though the Greece 2010 situation was handled very badly.
And yes the Japan debt to GDP is the highest among advanced economies, in the near future there doesn't seem to be any significant risk at this time. That doesn't mean there is not going to be risk in the future as Japan is an ageing society and is not really trying to improve its immigration situation to bring in more workers to pay into the social security or pension system in Japan.
The challenge for the Japanese economy, unfortunately, has always been the small and mid-size companies and just how much they can handle related to increase in the interest rate when they need loans to get raw materials or even pay wages for their workers.
And then there is the supposed labor shortage in Japan which is affecting small companies the most as their profits margins are not able to handle even small increases in wages. As a result some or many small Japanese companies can't afford to increase their wages to either attract new workers or even keep their current workers.
Corporate sentiment related to Japanese companies is always an up and down situation as they recently have been more pessimistic than optimistic due to the US tariff situation.
Yes, Japan's key interest rate is way below what other central banks are at now, and it could be the main reason why the Japanese yen is very weak at this timed, which is causing havoc with the Japanese domestic economy but at the same time helping Japanese exports companies with more profits.
Japan's fiscal health has always been challenge for the Bank of Japan and the Japanese government but they needed to prioritize what is most important and trying find strategies and solutions to help the overall Japanese economy seems to be its more important priority at this time.
The Japanese economy is a very stable economy and is in no position to default on its loans or even bonds purchases, as most of it not all of the bonds are owned internally and not owned by those outside of Japan, for the most part.
The Bank of Japan is well aware of the situation and will not allow the key yield increase to 2.5 percent as they have enough tools needed to keep the situation stable without losing control of the situation.
With that being sad, there is always the possibility, at least in the short-term they might allow the rate in reach 2.5 percent but only if they know it can help the Japanese economy and maybe reduce inflation at the same time.
Semiconductors and shipbuilding in Japan used to be two sectors that could have been considered economic drivers of the Japanese economy but both sector have lost significant market share to Taiwan and South Korea related to semiconductors and both China and South Korea in shipbuilding.
Its way to early to determine at this time if Japan can really regain any market share in the two sectors as its going to take a significant investment over many years to re-energize those sectors.
A the same time, many of the past Japanese governments and Prime Ministers have tried repeatedly to improve the Japanese economy with significant subsidies or cash handouts, which might have worked in the short-term but didn't do much in the long-term for the Japanese economy.
Back when the last Abe was Prime Minister the Japanese government increased the retail sales tax from 5 percent to 8 percent as away to start to pay-off the government debt, but it seemed to fail and Japanese consumers didn't buy as much but over-time, as with any consumers in any economy they got use to the new sales sales and spending went back to normal.
The Japanese government in 2019 did the same thing by increasing the sales tax from 8 percent to 10 percent and again the same thing happened with consumer spending decreasing for a time and then again back to normal as consumers got used to the new sales tax.
So whatever the new Japanese government is going to do to try and reduce the debt they need to be aware how its going affect Japanese consumers even more importantly how its going to affect the low-income groups including the fixed income groups.
Have a nice day!
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