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Good morning from Japan!
Behind me is the Tokyo headquarters of the Bank of Japan (BOJ).
It’s Japan’s equivalent to our Federal Reserve. And like the Fed, its mission has morphed from controlling inflation to combating deflation.
From the outside, everything seems hunky-dory: BOJ officials going about their daily business as usual … Japanese financial markets relatively steady … Japan’s GDP holding up OK for now.
Inside this building, however, lurks a monetary time bomb.
It’s a bomb that’s been gaining in potency for over two-and-a-half decades.
It packs more megatons than virtually any financial stress point in Europe or the U.S.
And when it blows, it could drag the economy of Japan, most of Asia and much of the world down with it.
I’ll explain exactly why in just a moment. But before I do, let me tell you how I got here.
Back in 1980, while I was working in Japan, one of Japan’s largest brokerage firms asked me to launch Gaikoku Saiken Nu-zu, a newsletter on foreign bonds.
I met frequently with officials of Japan’s banking and government community. I often covered the Bank of Japan. And I’ve been tracking it ever since.
Now, I can tell you flatly:
If you think the U.S. Fed is caught in a dangerous policy trap, wait till you see the massive hole that Japan’s central bank has dug for itself.
Here’s the crux of their dilemma:
Both the Fed and the BOJ have been pursuing the most aggressive easy-money policy in modern history.
Both have deployed the same two weapons of mass financial destruction — unbridled money printing and absurdly low interest rates.
And both central banks have done all this despite record federal deficits with massive government borrowing.
That’s the great monetary paradox of the 21st century, a paradox that both central banks share:
A. Big government borrowing and debts, which, by all accounts, should drive interest rates (especially long-term rates) dramatically higher, while, at the same time …
B. Massive, Herculean efforts by the central bank to smack down interest rates (especially short-term rates) to unheard-of lows.
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Those are the things that the U.S Fed and Bank of Japan have in common, and they are shocking enough. But it’s the four critical differences between them that are truly mind-boggling:
First, the U.S. Fed has been on its monetary rampage since 2008, when the U.S. housing market collapsed and Lehman Brothers failed. But …
The Bank of Japan has been on this tricky track since the early 1990s, when its commercial real estate market fell apart and some of its largest banks failed. That’s eight long years of extreme money easing in the U.S., compared to 26 years in Japan, or over three times longer.
Second, the U.S. Fed knocked its official interest rate down to nearly zero, a phenomenon so strange that even prominent Fed officials have expressed shock and awe. But …
If you think that’s extreme, consider Japan’s “new and improved” formula for monetary excess — below-zero interest rates: For much of the money that Japanese banks keep on reserve with the BOJ, instead of earning a yield, they must actually pay the BOJ 0.1%. (The BOJ’s goal is to penalize Japanese banks for not lending enough.)
Third, the Fed has pushed rates down by buying up all kinds of bonds. But …
The BOJ has gone far beyond bonds. In its zeal to hold interest rates down and to support its financial markets, it has broken radically with past practices by buying up Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) and other investments that the U.S. Fed wouldn’t touch with a ten-foot pole.
Fourth, the U.S. government debt is 104% of GDP, considered extremely worrisome. But …
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Tokyo’s public debt is 229% of GDP, or more than double Washington’s. In fact, as Larry Edelson has pointed out, it’s even bigger than the debt burden of the chronically impaired country that has already nearly toppled global markets — Greece, with a public debt load that’s 177% of GDP.
Multiply out each of these four factors …
- The BOJ’s history of monetary excess, which is three times longer than the Fed’s …
- The BOJ’s below-zero interest rate policy, which is even more aggressive than the Fed’s zero-rate policy …
- The BOJ’s audacity to break radically with central bank practices, buying up ETFs, REITs and other investments …
- Japan’s budget deficit burden, which is more than double ours …
And you will see that a monetary eruption in Japan could pack far more power than the equivalent events in the United States.
Precisely how could that happen and
what would be the consequences?
For the answers, I just interviewed a very astute Japanese economist whom I’ve known since 1980. (He wants to remain anonymous. So I’ll refer to him simply as “Mr. X.”)
Here are his own words, which I’ve translated and edited for clarity:
“Yes, the BOJ’s situation today is indeed a time bomb. No one can say precisely when it’s going to explode. But I can say with near certainty that it will explode one day.
“There are three possible trigger events that could set it off.
“First, the yield curve in Japan. Right now it’s extremely flat because Japan’s short-term interest rates and long-term interest rates are both near their lowest levels of modern times.
“That may be what the Bank of Japan thinks it needs to support the economy and fight deflation. But it’s terrible for bank profits. How is it possible for Japan’s banks to make money when their profit margin is practically nothing, when they can’t charge hardly anything for their loans?
“So pressure is building on the Bank of Japan to finally let long-term rates rise for these banks to finally start making a bit of money.
“Second, housing. We have another real estate bubble in Japan. Never forget: It’s the commercial real estate bubble and bust of the late 1980s that started the deflation and that started the Bank of Japan on this crazy course to begin with. Now, here we are again with another bubble, this time mostly in the residential sector.
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“The pitch to real estate investors is twofold: ‘You can use real estate to reduce your burden of Japanese inheritance taxes,’ which as you know, are the highest in the world. And ‘you can get long-term mortgages for practically nothing.’
“So money is pouring into homes and condos, and despite the low fixed rates, many home buyers now favor variable-rate mortgages, which are even cheaper, but riskier. The result is that construction activity has surged, and we’ve now reversed from housing scarcity to housing overcapacity in many areas.
“Third, is inflation. What makes everyone think that deflation is forever? Are they too young (or maybe too senile) to remember how inflation used to appear suddenly in Japan? For example, what about the two oil shocks of the 1970s that instantly caused double-digit jumps in Japan’s wholesale prices?
“Any one of these pressures could force the BOJ to make a minor tightening adjustment and raise official rates slightly. And any such move by the BOJ could cause things to unravel very quickly.”
Mr. X did not seem anxious to spell out more precisely what he meant by “unravel very quickly.” So I didn’t press him and nor did I have to. I know what the consequences are, and he knows that I know:
- A collapse in Japan’s bond markets, which are hypersensitive to even minute changes in BOJ policy.
- The rapid exodus of foreign investors, who have flocked to Japan for safety.
- A collapse in Japan’s stock market, which could later become a contagion that rocks the rest of the world.
What’s Most Ironic about This Scenario
Most people don’t know that it was America’s top Treasury and Fed officials who first warned about a future disaster in Japan.
I know because I was in Tokyo at the time. The U.S. officials were visiting Japan and held a series of meetings with their counterparts at Japan’s Ministry of Finance and BOJ.
The essence of their message was this:
The BOJ must not continue this zero-interest-rate policy much longer. If the BOJ doesn’t soon phase it out, it will create such massive distortions in Japan that it could sabotage global financial stability and growth.
What’s even more ironic is that, in subsequent years, the Federal Reserve itself followed in Japan’s footsteps, pursuing essentially the same policies they had explicitly warned Japan against.
So did the European Central Bank.
And ditto for the Bank of England.
First In, First Out
What’s next? The most likely outcome is what I call the “first-in-first-out syndrome.”
Japan was the first major nation to enter the whacky world of zero interest rates. It could also be the first to exit.
And when it does, you had better be ready. Because higher interest rates in Japan could spread globally like a contagion.
And higher interest rates in the United States, no matter how long they are delayed, could cause even more financial turmoil.
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
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“And like the Fed, its mission has morphed from controlling inflation to combating deflation.”
What is missing in global economies today is that ordinary people are being ignored by elite and self interested bureaucratic politicians. Increasingly several groups including savers, builders and creators are being sidelined by the market control forces of central banks. Whether this is a new version of a currency war or just plain old manipulation it is destroying the initiatives of those who build, those who invest in free markets and those who rely on respect for the capital they have accumulated in their lifetime. Just like ‘Brexit’, other countries are facing building opposition to this economy destroying intervention. These bankster’s have no skin in the game, instead they operate with near impunity ruining the self building opportunities of those who want to develop and create. We haven’t finished with 2007/8 yet, we’ve just prolonged the painstaking recovery until a genuine correction happens and we can all get on with our lives. Elitist members of the media won’t see it coming and won’t be prepared for the changes.
Well said!
I am sure by now that these are only looking for a tradgedy which is going to happen, and I am sure you will see it comming, the problem is that most of our population hasen’t really experienced failure and that’s because the average American does not the American economy, we as a people don’t understand the economy and how it works, this our biggest problem, I think it’s called lack of education, This our biggest problem
Great article. What is the trade? Short long term long term the globe over?
The trade is long silver bullion.
ARE U extremely sure of what U are writing ???.
One thing we know for certain. No business or country can borrow ad nauseum even if they are printing money. The intrinsic value of the yen is dependent on Japans ability to generate wealth which is increasingly precarious due to their enormous debt. Would you invest in a company with good assets but huge debt?
one interesting aspect in japanese economy is that the politics do obey to the very rich industry company owners. Or better said the big companies does decide on their own what will happen economically spoken. For example when japan governement to invest in another country like china the governement spoke about a certain amount but the company owners decided to invest one hundred times more than the governement had projected. I remebre precisely on 1989 or 1990 it happened. We must see the decisions which are done in japan are done by a few group of very influent rich people.
Question, Martin..
I remember when interest rates were 17%. Savings accounts were a good, safe place to put ones savings. Will that be the case when interest rates go up next time.
Thanks
Barry
Thank you Dr. Weiss. You background, knowledge and experience have been a valuable guide to all who listen to you. Most important is your integrity!
The only reasonable solace from this scenario is the “longevity” that BOJ has endured
versus the relatively “short” time of the US FRB monetary policy. So let’s cross fingers
wish and hope that this financial madness will continue for another 20 years.
Sayonara
Wholly agree – the World lives on an economic powder keg. Only the timing is uncertain that could produce deflation and a repeat of the Dark Ages or runaway inflation with equally disturbing implications. Since the timing is uncertain, what to do and how does one formulate one’s investment philosophy?
Thanks for the info.But I think we all know EVERYTHING is on a knife edge,I know its impossible but a certain date would be appreciated,but hay ho
We in the UK are doing better than anyone else especially so that we are removing ourselves from Europe. We here have nothing to worry about.
Smartest move the U.K. Ever made. Globalism is a cancer.
Yes, congrats. But you don’t have your own sovereign immigration policy. Until you do, you don’t have a country.
What defense? gold, silver ?
who would borrow their money to a country with such debt?? or did japan force by law for their companies, Toyota, to buy their debt from pension funds etc, maybe the US will do the same in future??
The laws are already in place for our government to take what it needs, along with banks. Another mighty pen move by Obama.
Why is the Nickki up again today if all these problems exist ?
Maybe 204% Debt to GDP is new sustainable debt model ?
Maybe the problem with Japan is its demographic problem which differs from other countries
Are Weiss relying on the old models instead of searching for whats the new Debt/GDP model for the current no growth paradigm ?
Whats are the scenarios for Japan going forward ?
John
As long as they can keep servicing the debt with timely interest payments, business continues as usual and Nikkei can advance. At what point will Japan feel that the interest payments are too high and damaging their economy. At some point they will have to stop borrowing
Predictions are impossible as the system is rigged more than ever before. Japan will perform exactly how “they” will make it perform. We don’t have a clue what’s in “their” heads. Heck, people don’t even know who “they” are. Or what “their” true motivations are.
does that mean that interest rate will be on the rise in the future we a Canadian cant lock in for 30 year so we are stuck for 7 is the most would that be a good idea to lock in now with a refi with one year left in my contract…..frank
Thank you Dr Weiss for your very cognizant observations.
Dr. Weiss: Above certainly is unpleasant information, but it is a blessing to know and to prepare. Thank you. HMB.
The market is so crazy right now. It’s like being in the investment valley and watching the cracks in the Market dam appear. All you can do is try to climb to higher ground before the financial flood…but where is there a safe place? Looking for that financial “ark” to ride out this pending disaster.
Fiscal policy is foreign to the FED. Congress is the roadblock.
Socialistic policies are doomed to wreckage.
Free markets with lower taxes will foster growth in the economy, and bring back jobs and income and higher tax revenue…..will the socialists go along?
> … will the socialists go along?
Nah. “Free markets” are anathema to socialists. Lower taxes – nope; socialists believe that “all the fruits of your labors belongs to us”. In other words, they believe in slavery/serfdom (yours, not theirs).
Could you be more specific ? What can the whole world do to solve this problem ? The solution must not come from the creators of this quandary ! We’re not about to be party to a World War as a reset . Depopulation as a rationale to further Artificial Intelligence as a replacement to human beings ! Common you guys, What up ? WTF ? Time to expose these perps and train the spotlights on them ! Let us solve the problem as a world community ! God Bless !
How do you expose them with a media who works with them? The only answer is contained in your last sentence.
They had no choice but to become criminals to keep the systems still up and running until and for some time into the future. 1. They ran out of legitimate money; so they had to print loads and loads of to it to patch things up … resulting in massive, massive debts(that in no way they can get out of); and 2. These massive debts can only be managed with small, manageable interest payments; so the official interest rates must be managed/manipulated down … way down. The two go hand in hand … until they are no longer manageable. Boom, Boom, Boom.
A brilliant and incisive report of the true facts. The general information the general public receives no such quality information. In fact, the majority of people seem to be in lala land. And everybody lived happy thereafter. Our universities charges upwards of $200,000 that qualifies for an $80,000 employment if one can be found. And there is sparse evidence the evidence teaches the graduate how to produce.
My guess is that all major Central banks will eventually cancel a large part of existing government bonds. Right now, they are effectively sterilized already. Martin, what would be the consequences?
Martin,
Thank you for your insight and warning on Japan!
Per Bloomberg – Japan’s Debt Burden Is Quietly Falling the Most in the World. “While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100 percent of GDP in two to three years, from 177 percent just before Prime Minister Shinzo Abe took power in late 2012, he estimates.” Permanently Monetized with no inflation.
Hi Martin,
Read ALL of the previous responses.What you are saying is nothing new,but you aredrumming it home,which is good,as most people have poor memories.My advice is have cash immediately to hand/reasonable amount of precious to hand,but most of all NO debt if at all possible
Denis-Canada
Shouldn’t all this easy money lead to a staggering rate of inflation? But after 26 years for Japan and 8 for us there’s not been much inflation. This points to a dramatic flaw in our understanding of economics.
Why has there not been any inflation? Until that is explained all predictions made using the current economic model are not worth much.
The money is not in circulation. The Fed has dumped it all into the market and the banks. There is no inflation because main Street hasn’t seen any of it. It was fed in at the top, and it stopped in the first savings account it came to. Thus there is no liquidity.
The industrialization of many previous 3 Rd world
countries has helped maintain the supply/ demand so that inflation has not ramped up.
Hi Al, You asked why hasn’t there been any inflation? Gas used to be $.19 a gallon. We built homes when I was in my 20’s for $10.00 a square foot. Gold was $35.00 an ounce and you wonder why there has been no inflation? It’s like going bald, it happens slowly and then you are. The best advice of all the above comments is “get out of debt”. I’ll add to that, don’t be too dependent on your Government check. Our kids will put a stop to it all when they get fed up the debt we have dumped on them…did anyone mention Government mismanagement?
1. Technology makes things cheaper
2. Change in the way that the govt calculates inflation (ie. substitutions)
why would Japan be a safe haven for anyone?
Interests rates will definitely go double digit negative! I am waiting for that to happen, then retire a wealthy multi millionaire. :)
It is clear that the end of the fiat money system is near. If we add up the debt of the ECB, FRB and BOJ, total collapse is inevitable! It is a mathematical certainty! A global depression with a new world reserve currency will be the next step. It will be interesting to see how and when it will play out! The world will soon never be the same again……..
I speak on behalf of all who benefit from the insights to be gained from your newsletter and those of your team: Thank you Mr. Weiss for another informative report.
Kinda sounds like the Book of Revelation beginning to come to pass.
It is !!!
Sure is.
Amen brother.
…. you missed two important points.
The National savings has been spent … and they are exposed to the International Bond Market … hence their choice to print money instead.
The ageing population who now want their retirement savings … of which ave been spent trying to save the country!!!
Country is stuffed for a very long time as the poplation goes from 120 million to 80 million. Definitely won’t need houses …
Massive depression coming. No immigration BTW.
You have left out another major time bomb in Japan, which is far worse than USA or Europe; it is Japan’s demography. The central bank may try to play around other bubbles by tweaking monetary policies from time to time, but demographics is not under its control. This time bomb is sure to explode sooner than later.
I am going out today and buying an Apple cart.
Dr. Weiss: I am fortunate in having access to your knowledge and experience. It appears that private interests in banking have bankrupted the West and Japan while leaving China to pick up the pieces and world hegemony.
It appears we will have mass inflation or mass deflation. I AM SURE IT WILL BE ONE OR THE OTHER, I JUST DON’T KNOW HOW TO CHOSE.
That picture looks absurdly photoshopped… c’mon…
Thank you Dr Weiss for another very enlightening column.
This crazy frozen interest saga throughout the West surely will be continued even in December as the Fed are well aware of the mayhem caused by any rate change.
Meanwhile the market continues to be artificially pumped up to burst.
Meaning only a crisis can force a change on the Central Banks, hopefully taking such power from them and their political lackeys to allow a healthy financial system to evolve.
But at what great cost. The pain and suffering that the world has to go through first.
What event will finally stick in the pin, Japan, China, Middle East, Putin or perhaps Europe? Responded to Boris Schlossberg regarding Brexit and the warring EU.
Many of your respondents should learn proper grammar, as well as learn how to phrase sentences and spell (or at least use spell check). As to what to do, I recommend the three G’s – gold (and silver) guns and grub. Good luck.
Strunk and White!
Several of the folks who commented in this thread are not native English speakers. Being the grammar policeman in a comments thread is a big job. I hope you are up for it!
There is no point in reading something that is grammatically incorrect. First, you can’t be sure of what the person is saying. Second, you waste too much of your valuable time trying to decipher what they are saying, and third, if someone writes in a poor or unintelligible manner you are going to assume that they are not knowledgeable. Who looks to people incompetent people for advice?
Why don’t they call a yield income or are they both the same thing?
Japan has an economy; Greece has islands and olive oil..not the same. I live in New York, not Tokyo…the US will not react to Japanese turmoil as you predict
Oh! The economic world is in a real mess.
“Good bye cruel world I’m off to join the service”
We are all only human beings, theirs such a thing as human error, maybe the dilemma faced by the Federal Reserve will resolve its self naturally.
Nearly six years ago (as I recall) I had lunch with the chief economist (who shall remain nameless) at one of the Federal Reserve Banks. I inquired as to what the Fed’s exit strategy was for normalizing interest rates. He quickly answered, “They do not have a plan.”
Dear Martin,
No bull market lasts forever. I think the bull market, in govt. debt, may have ended at the beginning of July. That will spell much higher yields. But they do not need to rise far to cause mayhem!.
I live in the U.K. Our govt. has massive debt, which although better than some countries, is still completely unsustainable. We all live in the same pond.
Best wishes,
Adrian.
“when i was a child i thought grownups always have a plan” truth is, we are winging it. The world is awash in cash, inflation exists in services, deflation in products.
No one knows how this will play out.
But: central banks have done all they can, perhaps too much. Leaders, politicians, need to man up, use fiscal pollicy, instead of scapgoating the fed.
Even that will not be enough, can only pray that human ingenuity can be up to the task.