In Ernest Hemingway’s 1926 novel The Sun Also Rises, Bill asks Mike, “How did you go bankrupt?” “Two ways,” Mike said. “Gradually and then suddenly.” Hemingway succinctly conveyed the way things tend to fail. The gestation may be long: a slow, gradual compounding of headwinds, errors and missed opportunities, with failure becoming probable long before it actually happens. When it does happen however, it may seem sudden and even unexpected.
The gradual decline of Japan
I’ve been following the gradual decline of Japan’s economy for over ten years; Way back in March of 2010 I published an article titled, “Japan: the Harbinger of (bad) things to come,” opening with the sentence, “Large and gathering imbalances brewing in the Japanese economy threaten to generate a tsunami-like fallout that could soak most of the global economy.” The Bank of Japan (BOJ) cut interest rates to zero in 1999 and started quantitative easing in 2001, using its monetary printing presses to buy up corporate bonds, REITs, stocks and Japanese Government Bonds (JGBs).
Over the ensuing 12 years and several rounds of ever greater QE, the imbalances have only worsened and in February last year, the BOJ was forced to go full Mario Draghi, all-that-it-takes, committing to buy unlimited amounts of JGB’s. At the same time however, the BOJ capped the interest rates on 10-year JGBs at 0.25% to avoid inflating the domestic borrowing costs.
Yen will burn to a crisp!
Well, if you conjure unlimited amounts of currency to monetize runaway government debt, and you keep the interest rates suppressed below market levels, you are certain to blow up the currency. On 8 March this year, when the yen was trading around 115 to the US dollar I wrote in my daily TrendCompass report that the “yen will burn to a crisp over the coming years,” as discussed also in a podcast with Tom Luongo. By the way, that podcast has aged remarkably well considering everything that’s been happening through the super-eventful year 2022.