Excerpts from Edwards’ report via ValueWalk:
There is a large body of highly respected commentators who dismiss the notion that Japan is bust. My friend, former colleague and Japan guru, Peter Tasker is certainly one of them. In a recent FT article Tasker highlighted Japan’s “structural excess of savings and net overseas financial assets equivalent to more than 50% of GDP” – link. He is worried though that the rise in the consumption tax is a policy error because the economy is simply not strong enough at this stage to shrug off such a fiscal hit equivalent to 1.7% of GDP.
Our own economist’s views are similar – even with the likely ¥5tr stimulus package to offset the impact of the consumption tax hike. Tasker points out that since a sizable stimulus had already been implemented this year, another of a similar size will be required just to avoid, ceteris paribus, a GDP contraction (no wonder Japan’s public sector deficit is still almost 10% of GDP in 2013!). Our own economists believe that at the current(ish) ¥/$100 exchange rate, GDP will stagnate next year with the announced mix of policy. Hence both they and Tasker expect more QE from the BoJ to be required and in the process a decline in the Yen to ¥/$110 should sustain growth at a meagre 1% next year.
In my view we are quickening the pace towards losing control of both the Japanese currency and inflation. We reiterate our view that any decline in the yen at this time will echo the 1996/7 period where yen weakness put a severe strain on other Asian countries balance of payments and contributed in large part to the 1997 Asian currency crisis. I expect yen weakness over the next year to begin accelerating out of control as BoJ QE is stepped up, forcing widespread devaluations in the EM world, including China. The impact of this on the West is not rocket science. There have only been two occasions when US implied inflation expectations have turned negative – 2008 in The Great Recession and 1998 in the wake of the Asian crisis.