Japan on the Verge of Economic Collapse?
On Friday morning, the Bank of Japan (BoJ) cut interest rates below zero. If you needed a clearer sign the world is on the verge of an economic collapse, this is it.
The surprise move was likely dictated by Shinzo Abe. The country’s prime minister has spent over a trillion dollars to dig Japan out of its two-decade-long financial coma.
The move is mind-boggling. The central bank actually wants to see inflation and raise the cost of living for citizens. In their logic, I suppose, this would be good for the economy.
Japan is struggling for growth. Its economy is stalling and could falter into another recession. But the problem is that this aggressive move appears to be a last ditch effort to get people to spend.
But what happens if they don’t?
Confidence is not the highest in Japan and my thinking is that consumers will continue to hold back. The BoJ’s plan may then result in an economic collapse.
Another point is that the moves to weaken the yen against other world currencies and trading partners could trigger a currency war in Asia.
China may want a lower yuan in light of the Japanese move. This could then force the other Asian tigers, including Korea, Malaysia, Indonesia, and Vietnam, to do the same.
This is not what you want to see, as it’s a trade war driven by currency weakness.
The eurozone has already seen its currency fall in value against the dollar. The European Central Bank’s president, Mario Draghi, has hinted at even more stimulus, which could further weaken the euro. Other countries could follow to help their exports.
Seeing all this, can you blame Japan for pursuing its aggressive strategy? The problem is that interest rates were already near zero in Japan. Cutting interest rates below zero is viewed as the only choice to avert slowing, but it could drive an economic Armageddon.
In an interview with CNBC, long-time bear Marc Faber (a.k.a. “Dr. Doom”) said that the world was giving way too much latitude to the central bankers. He questions the validity of all the quantitative easing (QE) programs in the U.S., the eurozone, the U.K., and Japan. (Source: “World ‘crazy’ to give central bankers power: Faber,” CNBC, January 29, 2016.)
Faber suggests the policies of global central bankers have been a “complete failure.” While I don’t agree with Dr. Doom completely, I have always said that the Federal Reserve’s QE plan was excessive. It has resulted in the current climate of massive debt loads and excess risk. The current stalling in the U.S. economy and backlash in the stock markets help to support my stance.
Folks, we have a financial mess on our hands. But what makes it dangerous is that the central bankers still want to spend their way out of it. This helps the stock market, sure, but it does little for the real economy.
The move by the Bank of Japan could wreak economic havoc, in my view, as I don’t see it to be enough to get consumers to spend. Plus, we could see a heightened currency war emerge, which really benefits no one at the end of the day. Beware of a coming economic collapse.