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Charlie Price
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I am an active private investor, with interests in both markets and private equity. Until 1999 I was largely invested through my business career. Then I sold to a good offer and, since then, I have concentrated on managing my own money. I split my funds between trading and investment, with the... More
  • Japan: past the point of no return? 2 comments
    Feb 25, 2010 9:45 AM
    This is an interesting view on Japan from Vitaliy Katsenelson. He says that Japan is past the point of no return. He might be right, but I think that he and others make the mistake of ignoring the monetary side of Japan's crisis.

    Japan's major mistake was obviously to get in to this state in the first place. But once the problem started, in my view, they made two major errors. Firstly, they wasted a lot of tax payer money and secondly, they failed to provide the right monetary conditions for growth.

    Increasing deflation meant that they got stuck in a version of a liquidity trap. They could not reduce nominal interest rates further, and real rates were rising.

    They waited 10 years before implementing a policy of quantitative easing. When they did, things turned round. They had relatively good growth from that point until the world collapsed in 2008.

    In his analysis, Katsenelson focuses on nominal interest rates and ignores real rates completely. That's a mistake. Japan's chances of recovery depend on them getting back to low real rates. Only then will they generate investment and spending. That would grow the economy and stop the tax base going in to terminal decline.

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    I'm still baffled about why the Japanese central bank chose to drive long term rates below 1.5%.

    How are their banks going to make money off a spread like that (and to compensate for bad asset write offs)?
    25 Feb 2010, 11:48 AM Reply Like
  •  
    I'm not sure that the government drove long term rates in that way. I think they got there as a result of zero short term rates and a bond market looking at persistent deflation. But you're right, with a shallow yield curve, it makes it harder for banks to make money and, as you suggest, Japanese banks had (have?) a lot of bad loans to write down.

    What matters most is investment. That's the only reason why anyone outside the banking industry cares about the state of banks. If they are not able to lend, then investment collapses and the economy heads down. But to create actual, rather than potential investment, you have to create a climate where businesses want to invest. Part of that is to have low real rates.
    25 Feb 2010, 02:15 PM Reply Like
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