Japan's Central Bank Bubble Is Truly Remarkable

Mar. 04, 2019 2:04 PM ETBBJP, DFJ, DXJ, EWJ, FNV, HEWJ, FNV:CA123 Comments

Summary

  • Japan's economy is a potential model for how many developed markets could end up over the next decade or two.
  • The Bank of Japan's balance sheet and money supply are enormous compared to the size of the economy.
  • Money-printing has not yet led to the consumer price inflation or currency devaluation that some people feared, but it is not without downsides.
  • Potential lessons we can learn from this when investing in the United States and elsewhere.

Japan's economy was a huge success story during the second half of the 20th century, and today the country's wealthy, healthy, and aging population continue to reap the benefits of such hard work and prosperity.

However, in recent decades economic growth has been nonexistent, debt has accumulated, the population has begun to shrink due to low birth rates and low immigration, and so the central bank has turned to a variety of experimental tactics to try to revive the economy. In this sense, Japan is a step ahead and serves as the guinea pig that the rest of the developed world can watch and learn from.

This article provides several charts showing how truly remarkable some of these central bank actions are, and what they may tell us about the future of the United States and other developed nations.

Japan's Central Bank Balance Sheet

In the late 1980s, Japan had an asset bubble with a scale that dwarfs just anything else. With cyclically-adjusted price-to-earnings CAPE ratios nearly 100 for Japan's stock market, it made the U.S. Dotcom Bubble in 2000 look cheap in comparison.

Japan's stock market still hasn't recovered from that high point three decades later.

Nikkei 225Chart Source: MarketWatch

Additionally, Japan's GDP has been flat since the mid-90's with no growth, low inflation, and zero or near-zero interest rates.

Since 2013, the Bank of Japan began embarking on an aggressive money-printing plan to increase inflation and revive the economy. As a result, the size of their balance sheet has quintupled in a little over five years and is still growing:

Bank of Japan AssetsSource: Trading Economics, Bank of Japan

The central bank is mainly buying Japanese government bonds. Since Japan has sovereign debt equal to over 200% of GDP (the highest in the world), they depend on zero or near-zero interest rates for the budget not

This article was written by

Lyn Alden Schwartzer profile picture
43.75K Followers
Author of Stock Waves
High-probability investing where fundamentals and technicals align!
With a background that blends engineering and finance, I cover value investing with a global macro overlay. My focus is on long-term fundamental investing, primarily in equities but also in precious metals and other asset classes when appropriate.

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My work can be found at LynAlden.com, ElliotWaveTrader.net, and within the Seeking Alpha marketplace where I work with the Stock Waves team to blend their technical analysis with my fundamental analysis for high-probability long-term setups.

Disclosure: I am/we are long ENB, KMI, NTR, JPM, FNV, IEMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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