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Will the US Economy Mimic Japan's Lost Decade(s)

Those who are expecting the massive influx of liquidity into the economy will definitely result in inflation will have wait another month or so for confirmation.  Yes there was a mini spike in the oil price, but the Core CPI was a tame increase of 0.1% as expected.    The preliminary University of Michigan Consumer Sentiment report came in this morning at 72.8, a modest improvement from last month's 72.5 but less than the expected 73.8 number.  This, combined with a poor earnings reported from J. P. Morgan turned the equities lower.

Treasuries, perhaps in response to the CPI number, plus the successful conclusion of this week's sale of $90B notes and bonds worked higher.

For years now, Japan has been confronted with slow growth and deflation.  During the past year wholesale Japanese prices fell by a record 5.3%.  In the accepted Keynesian prime pumping tradition, the new Japanese government, has commenced a stimulus package designed to pick up the pace of Japanese economic activity.  Never mine that the IMF says that the public debt of Japan is 227% of GDP this year, and growing.  If the elderly Japanese population will not spend money the government will do it for them.

This week Ambrose Evans-Pritchard in the wrote:  "A global fiasco is brewing in Japan......The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

This week Forex traders were unconcerned about potential longer term monetary problems in Japan, as the yen gained strength against all major currencies.  After the 900 point rally a retrace in prices should be expected. 

The Japanese society, with about 25% of the population aged 65 and over, is confronted with a decline in the rate of savings.  The elderly, rather than continuing to work and save, are now beginning to cash out their accounts.  Interest rates in Japan are low with a 10 year note yielding about 1.4% compared to 3.66 in the US.  As long as the interest rates remain low Japan can manage their massive debt, but we wonder how long will currency traders continue to believe, in the illusion that the yen is truly a safe haven.  As the yen retreats from the recent highs, we will be patiently watching for an entry level to sell the yen and buy the USD, and possibly buy the Euro.  Longer term we wonder to what extent the Japanese economy and debt problems, will be a precursor of US problems.

Disclosure: no positions