Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Japan: past the point of no return?

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.