Japan’s liquidity trap – are we in the same boat

By Kimberly Woody, Senior Portfolio Manager, GLOBALT Investments

The asset price bubble in Japan burst in 1992 after a period of price spikes and overheating economic activity associated with unchecked money supply and credit expansion. This resulted in an excess of optimism and speculation on the prices of real estate and stocks. And so followed the lost decade – a period of chronic deflation, weak growth and a sharp transition to temporary employment. This “lost decade” ultimately lasted more than 20 years. In 2013, the Nikkei 225 index was still well below a peak reached in 1990 and nominal GDP was at the same level as in 1994. In previous years, Japan has spent heavily on extensive public works, most of which were notoriously unproductive (remember the “bridge to nowhere”). Japanese short-term rates remained close to zero and the Bank of Japan significantly increased its balance sheet, becoming the most indebted developed country in the world. world in terms of debt-to-GDP ratio. Despite this, the economy continued to collapse. Japan was experiencing a liquidity trap in which monetary policy became largely ineffective. Consumers fearing deflation or sub-zero rates were showed a preference for savings. As a result, no monetary stimulus has generated economic activity and Japan has made little progress in generating growth or inflation. 12, after 5 one-year prime ministerial terms, Prime Minister Shinzo Abe crafted an aggressive plan dubbed “Abenomics” involving his three arrows: printing money, more stimulus spending and pro-Japanese regulation to get out of the crisis of several decades. The Japanese government issued 10.3 trillion yen for infrastructure spending (roads, buildings, bridges, etc.). The Bank of Japan has started buying large-scale assets worth more than $ 660 billion a year in order to push the inflation rate towards the 2% target. The final component of Abenomics consisted of reforms aimed at increasing the birth rate and labor market participation of women in order to combat a secular decline in the population.

Because so many developed economies are now using tools first implemented by Japan in the early ’90s, this deserves attention. We have yet to see any country successfully reverse a zero interest rate policy or significantly reduce stimulus spending. Debt is exploding around the world and the balance between interest rates, inflation and asset prices is increasingly delicate and precarious. Japan raised its late rates and in so doing created a bubble so large that only drastic measures were effective in mitigating the fallout. What we didn’t know at the time was how difficult it would be to reverse a deflationary spiral and, thirty years later, Japan remains firmly entrenched and heavily in debt. Much like the end of the bubble in Japan in 1992, Europe and the United States fought the fallout from the Great Financial Crisis by supporting a distorted real estate market with asset purchases and a money supply. A monetary sugar regime that the United States and Europe have not yet managed to part with. We have witnessed the conditions that trigger a liquidity trap and the difficulty in combating it in Japan and it is difficult not to extrapolate these same experiences elsewhere.

So how do you reverse this generalized liquidity trap? One bright spot is that China’s regressive and harsh actions of late to limit a few sectors appear to have broadened into a much larger campaign. A potential default by real estate developer Evergrande is potentially as disruptive as Bear Stearns in the United States. Moreover, China’s thinly veiled aggression against Taiwan further alienates the developed world. At the same time, we see clear evidence of a slowdown in China exacerbating political and financial turmoil. Developed markets should benefit from the remoteness of investment spending from China – not just from the United States with its manufacturing renaissance, but also from Japan, and perhaps the eurozone.

GLOBALT has been an SEC registered investment adviser since 1991 and, as of July 10, 2013, remains a registered investment adviser through a separately identifiable division of Synovus Trust NA, a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be construed as a solicitation to buy or sell any security. This does not constitute legal or professional advice and is not tailored to the investment needs of a specific investor. The registration of an investment advisor does not imply a certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, additional information may be required to make informed investment decisions, depending on your individual investment objectives and specifications. ‘adequacy. Investors should seek personalized advice and should understand that statements regarding the future prospects of the financial market may not come true as past performance does not guarantee and / or indicate future results. The content may not be reproduced, distributed or transmitted in whole or in part by any means whatsoever without the written permission of GLOBALT. For authorization, as well as to receive a copy of GLOBALT’s ADV Part 2 and 3 Forms, contact GLOBALT’s Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339. You can get more information at GLOBALT Investments and its advisers access www.adviserinfo.sec.gov, sponsored by the United States Securities and Exchange Commission.

The opinions and certain comments contained in this document reflect the judgment of the author as of the date indicated.

The investment products and services provided are offered by Synovus Securities, Inc. (SSI), a registered broker, FINRA / SIPC member and SEC registered investment advisor, Synovus Trust Company, NA (STC), Creative Financial Group, a division from SSI. Trust services for Synovus are provided by STC.

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