Global Imbalances Keep Piling up; Japan Slides Towards Recession; Yen Strengthens; Japan's Bond Bubble

Imbalances in Asia continue to mount as Japan slides precariously towards another recession. Please consider Japan Slowdown Amid Yen Rise Adds Pressure for Action

Japan’s weakest economic growth in three quarters adds pressure on policy makers to safeguard the recovery by expanding fiscal spending and loosening monetary policy to weaken the yen.

Growth slowed to an annual 0.4 percent pace in the three months ended June 30 as consumer spending stalled and exports cooled, Cabinet Office figures showed yesterday. The expansion was less than the estimates of all 19 economists surveyed and pushed the economy into third place behind the U.S. and China.

“If the yen strengthens further, the Bank of Japan may have no choice” but to ease monetary policy, said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “We could see more fiscal support from the government.”

The central bank is likely to ease policy at its Sept. 6-7 meeting or sooner should the yen gain and stocks fall sharply, said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

Overoptimism Regarding Japan

Japan is sliding towards recession if not indeed in it with GDP falling to a mere .4 percent.

Note the perfect score by 19 out of 19 economists regarding Japanese GDP. All were overoptimistic.

Nonsense About Easing

Sentiment is overwhelming that Japan is about to ease. One economist suggested there was "no choice".

Really!?

What good could it possibly do?



click on chart for sharper image

Chart courtesy of Bloomberg.

Pray tell what kind of reaction does the bank of Japan expect from "easing" when 5-year bonds are yielding .28% and 10-year bonds a mere .95%?

Talk of the need to "ease" is nonsensical and the Fed better take note.

Japanese Bond Bubble

Those looking for a bubble in bonds can arguably find a bigger one in Japan than the US.

Some will counter that Japan is "nation of savers". However, the savings rate in Japan has fallen to 1% while the savings rate in the US has risen to 6%.

How much longer Japan can get away with interest rates this low is a mystery, but that too is something for US treasury bears to consider.

The day of reckoning will come for Japan if and when it needs foreigners to supply money at any spot on that yield curve, because that is not likely to happen.

However, one must also factor in balance of trade issues. Right now those trade flows are strongly in favor of Japan.

Japan Balance of Trade



click on chart for sharper image

Japan's export model is one reason Japan has serious concerns over the strength of the Yen.

Every country wants a cheap currency relative to the others to help fuel exports. Mathematically that is impossible, and the global imbalances keep piling up as a result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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