Yen for stimulus or trillions of reasons to consider Japan!
Two historic changes make Japan a buy for investors:
Now in place: Japan’s printing an ocean of stimulus money
- More pending: NISA taps an ¥8 trillion savings ocean
In past years, when looking for new investments outside North America I routinely passed on Japan. Although a sophisticated and advanced society as well as a leading economic force, Japanese growth stalled decades ago.
The upside potential seemed unlikely or very limited. However, that all changed last December.
Let the stimulus party begin
The new government immediately put in place policies that radically changed the economic outlook for Japan. Japan dusted off the printing presses. The global stimulus was joined by a new host that began producing a sea of yen.
Some historical context
For the previous quarter century elected Japanese leaders had refused to consider such an approach. The default position of previous Japanese governments was to blame others for economic problems. Favorite targets were the policies and actions of trading partners and foreign governments.
With little or no growth, government used massive borrowing to fund developments and operations. They stayed with the borrow and spend strategy year after year for over two decades. It did not work.
Economic growth remained stalled. But such a policy ballooned debt year after year until it eventually surpassed ¥1,000 trillion! In dollars that is well above $10 trillion! That is twice the size of the entire Japanese economy!
That is one huge mortgage! Beside the incredible amount of debt, for 25 years, Japan remained economically mired. It was a no growth, financially and economically stalled recessionary state. Economically, Japan moved sideways while the population aged and the birth rate fell.
The population was not replacing itself! Something had to give or a great economic and social disaster loomed.
Stimulus stirs interest
In national elections the Japanese people supported a new government. The new government changed the deeply ingrained economic policies. On taking office they began a stimulus program. Massive amounts of newly printed yen were injected into the economy. This injection of fresh capital produced an immediate and positive response from both the economy and investors.
With the new economic fuel, the idling but always powerful Japanese economic engine sprang to life. The Nikkei and began accelerating. That index tracks the biggest 225 stocks listed on the Tokyo Stock Exchange. Immediately a new trend up was established.
Stimulus produces a political dilemma
Like politicians everywhere, Japanese politicians want to be reelected. The money printing stimulus program got underway and quickly showed some promising results. But along with the growth came a major potential problem, inflation.
Unfortunately, inflation has the immediate effect of eroding the value of savings. That is very bad news in Japan. Japan’s large and aging population would not tolerate any significant value erosion of savings. Their savings were the accumulated gain of a lifetime of hard work.
In a low interest environment those savings already produce no real return. The introduction of inflation puts a unwelcome leak in the pool. The value could decline. The government responded to the concern.
Jumping into a deep saving pool
A new Japanese financial invention is a clever creation to meet this challenge. It will also add yet more energy to an already promising economic growth rate. The new economic creation, called the Nippon Individual Savings Account (NISA), becomes available in January 2014. NISA is a tax-free equity savings vehicle for Japanese citizens.
This innovative, made in Japan creation, promises to further accelerate the economy by tapping into their huge domestic savings pool. NISA is uniquely Japanese but somewhat similar to Canada’s RRSPs, TFSAs and America’s 401Ks.
In contrast to most North Americans, Japanese people save a huge portion of their income. Generations of that saving behavior produced a national capital pool that exceeds $8 trillion! That capital horde totals more than twice the entire Japanese equity market!
However, that huge ocean of Japanese savings, because it was caught in a moribund economic environment, produces virtually no return.
NISA entices Japanese savers to turn into investors. Those that do get to enjoy tax-free returns. That also puts idle capital to work. Putting capital to work adds more economic stimulus.
NISA may put an idle ocean of money to work. It gives savers a way to avoid any inflationary loss. By becoming investors they can seek returns on their saved capital. In that way they can profit and grow in wealth rather than let inflation eat their wealth.
The potentially huge NISA pool could add significantly to Japan’s economic growth without printing any new money. And as that additional stimulus comes without printing more money, it sounds perfect for both the nation and individuals. A lets the political leaders promise everybody can win! Brilliant!
Are you in? Are you considering new investments in Japan? Make a comment, ask a question, we can talk about it.
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White Top Investor
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