Japan is in recession, again. A year ago, I wrote about Japan facing back-to-back decline in its quarterly gross domestic product (GDP). Despite the Japanese government’s admirable changes to corporate and social policies, continued misguided monetary policies have effectively created a black hole of wealth for Japanese bond holders.
Preliminary results for Japan’s third-quarter GDP show a 0.8 percent decline; following its second-quarter decline of 0.2 percent. Since November 2014, the Bank of Japan has purchased roughly 80 trillion yen in government bonds—on top of 100 trillion yen purchased since April 2013. Private demand fell 1.8 percent in the third-quarter and 0.2 percent in the second-quarter, while government consumption has continued to grow.
Japan’s “safe” strategy for growth is not new. The Bank of Japan has held interest rates below 1 percent for the past 20 years. While a 1 percent interest rate sounds good to those seeking to borrow money, it generates low incentive for those who have the cash to lend—meanwhile creating a catch-22 as those who hold bonds purchased at a low rate effectively? lose wealth relative to any new bonds issued at a higher interest rate.
There is a gleam of hope as Japan Post (Holdings, Insurance, and Bank Co., LTD.) became one of the world’s largest initial public offerings on the Tokyo Stock Exchange last month at an initial 1.4 trillion yen. The privatizing of government-owned Japan Post comes at a time when experts and officials are looking to Japan for making riskier investments and boardrooms for considering more the shareholder opinion over the stakeholders. Only 11 percent of Japan Post is open to the public, with more to be opened in the future.
As the government and Bank of Japan attempt to increase private spending, however, the Bank continues pushing up the monetary base and subsequent prices of goods. Monetary easing and a near-zero interest rate policy has trapped Japan. The public face an uneasy, but necessary, adjustment to a market-established natural rate of interest—whatever it may be.
As the government arbitrarily seeks to grow GDP to 600 trillion yen by 2020, it is important to remember that this is Japan’s fifth recession in 10 years.
