In light of recent outrage over Japanese Prime Minister Abe, Tokyo is awash with protesters and Abe’s approval rating has dropped by 39%, which has financial experts like Tres Knippa, member of the Chicago Mercantile Exchange, questioning Japan’s economic stability.
In a recent interview with Dawn Bennett, host of the nationally-syndicated talk radio show “Financial Myth Busting with Dawn Bennett”, Knippa argues that the stability of the Japanese economy is not just called into question as a result of political unrest; the Bank of Japan’s increased purchase of government bonds is also cause for concern, given that the purchases are being made out of necessity, not as a part of some larger plot to weaken currency and ease fiscal policy in the fall. The bank is purchasing government bonds because there’s simply no other market for them.
Japan currently suffers from crippling debt and spends twice what it actually brings in tax revenue. Japan’s aging population isn’t helping matters. Knippa points out that what Japan needs more than anything else is additional bodies, not more currency.
A Lesson for the U.S.
Japan’s economic woes are unfortunate, but they have a larger significance, particularly for the United States. In many ways, Japan’s economic situation reflects the likely future of the U.S., as Japan was set on the same course of economic upheaval with a housing market that burst, a government bailout and subsequent low interest rates 16 years ago. In other words, we can expect something very similar in the near future if we don’t change course and reign in unwieldy government spending, which is what Japan failed to do, too. Heightened government spending in the face of growing public demand only exacerbates the economic challenges faced.
Japan’s economy shrank in the second quarter by 1.6% with decreasing exports (a decrease of 16% year-over-year), and while some speculate that Japan’s economy is suffering the consequences of a weakening Chinese economy, the influence of its housing crash, government bailout and zero interest rate policy can’t be ignored.
Interestingly, there may be an immediate upside to Japan’s economic crisis for those in the U.S. Knippa notes that it can be wise for individuals to borrow from weakening currency like the yen. For example, if an individual takes out a mortgage in yen on a rental property (as Knippa did himself), but collects the rent in dollars, the mortgage principal decreases faster as the yen is devalued and the dollar strengthens. Knippa also advises that when investing in a sinking currency like the yen, it’s imperative to guard against the risk with a large investment in something more stable like gold.
Ultimately, though there’s a bright side for international investors in the short term, Japan’s weakening yen and overwhelming debt should serve as a warning to the U.S. above all else.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett firstname.lastname@example.org