Beware December 29th

“Suppose the Bank of Japan prints yen and uses them to acquire foreign assets. If the yen did not depreciate as a result, and if there were no reciprocal demand for Japanese goods or assets (which would drive up domestic prices), what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets, leaving foreigners nothing to hold but idle yen balances?” [p20]

“By a fiscal component I mean some implicit subsidy, such as would arise if the BOJ purchased nonperforming bank loans at face value, for example (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does. Although such operations are perfectly sensible from the standpoint of economic theory, I doubt very much that we will see anything like this in Japan…” [p23-p24]

Japanese Monetary Policy: A Case of Self-Induced Paralysis?* Ben S. Bernanke, Princeton University, December 1999
* For presentation at the ASSA meetings, Boston MA, January 9, 2000.


You can call it a “lack of confidence” when you cheat on your wife or girlfriend and get caught out. You can sweet talk your way back into “confidence” but should not believe that you can continue to cheat. Do not complain to others that the problem with your relationship is a lack of “confidence” then continue cheating. The excruciatingly simple answer is that your cheating is the problem. The “lack of confidence” is only a symptom of your cheating.

Try explaining this simple concept to a Central Banker. They cheat on the market with unlimited liquidity and artificially low interest rates. A “lack of confidence” they say, is the problem when the market catches them at it. Then they want to sweet talk the market but go right back to cheating. On 29 December 1989 the Nikkei kicked out the sweet talking Japanese Central Bankers. Nineteen years later she still refuses to listen to their sweet talking. Nineteen years they keep trying to talk their way back in without giving up their cheating ways.

Central Bankers in the West treated the Japanese market behaviour like that of a wilful child. Telling the Japanese you should cheat more and sweet talk with more purpose. It did not work and sometime in 2007 the sweet talking Romeo’s in the rest of the world also got kicked out. No amount of sweet talking would restore confidence when they chose to go on a cheating binge.

Stop cheating or stay outside in the cold. Nobody is listening. Take a good look at what to expect for the next 20 years should Central Bankers fail to stop their cheating ways.


Banking Stagnation.




Systemic banking failure with the Bank of Japan providing unlimited liquidity and zero or near zero interest rates. This Central Bank policy prevents debt clearing and ensures stagnation. It is no surprise that Bank of Japan officials have designated the NPL (Non Performing Loan) as enemy number one for Central Bank policy.


Long term Bear Market in Stocks with high volatility.




Let’s record the pivotal points again. 29 December 1989 intraday high of 38,957; 19 August 1992 intraday low of 14,194; 28 April 2003 intraday low of 7604; and 28 October 2008 new intraday low at 6995. A nineteen year Bear market in the Nikkei and still making new lows. Any stock market trader would look upon this chart and identify the trend but know that one wrong point of entry could end his career. This market is for long term professionals and not for speculating taxi drivers.


Exploding Government Debt without pressure on long term interest rates.




The Nikkei high of 29 December 1989 haunts this chart. Japan’s Government liabilities exploded upwards and tapered off only at the height of the boom in the rest of the world. How near is Japan to the precipice of a Hyperinflationary episode?

The world in 2008 stand before three choices, none of them pleasant.

1. Liquidation of Debt. This choice is the least palatable for politicians and Central Bankers alike. It will bring about a market driven realignment of the economy. The rebalancing of the economy will remove the malinvestment and structural imbalances from the economy and produce fast recovery thereafter. An undertaking to follow prudent and responsible Monetary and Fiscal policies will restore that elusive “confidence”. The political will for this option does not exist and it is therefore an unlikely scenario.
2. Japanese style incremental liquidation of debt. All my research indicates that this process will take from fourteen years to longer. The fourteen year benchmark is the extent to which monetary policy had stimulated 20 year mortgage absorption below the 8% crossover where capital repayment become more important than interest repayment, which need to be rebalanced. The reality of the Japanese scenario is as above, nineteen years and still counting. This is the explicitly stated choice of the Politicians and Central Bankers as of November 2008. I can detect no change in the intent or rhetoric indicating a change of heart. It is therefore very likely that we will get to experience this scenario. The likelihood is high that the experience will prove worse than Japan. Japan had savings, reserves and a huge Current Account surplus and a rest of the world in an extraordinary boom to keep it from slipping further into the abyss. Let’s not forget the Yen Carry Trade so eloquently suggested by Bernanke to the BOJ in the quotation above. (Beware anyone who does not comprehend that the FED could choose to engage in exactly the same tactic). The 2007 Depressionary Bubble is now world wide in decline with everybody trapped in its grip.
3. Hyperinflationary Bubble. It requires one final co-operation between Monetary and Fiscal Policy. The creation of money for direct spending by Central Government without using the formation of debt as the distribution channel. The risk if Monetary and particularly Fiscal interventions getting out of hand is high but not likely for now (my sincere hope). I have no personal desire to experience this scenario firsthand.

It is good to look at the 1929 experience. So too the 1970-1976 experiences. History gives us prior warning and we need to revisit the lessons of yesterday but the Japan experience is the prior warning for the 2007 systemic collapse. The cause was the same type of Monetary Policy, the collapse was the same type of systemic banking failure and the remedy so far is the same. Why would the result not be the same?

Sarel Oberholster
BCom (Cum Laude) CAIB(SA)
14 November 2008


© Sarel Oberholster

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .

Ps. I count the 17 years for the Deflationary Bubble from 1991 when the property bubble joined the collapse. For a good chart see Fig 8 on page 25 of "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses by Hiroshi Ugai, published by the BOJ.