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The Daily Reckoning

Japan was a 'zombie state,' even before the earthquake

The country has been living beyond its means for years, leaving future generations to pay

(Page 2 of 2)



Under these circumstances, austerity was not only out of the question, it was no longer even part of the conversation. Reprising almost the exact words used by Ben Bernanke, Larry Summers and Tim Geithner in the autumn of 2008, the Japanese announced they would deal with the emergency at hand and worry about the long-term integrity of their national finances later.

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In came the Bank of Japan with ¥15 trillion ($189 billion) of QE on Monday and another ¥21 trillion ($264 billion) on Tuesday. By Wednesday, almost $700 billion of new funds had been made available. On Tuesday, the price of gold also sank $30, prompting observers to speculate that Japan was selling gold in order to raise cash.

Japan hardly needed to sell gold. Like the US, Japan uses debt monetization (now politely called “quantitative easing” but more accurately described as money-printing) to fill in the gaps in its budgets. But as the Japanese age, they save less and less. And the window on “borrowing from ourselves” closes. QE is surely destined to play a larger role in financing both the Japanese reconstruction…and Japanese self-destruction, too.

As to the reconstruction, no one is going to complain if the Bank of Japan buys a few more government bonds. The country is repatriating capital from all over the world. In anticipation of this the yen has spiked to record highs versus the dollar. This makes QE seem not only like a sensible way to make funds available for reconstruction, but a way to help the economy too. It will help push the yen back down, helping Japan’s export industry.

In the long run, no program of unbridled money printing goes unpunished. Sooner or later, Japan will add hyperinflation to its long list of torments.

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