After its spectacular rise over the 45 years following World War II, Japan’s economy was hailed as a model of how to do things right. But then times changed. Japan shifted from leading the way, to showing the world what not to do. And now, the world is doing it anyway.
From the end of World War II through 1992, Japan’s economy grew at an average of 7.3 percent a year. That’s as impressive as China’s recent economic growth. But since 1992, Japan has been in a decades-long economic slump, with real GDP growth averaging just 0.8 percent a year.
Meanwhile, Japan’s debt load has ballooned. From 1992 to 2015, government debt as a percent of the country’s GDP increased from under 100 percent of GDP, to 229 percent of GDP.
Japan’s prolonged economic slowdown helped bring about an era of deflation. Now its annual inflation rate stands at negative 0.4 percent (a negative inflation rate means there is deflation). This means that, in theory, if you paid 280 yen for a dozen eggs last year, this year they would cost 278 yen. In a deflationary environment, consumers believe prices will be lower in the future – so they delay purchases, waiting for lower prices. This in turn slows economic growth and results in further deflation.
To get people to borrow and spend more, the Bank of Japan started slashing its prime lending rate in 1992. It cut it until the rate reached nearly zero. It’s been there for about 20 years. And recently, Japan’s central bank decided to move to negative interest rates – a financial concept that is flipping the world of finance on its head.
One of the side effects of the disease has been pitiful stock market performance. Japan’s Nikkei 225 index hit a peak of 38,957 in 1989. It is now at 16,620. So 27 years later, the stock market is 57 percent below its all-time peak.
It may be spreading
The rest of the world seems to be headed down Japan’s path.
Global economic growth has been slowing. From 1980 to 2008, world GDP growth averaged 3.5 percent. Since then it has averaged 3.2 percent, and it fell to 2.5 percent last year. And this slowdown has accelerated despite steady growth of nearly 7 percent per year in the world’s second-largest economy, China.
Since the 2008 global financial crisis, central banks around the world have continued to slash interest rates and print money, hoping to stimulate growth. For example, the U.S. began printing huge amounts of money in late 2008 and started buying up its own debt to reduce interest rates. During its 2008-2014 quantitative easing (QE) programs, the U.S. Federal Reserve bought over US$3 trillion worth of U.S. Treasuries, or government bonds.
This did succeed in lowering interest rates. But growth in the U.S. and around the world is still low.
Now, other governments besides Japan are trying negative interest rates. Because of already low interest rates and quantitative easing programs, a number of countries – with around US$13 trillion in bonds being affected – now offer government bonds that “pay” negative interest.
And, like Japan, inflation is very low. In fact, global deflation is now a legitimate threat. Besides Japan, still the world’s third-largest economy, the European Union has had four months of falling prices in the past year. Singapore has seen 20 consecutive months of deflation.
Last month, the Organisation for Economic Co-operation and Development (OECD) warned that the world economy is slipping into a self-fulfilling “low-growth trap.” This means that the economy may be at a point where all the spending, stimulus and negative interest rates won’t help growth, and may make an economic slowdown even worse.
Several factors are driving low growth and rock-bottom inflation levels around the world, including demographics and debt levels. That there will soon be more older people than younger people in the world is, and will continue to be, a drag on economic growth.
The global economy has also seen an explosion of global debt, which now totals over US$200 trillion dollars, up more than US$60 trillion since 2007, and 130 percent more than total debt in 2000. When interest rates eventually rise, the cost of servicing this debt will rise – depriving governments, corporations and households of money to spend and invest. And this would be a further drag on economic growth.
What happens next?
Low (and negative) interest rates, rising debt, possible deflation, stagnant economic growth… the rest of the world seems to be catching Japanese disease. Is the table being set for a repeat of Japan’s two decades of dismal stock market performance?
So far, no. U.S. markets have reached all-time highs this month – the S&P 500 is up 6 percent year-to-date. Other markets like Britain’s FTSE 100 (up 7.5 percent), the MSCI World Index (up 2.5 percent), Singapore’s STI (up 1.6 percent) and Hong Kong’s Hang Seng (up 0.4 percent) have all been holding up so far this year. (All returns in local currency). However, Europe’s Eurostoxx 50 index is down 9 percent this year and Japan’s Nikkei is down 12 percent.
But if the rest of the world continues to show symptoms of Japanese disease, stock market weakness can’t be far behind. The headwinds of low economic growth, high debt and deflation will eventually win.
One way to insure your portfolio and your wealth against this is the use the best hedge there is: Cash. And to insure yourself against it, make sure your portfolio includes precious metals like gold and silver.
We will be providing more information on how you can profit from gold and silver investments later this week. So please stay tuned.