Japan is a Train Wreck

The latest insane policy to come out of Japan is that they are going to raise the countries’ sales tax from 5% to 8%!

Yes, the Japanese economy is starting to grow. But so is inflation.

Yet Prime Minister Shinzo Abe says it is needed. The New York Times reports that he is “citing the need to “maintain confidence” in Japan’s fiscal health and pay for the country’s growing number of elderly citizens.”

From the NY Times:
“If we raise taxes now, would consumption slump, and would the Japanese economy sink back into the deep valley that is economic morass and deflation?” he said. “I pondered these questions until the very end. But there is no road left for us but to grow our economy and to rebuild our finances at the same time.”

By combining a tax increase with government stimulus, Mr. Abe is signaling to global investors that Japan will start taking concrete steps to rein in its colossal debt and that it is prepared to take ample measures to shore up the economy.

Earlier this year, national debt topped 1 quadrillion yen, or $10 trillion, for the first time — more than twice the size of Japan’s economy and larger than the economies of Germany, France and Britain combined. That level of borrowing raises concerns that investors could one day lose confidence in Tokyo’s ability to service its debt, which could set off a crisis with grave consequences for the global economy.”

This will fail.

Yes, the government needs more revenue. But raising sales tax will lead to less sales.

I have a principle. If you tax something, you get less of it.
The principle means that there will be less sales as a result of the tax hike. This means that there will be a near recession coming in Japan after that tax hike.

I’ll monitor the situation closely to see if the staggering of the economy will create a trading opportunity. Normally, I’d be looking to sell the yen, Japanese stocks and buying Japanese bonds.

I’ll keep you posted!

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  Notes    

I’ve never spent very much time in Japan. The weather sucks. It seems like it is always cold when I am there.

Yet, there, in the distance, is the magnificent Mount Fuji. I find my heart leaps every time I see that beautiful mountain.

I love Japanese prints by Hokusai and Hiroshige. I love them for their subjects, color, design, and odd perspective.

Few people realize the impact these prints had on western art.

I saw a remarkable exhibit at the Vincent Van Gogh museum in Amsterdam.

What they showed was early paintings by Van Gogh. What was remarkable were his copies of Hiroshige prints. He literally learned to paint largely from copying Japanese prints! Once you know that, you can start to see the influence even on his later work. Clearly his use of color and texture are very different from the Japanese prints but note that his perspective is very similar.

It gave me a completely different perspective on Japanese prints and Van Gogh. I love them both and the exhibit opened my eyes to a new reality and actually deepened my appreciation of both.

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