Japan Adds $113 Billion (4.7% of GDP) of Spending in Current Year To Fight Inflation Effect - Potential For Broad Market Impact
Yes, you read that right.
The Japanese government announced today it is adding supplemental spending of 4.7% of Japan’s GDP to 2023’s expenditures in order to “cushion” inflation effects.
With price inflation currently running at 3%, but Japan’s economy projected to contract in Q3 2023, the Japanese government is facing a stagflationary environment.
The classic definition of inflation is an increase in the money or currency stock (currency outstanding in the economy) that leads to goods price inflation. Thus increased government deficit spending that is fueled by the printing press will, typically with a short pause, only compound the current goods price inflation in Japan. And further loose money policy results in economic distortions that compound downturns.
Japanese fiscal and monetary policy is not only a matter of concern for the Japanese as Japan’s loose money policy to support it’s deficit spending has a potential knock-on impact on global markets.
Japan’s monetary policy has resulted in a devaluation of the Japanese Yen that is now forcing Japanese interest rates rapidly higher.
Secondary Market Effects
The secondary effect of these rising rates on global markets is due to what is termed the ‘Yen Carry Trade’ whereby traders and hedge funds have, for years, borrowed large amounts at very low interest rates in Japan and speculated in US and Global markets.
Suddenly rising Japanese interest rates can act as a global margin call as these borrowers are forced to cover or repay their Japanese loans in order not to face losses from the rising interest rates.
Such forced selling of stocks and bonds by traders and hedge funds can cause a strong down-turn in global markets.
Government and monetary central planners can only compound the problems caused by their loose money policy and deficit spending by applying more loose money and deficit spending.
Best regards,
David Jensen