Will this cause a "flight to quality" in the U.S., or will it be a millstone around our neck?

Fair use, for educational purposes.

Link

Japans Misguided Stock Market Bailout 18 April 2000

Summary:

"Japans premier stock index experienced its fifth-largest drop ever Monday in response to the Dow Jones plummet Friday. Japans government has now proposed direct intervention in the Japanese stock exchange. If executed, the new plan will fritter away billions of dollars and further indebt an already fragile economy."

Analysis:

"The Nikkei-225, Japans premier stock index, dropped 6.98 percent on Monday. This, its fifth-largest drop ever, was in response to the Dow Jones plummeting on Friday. To counter the perceived threat of a stock market meltdown, the three parties of Japans coalition government submitted a proposal that will likely be adopted. The proposal calls on the government to intervene directly in the Japanese stock exchange to prop up share prices. Against all odds, Japan has found a way to make its already piddling economy even worse."

"This drop was not insignificant. The total value of Japans stock market is approximately the same as Japans GDP  about $4 trillion. It is also one of the last economic institutions that has not been hindered by direct government intervention. The stock market is heralded as one of the few sure sources of capital for an economy managed by a government addicted to borrowing. The governing coalitions new plan envisions purchasing one trillion yen ($9.2 billion) of stock to offset the recent loss."

"Other countries, while not thrilled with their stock market devaluations, are shrugging off the losses as the cost of being linked to an international economy. Also hard-hit were Hong Kong, Mexico and South Korea. Only Japan is reacting with such a large-scale intervention. The effects of the new Japanese plan will be numerous and dire."

"First of all, Japan cannot afford such a costly bailout. After a decade of barely perceptible growth and rising debt, the government has little money to spare. Japans economic stagnation is exacerbated by its expensive cradle-to-grave social welfare policy and an economic structure that values stability and personal connections over ingenuity and merit. Japan needs to address these problems. Spending billions on bailing out a stock market that is suffering a cyclical downswing is not the way to do it."

"Second, a $9.2 billion investment amounts to only 0.23 percent of the markets value, not nearly enough to account for the recent loss. If the U.S stock market plummets further, as expected, Japans $9.2 billion investment will be wasted money. Stock markets are by their nature volatile as the past few months in America plainly demonstrate. Dumping an extra $9.2 billion into the market whenever it falls beneath an arbitrary trigger  especially when the fall is caused by factors in New York  is economically unsound."

"Third, Japan is already so low on cash that it has to take out high interest loans to fund its stimulus packages. This new plan calls upon the government to tap into one of its few remaining sources of funds, pension reserves  the Japanese version of Social Security. This would be equivalent to the United States spending retirees savings to bail out private investors whenever the Dow drops below 10,000."

"Fourth, Japans record of intervention is less than stellar. Often times when the government has intervened in the currency markets to weaken the yen, it strengthened instead. With the yen continuing to strengthen, Japan is likely to engage in another of these pointless interventions soon. Stock markets are even more difficult to predict. U.S. Federal Reserve Board Chairman Alan Greenspan solves this problem by having as little to do with the stock market as possible."

"The recent proposal also calls upon the government to accelerate the implementation of large-scale public works projects outlined in the 2000 budget. The logic being that early spending will help alleviate the negative short-term effects of the stock market fall. However, accelerating the implementation of the stimulus package, paid for with borrowed funds, will strengthen the possibility that Japan will borrow even more from its crippled banks later in the year."

"Incurring more debt will sink Japan  already holding the world record for most-indebted government with $6.15 trillion borrowed  further into the red. Japan currently runs a budget deficit of nearly 40 percent. When Japanese interest rates rise as eventually they must  Japan cannot keep them at zero percent forever, especially with U.S. rates at 6 percent  the cost of servicing these debts will mushroom and crash the Japanese budget."

"Despite the unfettered stupidity of this plan, Japan will likely implement it, so powerful is the perception that it must address the most visible aspect of its flagging economy  the stock market. The plan already has the support of the top policy makers of all three parties in Japans ruling coalition. Japans uninspiring prime minister, Yoshiro Mori, is not the type to stand in the way of such consensus. Furthermore, Japan has a history of adopting imprudent measures, such as taxing its dilapidated and stressed banking system to create the illusion of economic progress. If implemented as intended, the new plan will squander away $9.2 billion of Japans pension fund and further chain down an already hobbled economy. Not a small feat."

-- Deb M (vmcclell@columbus.rr.com), May 18, 2000

Answers

why is it they're so good at manufacturing and so bad at economic management

-- richard (richard.dale@onion.com), May 19, 2000.

After a decade of barely perceptible growth and rising debt, the government has little money to spare...

Japan allowed massive asset inflation (a.k.a. a "speculative bubble") in their real estate and stock markets, then it all fell apart and they've spent the ten years since then trying to dig their way out with almost no success. Ten years of recession in an economy that many experts thought was the model for the new industrial world. That's what happens with "bubbles" and we may see it here Stateside in fairly short order.

Has everyone seen just how fast the US markets have lost ground since March? Nazz went from 5000 to 3500 in about four weeks (billions and billions of dollars sent to "money heaven") and has been making lower highs (bounced off 4000, then 3600) and testing lows ever since. If it breaks support around 3400, the next stop is 2900, which would put it back to its levels from late October 1999.

People can (and often do) head for the exits at a party much more quickly than they arrive.

-- DeeEmBee (macbeth1@pacbell.net), May 20, 2000.

"why is it they're so good at manufacturing and so bad at economic management"

The U.S. is much worse at both, we're just better at denial. It's eventually going to come back and bite us in the ass.

-- Hawk (flyin@hi.again), May 20, 2000.