Japan: The Birthplace of Quantitative Easing?

Did Japan lose decades or not?

It’s been an interesting debate on whether Japan lost any decades in its economic history. But today, it has minimal impact on your decision to include Japan in your portfolio.

In the previous article, we looked at the hand-in-glove approach adopted by Japanese banks (SMFG) (MFG) (MTU) for low credit-worthy Japanese corporations. This was the reason for the asset price bubble in Japan. It makes Japanese banks and corporations inherently unlikable, and it becomes difficult to invest in them. But has Japan (EWJ) (DXJ) done anything to change this?

Recovery in the aftermath

After a slow start to reforming the banking system, Japanese authorities were forced to speed up recovery efforts after the banking crisis of 1997–1998. The crisis, which revolved around non-performing loans and damaged balance sheets, was largely resolved by the early 2000s, according to the paper “The Structural Causes of Japan’s Lost Decades” by Fukao, Ikeuchi, et al.

Japan: The Birthplace of Quantitative Easing?

But the impact of the banking crisis put a severe strain on Japan’s monetary and fiscal policy. This is very relevant to you from an investment perspective, since it still has an impact on policy.

Birthplace of quantitative easing?

Calling Japan the birthplace of modern-day QE (quantitative easing) is not outlandish, since Japan has had the longest experience with QE. The Bank of Japan first introduced quantitative easing in March 2001 when it began purchasing Japanese government bonds (or JGB). This continued until March 2006 when the Japanese economy started showing signs of exiting deflation.

Then the global financial crisis hit in 2008, and deflation and de-growth were again staring Japan in the face. The Japanese central bank had to introduce CME (comprehensive monetary easing) in October 2010 to fight its old nemesis.

In the next article, we’ll see how CME led to what is now known as Abenomics.