The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground by Francois Trahan & Katherine Krantz

Author:Francois Trahan & Katherine Krantz [Trahan, Francois]
Language: eng
Format: mobi
Publisher: Wiley
Published: 2011-07-13T04:00:00+00:00

Figure 8.5 Inflation and Policy Tightening to Slow Growth from East to West

Source: Wolfe Trahan & Co.

Nowhere Fast

Some analysts have compared America’s ultra-easy monetary policy to that of Japan during the Lost Decade of the 1990s. In some ways the comparison is justified, but in several others it is not. The nature of the policies and the speed of implementation differed greatly in the two cases. The results, however, have been similar.

In both cases, exceptionally low interest rates led to cheap credit, which in turn enabled speculation in land and equities. In Japan, the party ended with more of a slow hiss than a pop. The Finance Ministry raised interest rates to dampen speculation in late 1989, but the decline was long and slow. The equity market fell 63 percent during the following decade and troubled banks had to wait years before being bailed out by the government. Unlike most Americans’ experience, the impact on the daily life of the average Japanese person was small. Japanese corporations were in terrible shape, but the individual fared much better due to the cultural tendency toward frugality and high savings rates. The Japanese responded extremely slowly in addressing the problems. The initial reaction was to do nothing as banks faltered, and by the time the government injected public funds into the economy it had been over a decade since the onset of the malaise. It took the Bank of Japan nearly a year and a half to cut interest rates, and 10 years for them to reach zero. Inflation has languished near zero ever since.

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