Did Quantitative Easing Save the Japanese Economy?

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Tokyo in the evening
Twilight view over Tokyo metropolis with Mount Fuji on the horizon, back lighten by sun.
Tokyo in the evening
Twilight view over Tokyo metropolis with Mount Fuji on the horizon, back lighten by sun.

Depending on whom you ask, quantitative easing is just one giant global financial Ponzi scheme or a thinly veiled currency manipulation scheme. According to these schools of thought, quantitative easing and central bank meddling in general are very negative and tend to harm the economy in the long run. On the other hand, if you ask other economists, to them, quantitative easing is the best thing since sliced bread. They would eagerly point to the United States as an example of how economies can be jump-started back to life with quantitative easing. They would also point to the recent example of Japan.

Japan has been belly up for a long time. It has been suffering from deflation year after year. Its stock market didn’t go anywhere since hitting record highs in the 80s, and it seemed bound for several decades of economic underperformance. With the second election of Japanese Prime Minister Shinzo Abe, Japan went headlong into quantitative easing. It bought up government and private bonds, and just pumped a ton of cash into the financial markets. According to the boosters, this led to the yen crashing which, of course, made Japanese exports more attractive. Exports increased, and the Japanese stock market roared back to life.

It sounds awesome, right? It sounds like the answer to economic malaise is to simply just print up paper cash to scoop up bonds. Well, it is not that easy. I wish it was that cut and dried.

The problem with quantitative easing is that it created a lot of debt that somehow has to be paid off. We are not just talking about a few billion here and there. We are talking about trillions of dollars worth of debt. If you ever have a tough time paying off your credit card, can you imagine trying to pay off a credit card where you have more than ten trillion dollars on it? You still have to pay interest on that debt.

It is just a matter of time until the house of cards blows up. The ready use of quantitative easing and other stimulus schemes is actually creating bigger bubbles. It is no surprise why stock markets all over the world, from New York to the Philippines to London and Tokyo, are overvalued. It is not because companies are performing at optimal levels. It is because of the cheap liquidity. The chickens will come home to roost at one time or another.

1 COMMENT

  1. > The problem with quantitative easing is that it created a lot of debt..

    That does not seem to relate to the facts. What debt increase are you talking about?

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