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Durudarshan - Investment Analysis

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I believe it is time for Japan to taper the Stimulus

Posted on August 22, 2015 at 7:45 AM Comments comments ()
The recent slowdown in Japan, or rather economic activity not picking up any further in spite of the Stimulus, which is running at around $85 billion a month, suggests to me that the Stimulus needs to be cooled down.  In other words, it has to be tapered, as they have done in the U.S. for past several months.

When you look at the context, the Japanese Stimulus is creating a debt burden for the future that would be clearly unsustainable.  Granted that it is a simulation of the US quantitative easing, but for a nation with a population of 20 million to carry the same burden as the biggest economy, the US having a population of 330 million, seems like fencing on high ropes.  So far, so good, it has brought Japan out of a period of just ticking over to one of growth.  With their investments overseas creating a favourable Gross National Product, the Stimulus has a base from which to service the debt burden, but with perceived slowdown in a lot of the economies, and weak demand in Japan itself, it may be prudent to taper the Stimulus, and reduce it perhaps every three months, by say $10 billion each time.  A gradual taper will probably achieve the right result, keeping the economy ticking over at a pretty health pace but wiping off the excess which might be deadweight.

The patching up of the third Greek bailout just in time indicates the possibility of a period of economic expansion and consolidation both in Greece and the other Eurozone areas, with Mr Draghi's Trillion Euro Stimulus servicing the growth and investments throughout the Euro Area.

The U.S. will of course have the Debt Ceiling question raised in September, but the good news is that that was fixed to March 2016, so there can be no curtailment of economic activity until then.  But the stockmarkets heading down somewhat suggests the nervousness about the possibility of a rate hike.  On that score, I would suggest a quarter percent or even an eighth would not be bad, if the core inflation remains positive, which would suggest underlying strength of the economy.  Personally I believe the U.S. is transitting from Recovery to Prosperity, but with the recent nervousness the figures may be botched up and put paid to any rate hike, so necessarily the Fed will not need to raise it.

Oil touched $40 a barrel just yesterday, for the WTI, but now I feel the OPEC and Russia will think again and change their strategy and announce some production cuts.  After all, with tanks full it just becomes practical to cut down.  A low Oil price is just a bonanza for the world to enjoy for some short while currently and the near future. 

The Chinese economic activity is the one to watch - if it picks up, which it is bound to once prices are in their favour, it will restart the worldwide consumerism and growth.  Currently India and Brazil are achieving very healthy figures, and they will add to the worldwide economic Recovery. 

Interesting times ahead.

Kind regards,
Durudarshan H. Dadlani



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