Japan Hitting Gas on Its Ride Off Cliff: Shilling

Legendary bear Gary Shilling says Japan’s long-awaited economic reckoning has begun, thanks to trade's shift toward imports

Man examining stock board in Japan. (Photo: AP) Man examining stock board in Japan. (Photo: AP)

Two decades of stagnant growth, crushing debt, natural disasters and nuclear fallout—Japan has had it rough lately. But it’s turning a corner, John Arnhold, First Eagle Investment Management’s chairman and CIO recently told AdvisorOne.

“If you look at Japan, it's a market and economy that has been a relatively uninteresting place to be an investor,” Arnhold said. “But because the macro picture is less than desirable there has been very little money flowing into Japanese equities. But there are world-class businesses in Japan that actually operate around the world and have traded at very reasonable prices. We’re taking advantage of those opportunities.”

Great news, right? Wrong. Enter legendary bear (and AdvisorOne contributor) Gary Shilling to rain on the parade.

Japan is still a “slow-motion train wreck,” Shilling, president of A. Gary Shilling & Co., told The Daily Ticker on Friday, and the speed of the train wreck is now accelerating.

The Japanese yen recently began to weaken sharply, and Shilling told the website he believed this was related to Japan's trade balance, which recently slipped into deficit.

“A trade deficit will require Japan to fund its government borrowing with loans from other countries, as opposed to loans from its own citizens, who have been funding the government deficit for the last two decades,” The Daily Ticker says. “Japan's population, meanwhile, is aging, and its consumer savings rate has dropped as citizens dip into savings to fund their retirements. The combination of these two factors—a trade deficit and a declining internal savings rate—will exacerbate the need to fund the deficit externally.”

And what will that mean?

“In Shilling's opinion, it means that Japan's borrowing costs will rise and its currency will weaken. If Japan's borrowing costs rise too much, they could make Japan's debt-load unsustainable. And at that point, Shilling says, the Japan train-wreck will cease to be slow-motion.”

Enjoy the weekend.

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