The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Japan: On The Path To Another Long Recession

The verdict is in: QE doesn’t work, and in fact does the opposite of stimulating. That’s our view and that of a growing number of analysts world-wide.

Japan has implemented the largest QE policy (as a percentage of the economy) and has had the most miserable results.

Overseas investors, which account for about 70 percent of the market value traded in Tokyo shares, bought a net 18.5 trillion yen between 2012 and 2015. Global fund managers who were negative on Japanese shares for almost all of the five years before Abe came to power have been overweight every month since, according to a Bank of America Merrill Lynch survey.

Now that bullishness is dissipating, the number of overweight positions on Japanese stocks fell for a third straight month in March while investors’ outlook on the economy is dimming amid concern over earnings growth, the Merrill Lynch survey showed. They’ve sold a net 5 trillion yen since the second week of January, the longest stretch since 16 weeks of selling in 1998 and the most in records going back to 1993.

Bottom Line: All the efforts that the Bank of Japan took, including negative interest rates, have only worsened the economic stagnation. Negative interest rates were intended to fuel the stock market, making the yen value lower, which was supposed to boost sales of Japanese international firms. It hasn’t worked.

Instead, the Japanese people are buying safe’s and taking their money out of banks. That lowers the velocity of money, and therefore economic activity. We believe Japan is on its way to another long recession.