Dangers of Japan's monetary policy

In 2012, with the election of Shinzo Abe, Japan embarked on a policy of bond buying which has subsequently taken the dollar-yen back to 95 , it's highest point since the financial crisis started. This is great for Japanese exporters because it makes their exports more competitive and also exerts real wage depreciation on workers, which helps the long-term competitiveness of the country.

The downside to this policy is that Japan is already in a liquidity trap. Demand for money is very low despite interest rates that are touching -(1.5)%. This is creating a temporary bubble in the TSE as hot money starts flowing into the yen to take advantage of the inflationary bull market. The challenge is that as the hot money flows into Japan, the yen rises, making the central bank's bond buying harder and harder to stay ahead of to achieve their desired goal.

The liquidity trap is really dangerous - something Europe may soon learn (the Netherlands specifically). No matter how low interest rates go, the economic engine won't turn over. This is why the easing program that Shinzo Abe has announced is being well received - even if it is 20 years too late to have a real impact.

Japan's real problem is that they have no domestic growth and their exports are being commoditized by other Asian countries like Korea, Taiwan, China, Indonesia and even Malaysia. The question is: without monetary trickery where is growth going to come from?

Japan has a population expected to decline by as many as 50 million people by the end of the century; they have very limited natural resources, which combined with the current anti-nuclear push has created higher production costs for Japanese manufacturers; and they have a "ingenuity gap" as US tech companies continue to dominate the Internet and Korean and Chinese manufacturers handle the gadget manufacturing.

Today the Tokyo Stock Exchange entered into bear market territory, down 10% from it's recent peak. This monetary alchemy needs to stop or else the yen risks a real collapse into an unstoppable deflationary spiral with inflation. This is stagflation 2.0 and could do a lot to derail the good economic news coming out of the US. Trade with caution.