Hey everyone, welcome back, and thanks for following along. It is hard to believe that we are already halfway through December. Time really flies around the holiday season. For this Wednesday edition, we wanted to focus on recent developments in Japan’s economy and what we think this could mean for the U.S Markets. This is important because global economic conditions often influence market dynamics.

Politics is something that we never want to discuss in our newsletter, but we believe that covering the global economy in our newsletter is important because the way we invest relies partially on how well the global economy looks. We have seen things in the past like the Yen carry trade, the Russia/Ukraine war, the Iranian war, and other global events effect short term volatility, but today we are focusing on Japan, an industry that produces some of the most advanced automobiles, televisions and many other products.

Japanese Economy

Japan is often described as an advanced economy paradox: On one hand, it has massive national wealth, a high savings rate, and cutting edge industries. On the other hand it has the highest public debt of any large developed economy, a shrinking population, and a history of slow growth. This leaves Japan vulnerable to disruptions that could affect the global markets.

Simply put, Japan has a problem right now. They have a enormous amount of debt. In fact it is 230% of debt to GDP. To put that in perspective the United States is 125% gross debt to GDP. This size matters because it limits amount of policies that can be made and are very sensitive to interest rate moves. The Bank of Japan (BoJ) has been winding down years of easy policy (negative rates and yield curve control). This really just changes the price Japan pays to service debt. From 2016 to 2024 the policy rate has been -0.1% for reserves held by banks, which is a policy known as yield curve control to cap yields on 10-year governmental bonds near 0%. This means that new government debt even though huge in total could be borrowed at extremely low interest rates. This helped Japan service or maintain their enormous debt without immediate fiscal stress.

Recent Stimulus Package

In November the Japanese government approved about a 135 billion dollar stimulus package, aimed at boosting domestic demand. It was a one time cash handout of $150 per child, subsidies to help with energy bills and other living costs. To fund this Japan issued new debt through mostly short and medium term bonds. This was in hope to reduce long term yields. However some critics agrue that them adding this debt will just keep delaying the problem and continue to kick the can down the road while other hope it will cause growth and stimulate the economy.

Our Investment Thesis

So why should we care about Japan? Japan is one of the world’s largest holders of foreign assets, including U.S. Treasuries and equities (trillions). If they happened to lose confidence in their economy or yen, they may sell their foreign assets to raise cash or reduce risk. Additionally, Japan is a critical hub for global manufacturing and technology. Many U.S. companies rely heavily on Japanese supply chains like automobiles, semiconductors, and electronics. If for some reason they were forced to cut back on production or were delayed due to the rising debt costs, policy shifts or investments, some U.S. businesses could feel the effect through slowdowns, higher costs or some supply chain disruptions.

In short, while the U.S. economy remains structurally strong, Japan’s fiscal and economic moves can create a ripple effect that we are watching closely, especially in globalized financial markets. It is crucial to be informed and be aware of some of the potential impacts it could have on the market. We are ensuring that our portfolios are diversified across multiple sectors and asset classes, so we can try to navigate potential volatility.

Thanks for the quick read and we hope you have a great rest of your week.

Please feel free to join us on blossom: https://link.blossomsocial.com/7uYa/2ywli4mg

The information provided in this newsletter is for informational and educational purposes only and should not be considered financial, investment, or trading advice. While every effort has been made to ensure accuracy, we do not guarantee the completeness or reliability of the information. Past performance is not indicative of future results. You should conduct your own research or consult with a licensed financial advisor before making any investment decisions. We are not responsible for any losses that may occur from the use of this content.

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