Today’s market headline: Japan officially in “Triple-Dip Reccession”

Abe Shinzo became Prime Minister of Japan in September 2012 with a radical plan designed to reinvigorate the Japanese economy.  His plan, referred to as Abenomics, called for a three -pronged approach to stimulate Japan’s economy using: fiscal stimulus, monetary easing and structural reforms.  First, a little background.  Since the peak of Japan’s stock market in December 1989 when it almost hit 39,000 – today it is just under 17,000 – Japan has endured a rudderless economy that many have dubbed the “lost decade”.  Japan has tried many fiscal stimulus packages over the past twenty-five years that have not worked.  Today, its debt to GDP ratio of +240% is the highest in the world.

In our last Market Update, we discussed the “new” quantitative easing program in Japan.  Given this stimulus, why is Japan going into a recession again?  It’s simple, they raised taxes.  Look at 1997.  In 1997, Japan raised the sales tax from 3% to 5% to help balance its budget.  What happened?  Government revenues fell by 4.5 trillion yen and the economy fell into a recession because consumption fell.  Fast forward to April of this year –  Japan raised the sales tax from 5% to 8% and is planning to raise it to 10% in October 2015.  Abe never learned the lessons of the past – raising taxes slows economic growth.  This is especially true when that tax is on consumption.

What does this mean for investors?

This is not a time to own yen denominated securities – unless you are fully hedged against currency risk.  When investing in international funds, be careful about the amount of exposure they may have in Japan.  We believe emerging markets offer a better risk/return profile than Japan at this point.  Not only are they relatively cheaper, but emerging market countries’ debt problems are behind them and because of that are in much better financial shape today (Debt to GDP – Japan 240%, India 63%, Mexico < 50%).

Interesting fact – More than 1 out of every 3 Americans over the age of 65 have no other source of retirement income other than Social Security.

Sincerely,

Your THOR Team

THOR Investment Management, Inc. is a registered Investment Adviser with its principal place of business in the State of Ohio.  The commentary contained in this market update is limited to the dissemination of general information pertaining to THOR’s wealth management services.