Imagine a country. That country has more than the double of its annual income as government debt. The interest rates are at zero for almost 20 years. Deflation is a common feature. Population is getting old and decreasing. Both the Government and the Central Bank are trying their best (are they really?) to end stagnation.
It really seems like a place where you should avoid to invest your money in.
Do you know which country I am talking about?
Of course you do! You did read the title.
Despite all the problems Japan has, it has another one. People trust them. What?
Whenever there is instability in the world markets, investors fly to Japan and the Yen looks like the rising Sun.
Is that really bad? Yes..In the crazy world of economics, sometimes when something appreciates it means bad news.
If the Yen appreciates, imports get cheaper and so inflation will get even lower (which has a negative impact on debt) and it will cause a further drag on growth, as exports get more expensive.
But why does this happen?
The main reason is because although Japan is the world’s largest debtor it is also the world’s largest creditor (as its current account surpluses showed for decades), so every time there is instability in “Western” financial markets, there is a niponic exodus back home.
Well…Today, with the constant flow of information other investors will try to emulate Japanese investors and will buy the Yen when turbulence arrives.
So basically… the rising yen is another self-fulfilling prophecy.
Japan has been trying to avoid stagnation for over two decades now, but not only it faces a liquidity trap (as Paul Krugman kindly reminds us every time), but that problem is aggravated by being trapped within its safe haven currency!