Where is the Japanese economy headed?

With deflation continuing despite long-term zero interest rate policy, how does the new Japanese government plan to expand its efforts to revive economic growth and lower unemployment?

Is this our future?

Japan paints a very sobering picture of what the future of the United States may be facing in the future should this loose monetary policy continue unabated. Zombie banks, real estate bubbles, deflation and stock market collapses are all themes very familiar to the Japanese economy in the 1990s.

Unfortunately the circumstances are all too similar here at home. Adding to that Japan also has a large aging population that will soon outnumber its workers, akin to the situation we face in the United States. All of these reasons and more are why it’s important to pay attention to where the Japanese economy is heading.

Severe economic routs have no easy cure

Every time a massive speculative bubble implodes it leaves behind a tremendous amount of credit destruction, which in turn absorbs liquidity and pressures equities, corporate bonds and derivatives like credit default swaps. All of these circumstances potentially create deflationary forces that can shrink the capital base of a country and even create a banking panic. After all, debt is money in many modern economies. As that monetary base shrinks each unit becomes more valuable.

Mitigating the risk of severe economic contraction requires an innovative and careful approach to the underlying cause with attention to stimulating the next catalyst. Green energy is one of many appropriate catalysts for a non-speculative sustainable global economic evolution. Others include technology, infrastructure, education and health system improvements.

Japan must lead or become obsolete

For many years Japan has enjoyed the status of second biggest economy in the world, but that status is quickly fading as Japan’s export-based economy contracts in the face of a global recession and slumping industrial production.

The new government in Japan has an opportunity to reverse policy mistakes of the previous ruling party and create a sustainable economic model that is more focused on durable growth rather than speculation. This would prove to be a model for the rest of Asia if Japan can take the lead.

If Japan’s economy can not evolve and take the next step forward, China and other neighbors will gobble up the industrial production for exports that was once taken for granted.

Non-Farm Employment Change -533k

Today’s non-farm employment change was nearly twice as bad as consensus expectations and the worst in 34 years, slamming futures on all major US indexes sharply lower.  This economic data confirms that the US economy is in a deep recession and puts in jeopardy the consensus GDP estimate of -4%.  We may see a number as bad as -8% on the next quarterly GDP report because of the massive contraction in employment and ISM data.

Should the negative sentiment continue, this sell off could push markets much lower.  Futures are hovering at support levels and could be pushed significantly lower at open.  Watch this market closely today.  The price action will be extremely important in determining the next likely move.

Before we get ahead of ourselves

Much of yesterday’s rally was predicated on a rumor being circulated about the US Treasury planning to price fix new home mortgage interest rates at 4.5% and other whispers.  Many who selectively watch the news or ignore it may fail to fully realize how this short term optimism can impact markets.

We had a sleu of negative economic data yesterday, but it was trumped by the aforementioned rumor and speculation that the TARP be brought back to fund more bailouts.  Today we see terrible same store sales from every chain but Wal-Mart.  We also have unemployment claims at over 500k and factory orders at 10am that promise to be nothing short of terrible.

There will be plenty of Fed speak today.  I can’t for the life of me imagine any optimism they could install after yesterday’s gloomy beige book.  Most of the chatter will probably be about how the Fed wants to avoid cutting to 0% by using quantitative easing strategies, such as buying long bonds and forcing prime interest rates lower.

The futures are weaker by about 2% this morning, giving back much of yesterday’s gains.  Market gains made Tuesday and yesterday are still part of a bear market rally.   Markets are facing the upper resistance line of a falling six month wedge pattern on all major indexes.  Don’t get BULLied!  Remember the trend is your friend.