Tags: Schiff | yen | QE | Japan

Peter Schiff: Japan's Free Lunch of QE Policy Will End in Crisis

By John Morgan   |   Thursday, 09 May 2013 07:50 AM

The Japanese stock rally that was spawned by a tsunami of quantitative easing will end in disaster, according to Peter Schiff, president of Euro Pacific Capital and author of "The Real Crash."

Schiff told Yahoo Japan is trying to spur inflation and douse potential deflation, but the artificially low rates and a weak currency are wreaking havoc on Japanese savers.

"Be careful what you wish for because you just might get it," he said.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"I think you're about to see a big dose of consumer price increases in Japan based on a weakening yen, and that's not going to be good for the Japanese economy or the Japanese consumer."

As an example, Schiff said McDonald's just levied a stiff price increase for a hamburger in Japan, so inflation may already be festering there.

"For some reason, the Japanese blame their economic malaise on the fact consumer prices aren't rising. What they really had for the last decade was price stability."

He predicted that when inflation does take firm root in Japan, it would force interest rates to rise, including those on government bonds. And when that happens, the Japanese government "can't afford to service the debt," Schiff predicted.

In April, Bank of Japan President Haruhiko Kuroda announced a campaign of quantitative easing (QE) to double the amount of yen in circulation, with the goal of raising Japan's rate of inflation to 2 percent.

Kuroda's policy move lit a fresh fire under the Japanese stock market rally. The Nikkei 225 hit its highest levels since 2008.

According to Schiff, the same fate awaits the United States, as the Federal Reserve's quantitative easing is bound to produce the same unintended consequences.

The Globe and Mail pondered whether the Japanese stock rally will endure for long.

The newspaper said similar QE-fueled gains in the U.S. stock market have not diminished concerns about what will happen when the stimulus ends, with skeptics convinced the Standard & Poor's 500 could plummet because it has become so overextended.

Even while the Fed's ultra-loose monetary stance has been in effect much longer than Japan's, the Globe and Mail noted U.S. gross domestic product expanded only 2.5 percent annual rate in the first quarter. The Fed acknowledged in a recent policy statement that unemployment remains elevated and inflation remains below its stated objectives.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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