Japan faces prospect of third decade of low growth

Investors are not ready to bet against Japan. But maybe that's the country's biggest problem.

Until there is a sign that the outside world is prepared to park its savings somewhere else, Tokyo will continue to sail further into debt.

The Bank of Japan delivered its third shot of monetary stimulus in four months on Thursday, adding another 10 trillion yen (£73bn) to the £740bn of electronic money already spent by the bank on its own government's debt.

The move is considered a prelude to more aggressive action next year as the country confronts the prospect of a third decade of low growth.

Like the British chancellor, George Osborne, the incoming government of Shinzo Abe has ruled out a budget stimulus. Creating central bank money is the only game in town as ministers seek to boost the amount of funds available for borrowing.

How long will it last? Until demand pushes up consumer spending and thereby prices and, with the prospect of rising prices into the future, encourages consumers to spend even more.

At the moment companies and consumers are acting as a counterweight to central bank action because they are hoarding their money.

Abe wants the Bank of Japan to consider raising its inflation target from 1% to 2%. Alive to the massive political mandate acquired by Abe in the elections last week, the bank governor has agreed to debate the issue with his committee at a meeting next month.

"I take it that the BOJ is carrying out what we sought during the election step-by-step," Abe told a party meeting.

A higher inflation target will give the central bank licence to print even more money. Remember the Bank of England's monetary policy committee has just backed away from increasing the level of quantitative easing from £375bn because it fears inflation at 2.7% is too high. Like Abe, Osborne is encouraging a higher target.

But why should Japanese companies and consumers borrow when they have plenty of savings to spend?

Don't worry about that, argue the pro-monetary easers, it encourages investment in risky assets and that will get the economy moving. It will also bring down the value of the yen as long term interest rates fall even further, boosting exports.

Yet this reliance on monetary stimulus, as in the west, follows an abdication by finance ministries of budget reforms that could do much the same job without extending the sum of government/central bank debt.

The Tokyo parliament is due to push VAT to 8%, on its way to 10% (in the UK VAT is 20%). But there is every likelihood it will back away rather than face up to its budget deficit and more importantly a debt that is more than double the country's GDP.

Scared of deterring people from spending in the short term, ministers will blow a chance to push up prices that could encourage spending and generate larger tax revenues in the medium term. Long term planning from a parliament that limits its prime minister to a year in post at most, has been woeful.

Confidence in government spending as an instrument of growth is understandably shot to pieces after a splurge of infrastructure projects in the 1990s built with debt. In fact a large proportion of the 200% debt to GDP ratio can be accounted for by the concreted rivers and bridges to nowhere that dot the country.

If Abe can count on Europe remaining in crisis, investors are likely to continue backing Japan as a safer haven for their assets.

But should the eurozone situation improve, Abe could be in real trouble.

If his government relies only on monetary stimulus he could find himself in a couple of years with UK-style growth, which is to say zero growth. Will investors still hang around?