Japan - the new new QE

With the US embarking on QE2, it may be instructive to observe Japan's experience, whether or not one believes that the US faces similar macro issues to Japan.

Japan is an economy in deflation, a situation which has lasted the better part of 15 years. For many years Japan subsidized its exports by printing money to buy Treasuries and maintaining a relatively weak Yen but when 2008 hit and all hell broke loose, so did the Yen. And there is nothing worse than an economy in deflation with an appreciating currency. Bring on QE4.0 Japanese style: buy REITs.

What does this mean?
It lends support to real estate in Japan

So how does that help?
If real estate remains stable or actually appreciates then the consumer will feel richer potentially enticing them to spend today rather than wait for goods to get cheaper tomorrow due to deflation.

Will this work?
Unlikely - if we focus on demographics, Japan's population has been shrinking since 2007 (see Wikipedia listing under Demographics of Japan) with fewer births than deaths and no net immigration. This despite one of the longest average life expectancies in the world at 81.25. Think about it: will a more valuable piece of real estate entice older Japanese to spend more readily?

The US should take note, however, and observe how Japan plays out. If this succeeds it may be the trump card Ben Bernanke is looking for.