US Cannot Afford Negative Rates while Japan & Germany Can't Compete Without Them

Recently, I had been pondering the topic of negative interest rates, and I had a realization of how negative interest rates benefit Japan while I was buying a Toyota Prius for my firm's local driving needs. All of my vehicles are sustainable, we have Toyota Prius and BMW i3 Ranger Extender Hybrids. I am not a willing consumer of TSLA (by the way you saw the recall notice today about TSLA. Those cars have been sitting in AZ parking lots since before Christmas, I previously reported with photos.)

JAPAN NEEDS NEGATIVE INTEREST RATES TO MAINTAIN THE COMPETITIVENESS OF ITS HEAVY INDUSTRY (HIGH VALUE ADDED CAPITAL INTENSIVE) PRODUCTS FOR EXPORT

There is one thing I figured out that could be the reason that Japan hangs on financially, even with the population shrinking every year since 2012. 

Negative Interest Rates Historical Context & Rationale

Japan has had negative interest rates since 1999 (foreignpolicy.com) This mathematically illogical concept was implemented by the BoJ in an attempt to revive a contracting, deflationary, stagnant economy post 1992. It boggled my mind how this could make sense, as if you mathematically graph the function the limit of interest rates as they approach 0 is i/0 which is an undefined or illogical number (imaginary or magic numbers they are called in some advanced Math books)

However, I think that I understand why this works for Japan, which remains the third largest economy in the world.

Unlike many other Western / G-7 nations, Japan resisted the trend to become primarily a service economy, an economic strategy that has sunk the US and many other developed nations and caused the increasing chasm of Inequality, due to the comparatively low value-added of most service businesses. Financial Services at Bloomberg Clients' level, and professional guild type services including Law, Medicine and Tax Accounting, are notable exceptions because they are highly skilled and are restricted by regulation and licensing requirements. 

The focus on the Service Economy and Last Mile Distribution has resulted in most developed nations' Corporate Finance to move away from financing Capital Investment and Infrastructure to  a focus on transactional initiatives, including M&A, Private Equity, Corporate raiding and Hedge Funds. One of the main reasons CEO salaries have exploded in both absolute and relative to the rank and file workers' wages.

Japan, maybe in part due the strength of its culture of collaboration to solve complex problems, has been able to maintain its manufacturing base and even extend into areas such as corporate aircraft, new forms of nuclear reactors, infrastructure projects abroad such as the construction of Shinkansen type rail systems in other countries, I have first hand knowledge of Toshiba's successful high speed rail project in Taiwan completed in 2016. Japan remains a highly respected leader in the global manufacture of cars, SUV's, Trucks, Robotics, High Speed Rail, Ocean Port Development (some of it as subcontractors for Chinese hegemony over third world nations) etc across all segments of the marketplace.

Japanese Robotic leadership and Six Sigma principles including 5S, KanBan, etc is incorporated at manufacturing facilities and Amazon Fulfillment Centers. 

But given Japan's relatively high labor costs, and the costs due to the complexity of dealing with Japanese government procedures and bureaucracy and its Corporate & Banking Salarymen, it has become more difficult for Japan to compete. Also, the tremendous appreciation in the JPY during our lifetime makes exports much less competitive. (in my life JPY has gone from 350 per dollar to as low as 90, currently 103 JPY per USD. )

Where Japan has a tremendous competitive advantage is its Personal Savings Rate, which enables Japan to own 80% of its debt, and has equipped its Financial Institutions including its Mega-Banks with great financial power.

So what allows Japan to be competitive comes back to its Competitive Advantage, its Cost of Capital and relative novice level Financial Knowledge and Expertise compared to the US, UK and EU financial communities. Japan is able to aggressively finance its exports and global manufactures in a much more aggressive manner than other nations. 

In Japan, the Keiretsu concept allows the formation of Industrial Groups of Companies with a Mega-Bank including SMBC, Mitsubishi UFJ (Morgan Stanley partner), and Mizuho, primarily, which collaborate together, and get active assistance and support from the Japanese Government including JETRO and METI (Ministry of Economy Trade & Industry) to form effective Oligopolistic Industry Competitiveness Strategies. 

In this collaboration, under the radar or scrutiny of outsiders including the Business Media, the Japanese Government through the Bank of Japan, and the cooperation of the Mega-Banks, made available to Japanese Banks and their sister Industrial Corporations Finance and Export Operations, capital not only at a 0% but effectively below 0% interest rate costs.

This allowed Japan, when selling high value added, high dollar industrial products and infrastructure projects, to price very competitively on a time-payment basis over the longest time period possible. So with 0% to negative 0% working capital costs, Japan could sell cars with affordable payments, and make it possible for less wealthy nations to afford expensive infrastructure projects ranging from Light Rail, High Speed Rail, Vehicles, Power Plants (nuclear and conventional), Medical Equipment to acquire and maintain these types of investments (extended warranties are actually insurance projects, enabled by Japan's well financed and subsidized insurance industry).

So, Japan can be a pioneer in 0% to low interest loans for long terms of 4 or more for automobiles and in many cases from 10 to 50 years of infrastructure projects. The clean up of the Fukushima Daiichi complex may take 200 to 300 years, but SMBC, its main shareholder, has pledged all financial support necessary to complete the project. I don't believe that the Japanese Government has pledged anywhere near the necessary amount of money to clean up Fukushima.

The question is how much do these financial subsidies cost Japan? How do Japanese companies, finance subsidiaries, banks and government protect the economy from a US style financial crisis, in which bank regulations are loosened so much, and central bank money is injected into the economy or made easily available on a stand by basis. That is what is unknown, although it appears the poor trends in japan, particularly in population expansion, could overwhelm Japan's core strengths.

GERMANY IMITATED JAPAN

Germany, and to some degree France, are the leading European Countries that derive a substantial amount of GDP and National Wealth from Manufactures. There are some notable differences from Japan. For example, while Germany is known for high quality, high valued added Passenger Vehicles and Trucks, for which there is substantial demand for outside of Germany (think of Volkswagen, MBZ, BMW, Audi and even Opel under GM) and technology / infrastructure companies like Siemens, differs much from France, many of whose manufactures are more geared to domestic demand and export to countries that cannot afford Japanese or German Manufactured Products and Infrastructure.

The concept of the EU was to protect EU members from very competitive foreign products, by providing Financial and regulatory protection to Europe's best manufactures, and through a single currency, enable EU members to treat Germany primarily, France & Italy secondarily, as the first choice for manufactures that would be otherwise imported, as is the case in the United States.

Europe, like Japan suffers from high labor costs, a lot of regulation, powerful unions with high wages and expensive work rules relative to the US, China & other nations; and other government imposed restrictions, and needs creative ways to remain competitive to the threats posed by new foreign competitors especially China, and the others in its recently enacted trade agreement with main players in Asia's $27T economy. 

I'm sure one of the reasons the UK wanted to leave the EU is that its people did not want to support a negative interest rate financed economic policy. 

So Germany went to negative rates in 2014, as ECB policy under Draghi was enacted to 

It's citizens have a much higher savings rate 11%, than France 8% and the rest of the EU at 3% average. So they are being encouraged to support negative interest rate borrowing at the consumer to free up those idle savings, and with consumers getting more pessimistic about the stability and future promise of financial markets, they become willing to take any guaranteed payment from their government even if it means a negative return on their money.

Reuters: germans-paid-to-borrow-as-negative-rates-reach-consumers-2020

Germany used this structure to borrow increasing amounts of money at negative to near 0 rates and support their heavy industry and infrastructure companies, many of whom were still rebounding slowly and unevenly from the Global Financial Crisis that began in 2007. 2014 and negative rates saw Germany show its best economic growth and expansion of consumer spending in many years.

https://www.nytimes.com/2015/01/16/business/international/germany-economy-growth-2014.html

So this comes back to the United States and why negative interest rates don't help. First of all, we are not considered a manufacturing nation, first, any more. Much of our economic value added is created and sustained by aggressive financial investment, trading, speculation (options futures) and reaching for higher levels of current yield. None of these activities are helped by negative rates, because negative rates would create a tremendous frenzy in Capital Markets and Corporate Finance, because now money is not cheap, these firms would be paid money to accept the cash to invest in deals, so such a level of undefinable risk, that valuations would be so high, and so much money created, that the group of people not participating in these capital deals (most of the US, the other 99% to 99.5%) that would appear to be bankrupt from spiraling prices and costs.

Unless the US develops an exportable industrial policy including heavy manufactures, high value added products, and leadership in running and making much of the products for infrastructure projects, the US would find negative rates as the catalyst for an Economic Death Spiral. Negative interest rates will not make a United States that runs Current Account Deficits at all competitive. 

I wonder what happens when China figures this out and starts subsidizing its exports with increasingly sophisticated Finance concepts?

So while we will wrestle with low rates for many years to come, there exists a hard line, or in advanced math, an asymptote that cannot nor should not be violated in the case of the United States. 

I'm very interested in people's opinions about this.