The theme of 2009 was a turning point of US treasury market, however, whenever everybody keeps watching, nothing happens. Being watched, but all people are not careful even for a short time, a big event would often happen, like "Dubai Crisis." To the people who watched how Dubai worked, it might be a kind of bubble collapse as a matter of course, however, to me it overlapped with the Japanese bubble collapse. It might sound like odd to foreign people, as a Japanese the story quite overlaps with the Japanese fast-growth before 1980's and the bubble collapse at 1990. In those days, Japan had been very eager to import many things that we hadn't had from Europe and the US, however, it was obviously supported by the country on fast-growth, like the present China. It after all created a bubble economy, and at present Japan has not yet recovered from the bubble collapse.

There was another aspect in Japan's fast-growth. It was a huge impact from our generation (baby-boomer) to the society. That is, the population of our generation was so huge, and it affected on all factors of the society along with advancing the age. A simple example was that, when we became the age to enter universities, the number of universities was not enough to accept all of us. As this result, across the country so many new universities were immediately built, however, at present some universities are not needed to exist any more because of decrease of younger population. When we were young and worked very hard, we created the so-called real estate bubble. This social phenomenon was a bad effect from our generation. We were a kind of trigger to promote Japan to take off and pushed more, however, it went too far and led the country to a bubble. This was actually a temporary factor, I suppose, but Japanese politics hadn't taken it as I said as temporary phenomenon and thus it has created the fact that Japan still cannot recover from the bubble collapse as said "the lost decade."

Now our generation started to receive our own pensions. Many population are going to retire and have started to receive pensions, while the rest of Japanese generations are all less than ours, which must create another problems to the society. As written above, Japan experienced the bubble collapse in 1990's and still cannot recover from it. The biggest reason arose from our population, however, the politicians never realize it, and as they don't realize, "the lost decade" would become "the lost two-decades" and it further goes on. The reason is, after the bubble collapse, China started to grow. As I wrote many times in my BLOG, because of China's growth, Japan has been gradually driven to a deflation. Consumer prices in Japan has been falling because of the bubble collapse and the subsequent recession, and besides Japanese companies have become less competitive due to China's growth, which further brings commodity prices down.

This is the key to understand/solve Japanese social problems, however, the politics never focus on it since there are many stakes on that. I cannot say when the politics understand and focus on it. For example, Japan has been issuing huge amounts of government bonds and the half of budget of 2010 relys on government bonds, which is incomprehensible. The politicians seem to think that issuing government bonds have supported Japan and economy as well after the bubble collapse. If, however, the reason of bubble was brought by our big population temporarily, the size of economy in 80's was also the bubble, that is, maintaining the inflated size of economy by issuing government bonds might be said as very poor policy. On the other hand, if the social phenomenon brought by our generation is regarded as temporary phenomenon, and the size of economy along with average population with a long-term view is going to be maintained for the country, in my thought the current economy size is still too big for Japan. That is, capturing the size of economy as the country was not suitable, and the politicians took easier way to issue government bonds to run the budget every year after the bubble collapse. As a fact, however, it is very natural for Japan to have entered into a phase of balanced contraction as the commodity prices show, and upon China's growth this flow to a balanced contraction cannot be pushed back any more.

As shown on the following pictures, after the fast-growth of GDP had stopped around 1990, the issue amount of government bonds have become 4 times up to now. There would be another problem that this huge amount of government bonds could be perfectly sold within Japan, however, this is not a topic in this writing. Once, however, I think of that, it would be downright scared. As a rule of the market, if there are no buyers, normally a meltdown is waiting.

(Source; Wikipedia)  Economy of Japan)

(Source; Wikipedia) National Debt of Japan)

Given the above thoughts, considering the forecast of year 2010, I would guess as follows. Over one year has passed after Lehman Shock of the end of 2008, most of countries have taken various economic stimulus policies and for the time-being a major depression seems to have been avoided. About G7 countries, significant base rate reductions have been executed and therefore in order to get out of these states, opposite policies must be taken sooner or later. That means, business recovery is not straightforward, however, to me about emerging countries, this is not so difficult to go back to the state before the crisis. About resource-rich countries, with obtaining needs from the emerging countries, business recovery might be much easier than G7. Also considering on 1) price/wage levels of the emerging countries and the resource-rich countries are lower than G7, 2) Asian countries, ex. Japan, has already started to function as factories for the world, 3) excessive liquidity issue caused mainly by G7 countries stimulus plans, I presume, in G7 countries, ex. Canada, deflation factor would be a little stronger, and of course in the emerging countries, inflation factor is much stronger. In resource-rich countries, inflation factor might be stronger than deflation, and also very clearly in Japan, deflation and strong yen should be continuing unless the government take any fundamental solution to get out of deflation.

According to this, my investment strategy for 2010 should be investing to "stocks/ETFs/currencies" in the emerging markets and resource-rich countries, which are mush safer than investing in G7 countries. Furthermore, with confirming firm needs from the emerging countries, energy, mining and agriculture stocks/ETFs would be continuously expected. Especially food issues because of China and India development could be thought as critical soon. Environmental issues should be discussed with these needs and in my view any global conference wouldn't mean any significance without taking this into consideration. Finally about gold, this is the reverse side of economic anxiety in the world, and it is naturally solved with US dollar's stability.

[Jan 1st, 2010]