Japan Starts to Recharge After Two Lost Economic Decades
nytimes.com
nytimes.com
Granted, it is news that Japan has enacted a drastic change of any kind, but the fat lady hasn't even started warming up her vocal chords yet.
From this article: "Most crucially, there are signs that the policies may be breaking Japan’s debilitating spiral of deflation. In April, Mr. Kuroda declared that Japan would achieve an inflation target of 2 percent within two years" Read: There's a target to get out of Japan's debilitating spiral of deflation. Not that it's happened; there's merely a target.
"Is the new monetary policy working? It hasn’t been in place long, and no up-to-date inflation data is yet in hand." Read: Radical policy has happened, yes, but we have no idea if it's effective (yet).
"It may give the economy a short-term boost, but in a speech in April, Christine Lagarde, managing director of the International Monetary Fund, warned that Japan’s fiscal policy “looks increasingly unsustainable,” saying its debt-to-G.D.P. ratio is now nearing an extraordinarily high 245 percent." Read: No reading between the lines; the long-term risk is of major concern. Placement of this point: 14th paragraph of the story.
Worse still, politicians who respond to international press will see the political capital this risky policy has bought Abe. In Japan there's already talk of him moving further to the right, once again adding fuel to the nationalist fire (despite already having gotten his popularity back with this massive QE). I fear for this experiment creating worldwide financial risk (due to the size of Japan's economy and its image as a safe harbor) and an even bigger political risk worldwide.
If the appetite for JGBs in Japan starts going down, the government will have to start looking abroad to cut their deficit. Things could get very interesting.
I also wonder how Japanese pensioners view the "inflation target". If you are setting on a pile of cash, zero inflation or a mild deflation is not a bad thing. Your pension is not going to increase, so having each yen go a bit further than last month is not necessarily bad. Inflation will encourage consumption in the short term of course, but it may also result in economic hardship when pensioners find that their yen does not stretch as far as it used to.
I think the Abe government is walking a fiscal tightrope. If their policies result in hyper-inflation, we will have trouble. If they do nothing at all, the poor demographics and stagnant economy will lead to trouble.
I wonder if they could have used their election mandate to focuse on improving productivity, making it easier for women to hold full time jobs and for immigrants to live and work in Japan. I guess printing money is much easier politically!
(Disclaimer - I too live in Japan).
Edit - Corrected JTBs to JGBs thank you J_
A debt crisis looks imminent. Kyle Bass is asserting that they're going to have to default and the value of the yen is going to plummet to something like 200 to the dollar. This is just the beginning of the end. Get your money out of yen.
I can imagine the government making an appeal to patriotism, which may be more successful in Japan than in other places.
Let me guess: You think I should buy either gold or bitcoins, right?
I guess we're going to have to agree to disagree.
So the central bank ends up just buying all the debt that can't be sold at sustainable yields. Net result is extremely high inflation and massive Yen devaluation (i.e. >200).
Impact on the population: - poor stay poor - rich stay rich as their wealth is in real assets - middle-class get wiped out.
This is the end game and is likely a few years away yet, but there seems little chance of any other outcome.
Except for Japan's economy to grow faster than its debt burden, causing its debt ratio to decrease. There's a denominator in that ratio, don't forget.
Japan's economy has got a nice jump-start due to the unprecedent monetary stimulus. But, as others have commented, there are also issues are energy prices and the negative effects of inflation. Japan still remains an expensive place to do business. I wonder where the economic growth will come from without further reforms.
| very low immigration levels
Consider that just to achieve close to zero GDP growth over the last nearly 20 years, the government has been borrowing and spending ~10% of GDP every year. It will require an enormous amount of growth to offset even that spending, and you're still at 0%.
It's only when you're at your production capacity and still keep printing that you start seeing more money chasing after the same amount of goods.
Japan's unemployment is ~4%, low compared to other nations, but still high historically. Their labor force participation rate is about 8% below the U.S., though. There's lots of room to put people to work.
Let's not talk about the price of food significantly increasing, the price of oil and everything else that will make people poorer in Japan in the short/mid and long term.
(Disclaimer: I live in Japan.)
Currency devaluation doesn't make a nation wealthy. It doesn't make you more competitive. It doesn't create factories and jobs. It doesn't make your economy more productive. It doesn't spur innovation or business formation. It's a desperation move.
Japan has to import almost everything that their factories need. So while the claim that their exports will be more competitive is true short term, their costs will skyrocket alongside that and the net gain will be zero at best. Meanwhile you punish savers and consumers.
It's a bad Keynesian gimmick that won't save Japan. It's the last gasp of a dying experiment.
Japan turned to destroying the Yen because they have nothing left to eat before they start consuming muscle. 50% of their tax collections already go to debt maintenance. They're effectively bankrupt. Their savings rate has plunged compared to where it used to be. The Yen is all they have left to abuse before they have to start slashing the public sector directly; inflation is just another means of doing that.
Consumption will be negatively impacted by raising prices, leading to further recession for everything produced and imported to Japan. I don't see how this is even a "short term gain" for anyone expect for the next 2 quarters of Toyota and such companies (because the costs of making stuff catch back to them).
Jump to the section "All change," if you're impatient.
And let's not forget : "Energy has its own particular urgency following the nuclear accident in March 2011 at Fukushima Dai-ichi plant, leading to the closure, if only for now, of nearly all Japan’s nuclear power stations. The government wants to encourage competition in supply and investment in renewable energy as well as in a national infrastructure for imports of natural gas."
Import of natural gas + weak yen -> will not result in savings, oh no. This is going to cost more for everyone.
inflation is punishing savers who will start buying foreign currency instead to protect their savings, or take it away from banks to do something else with it.
leads you to believe this:
This, in return, will reduce the amount of money that can be lended to the private sector and therefore will drive the economy down further, too.
If savers were sticking all their money in government bonds and cash, what more could they possibly do to reduce the amount lended to the private sector? Their money is effectively gone from circulation already.
Besides, the Japanese stock market is up 70% (!) in the last 6 months. In what universe if you're Japanese do you dump your money in foreign currency in an environment like that? Heck, I'm thinking of buying a few Japanese stocks, especially in export driven businesses.
Devaluing their currency will enable Japan's industries to sell more products, make them more competitive, and create factories and jobs. How exactly is this a desperation move?
(Source: every economics textbook written in the last 75 years.)
"50% of their tax collections already go to debt maintenance."
Did you see the part about how almost all of Japan's debt is held internally? Those tax collections to service the debt are going right back into the pockets of Japan's bondholders, i.e. Japanese savings account holders and pensioners.
You have not been reading his comment, apparently. Japan has like no natural resources, all its industries import raw materials from outside of Japan. These costs will significantly rise with a lower yen, therefore the product prices will catch up and they not be competitive anymore on the global market in a couple of months. It's a very short-term policy. Nothing good will come out it, and that policy just destroyed 30% of the saving of the whole Japan population, including private companies.
Japan imports raw material, adds value with labor, and re-exports that material. The price of the raw material, if it doesn't change between importing and exporting it, is totally transparent. But with a lower yen you have actually lowered the cost of Japan's labor. So, yes, devaluing your currency makes your labor more competitive - you just made your workers less expensive. The downside? Your workers are less expensive - ie, poorer.
Re: the second point, it looks like RGDP rose 3.5% annualized in the 1st quarter, that means that real incomes in Japan rose in aggregate, even taking inflation into account. If true, it means that incomes rose faster than prices.
source: http://www.reuters.com/article/2013/05/16/japan-economy-gdp-...
It's not really surprising at all, Ben Bernanke and Paul Krugman have basically been calling for this (in Japan) for over a decade.
The idea that money has intrinsic value or should have intrinsic value is poisonous. Money is just a proxy for goods and services, and the only point of money is to facilitate getting everyone to engage in productive activity. Encouraging people to park money in a digital wallet because it will be worth more tomorrow is the last thing you want.
Japan's famous savings rate was actually one of the causes of its problems in the last couple of decades: http://aparc.stanford.edu/research/causes_of_japans_economic... ("Surplus in Savings: Japan has traditionally enjoyed an unusually high savings rate and a comparatively low consumption rate. During the decades of recovery and high-speed growth, this 'savings surplus' supplied sorely needed capital to private industry in the form of bank loans. This money was used to build and expand Japan's industrial infrastructure and to achieve the rank of a world-class manufacturing power. However, during the 1990s, the 'savings surplus', once the indispensable fuel for high-speed growth, became a serious, structural impediment, leading to a severe slump in demand and causing a heavy drag on Japan's economic recovery.")
"My favorite proposal really is a little bit more sophisticated—or less sophisticated if you want to look at it that way—than a straight increase in the quantity of money. I would—if I had my choice—freeze the amount of [currency plus bank reserves]. Not increase it."
I'd be interested in hearing your, and other's, thoughts on the topic.
[1]http://www.econlib.org/library/Columns/y2006/Friedmantranscr...
For the definition of "high powered money", see: https://en.wikipedia.org/wiki/Monetary_base ("in economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is defined as the sum of currency circulating in the public and commercial banks' reserves with the central bank. The monetary base must not be confused with the money supply which consists of currency circulating in the public and non-bank deposits with commercial banks. Normally, the money supply excceds the monetary base by far; the ratio of the two is referred to as the money multiplier. If one excludes currency from the definitions, the monetary base is not a subset of the money supply - rather, the two are disjoint sets. On the commercial banks' balance sheets, the former belongs to the assets whereas the latter belongs to the liabilities.")
With Bitcoin, the total money supply is fixed (which Friedman acknowledges as a "bad idea" in your quote), not just the monetary base, because there is no fractional reserve banking in Bitcoins (or at least I'm not clear how you'd build fractional reserve banking on top of Bitcoins).
> there is no fractional reserve banking in Bitcoins (or at least I'm not clear how you'd build fractional reserve banking on top of Bitcoins).
Fractional reserve banking with bitcoins works exactly the same as it does with anything else (modern USD, USD 110 years ago [gold-backed], etc.)
Friedman explicitly says, keep the amount of currency constant, and use fractional reserve to increase the amount of monetary supply, as needed for expansion. We can do exactly this with bitcoin. Do you disagree?
"Out of context" means you omitted other text that changes the meaning of the text you did quote. See rayiner's comment about this (the very next paragraph...)
The monetary base is the stuff consumers touch
No, it is not. See the wikipedia link and Rayiner's comment, which explicitly refutes this (The monetary base must not be confused with the money supply which consists of currency circulating in the public)
It is hard to take your arguments on good-faith if you make such blatantly false statements.
"MB: is referred to as the monetary base or total currency. This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply."
Please reread that last sentence before replying.
As a Japanese resident, I'm hopeful, but not optimistic. Japanese culture favours stability, consensus and precedent. Cronyism and powerful interest groups are the norm. Reform is viewed with suspicion. To prevail, Abe will need enormous personal authority, but the revolving door premiership (a new prime minister every six months or so for the past few years) deprives him of this.