Japan Falls into Recession
online.wsj.com
online.wsj.com
The regular folks want to see Dollar-Yen parity. As Yen drops, things become more expensive and regular folks cut back more on spending. I am not sure why increasing cost of imports doesn't show up as inflation. Things would have been worse if not for drop in oil prices (major import for Japan). These folks don't believe dropping Yen is the solution as majority of investment by Japanese companies is outside Japan and weaker Yen just reduces that investment, in turn less profit flow back in the country.
The expectation of deflation is deeply rooted in regular folks. Everyone is waiting to spend on large items, just not right now. Land prices are falling so no one wants to buy a house now. We were interested in buying a place in Sapporo but everyone told us to wait until we really need to buy. An apartment costing $200-300K rents for $500-700/mo in Sapporo compared to similar place in Seattle renting for $1,000+/mo. One of our friend mentioned that they just sold their house in Sapporo and had to offer healthy discount to the buyer.
I don't have a solution to Japan's problems. But QE, weaker Yen, and raising taxes doesn't appear to be the solution. Rolling back tax increases may be a start in the right direction.
Regular folks seems to have better pulse on the problem than establishments.
The more expected result would be a change of investment patterns so that more is invested inside Japan; investments abroad bring back only a relatively small amount of money back into the domestic economy and spread over a long period of time, as opposed to domestic investment which generally involves spending in the local economy and increased aggregate demand.
> The expectation of deflation is deeply rooted in regular folks. Everyone is waiting to spend on large items, just not right now.
And this is exactly why some inflation (caused by QE and a falling yen) would be a good thing - delays in consumer spending are a classic pitfall of deflation.
This doesn't sound like an issue of the average Japanese citizen knowing less than the establishment or vice versa, but of individuals making rational economic decisions are good for them, but bad for the economy as a whole.
(BTW, I agree with you on the VAT increase, which sounds like the exact wrong thing to do to get out of this low-growth, deflationary trap Japan has been in for so long.)
What do you mean by "delay in consumer spending" ? Oh, you mean like in the US when people buy everything at credit so that they don't have to wait, and have zero savings and huge debts as they go ? Is that the model you recommend ?
> This doesn't sound like an issue of the average Japanese citizen knowing less than the establishment or vice versa, but of individuals making rational economic decisions are good for them, but bad for the economy as a whole.
You fail to incorporate the bad decisions from the japanese government which are bad for the economy as a whole. As if it were JUST the fault of dumb people. Yeah, elites know much better :D
In the context of macro economics, delay in consumer spending actually means just that: They'll spend money later. You fancy a new car, but actually your current one still runs fine? You'll delay your spending and just drive your current car a year longer.
The only way for that not to hurt the economy would be finding a way to persuade the consumer to put all the money saved by delaying this specific consumption into goods that cannot be delayed. If I just saved $10k by not buying a new car, you won't be able to persuade me to buy a motorcycle instead, as that buy would be delayable in the same way.
Waiting until house prices fall isn't a sign of deflation - it's a sign of overpriced housing. Especially compared with the rent yields, vs. rent yields elsewhere in the world (grandparent compared them to Seattle). And it's definitely a good thing - I'm part of the millennial generation, and one of our main issues is that we simply don't have the money to buy property (even to live in), because older people have more money saved up, so they can bid more, hence a bubble (this is what happened in Europe, I assume it's similar in Japan).
Employees working themselves to death for little pay is only aggravating the problem, rather than solving it.
"Putting a fresh coat of paint on a house" also stimulates the economy. You have chosen some strange metaphors for criticizing an economic program.
If your point is that Japan needs more production and less consumption (you did not say this, but you were not clear about what you were looking for) then it is worth noting that lower interest rates also allow businesses to borrow and invest at lower rates.
So now you have underpaid people creating a housing bubble in Tokyo and going into debt. This does succeed in kicking the can down the road for a few years. But when the music stops in this game of musical chairs, the crisis is actually worse.
Which happened in 1989. Japan never came back fully from that. See "https://en.wikipedia.org/wiki/Japanese_asset_price_bubble"
Since QE increases the value of the stock market at the expense of a currency's value, it is actually eating away at the wealth and savings of individuals and redistributing it to stockholders. These stockholders tend to already be quite wealthy themselves.
Herein lies the problem. Very wealthy individuals tend to spend a much smaller fraction of their accumulated wealth than members of the middle class. Take that as you may, but at some point these massive stockpiles of capital grow so large that they can't possibly be entirely spent. As the stockpile languishes, it becomes wasted capital: money that has essentially fallen out of circulation within the economy.
Another way to think of it is that one person can only do so many things at once, which means there is an upper limit to how much capital a single person can put to good use. When you go from many people with moderate amounts of wealth, to a few people with lots of wealth, you severely limit the amount of creative work that capital can be used for.
...or at least that's my armchair understanding of things.
Thanks to our central banks, any deflation pressure is seen as a license to print more money, which is a tax on non-circulating savings. To avoid this, holders of cash do their best to invest as much as possible.
Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
This is a little strong, isn't it? Investment can certainly lead to job creation for the middle and working classes, if that investment is going into enterprises that need more labor and have the potential for growth. Whether there is much potential for growth after decades of regressive tax policies and hoarding by the upper and ruling classes, with everyone else living paycheck to paycheck, is quite debatable (my money is on 'no'), as is how much new labor is actually needed in the first place. But private investment can certainly create jobs and economic growth.
You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases.
There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
Even Apples massive cash hoard is put to good use, somewhere.
What there is a shortage of, is productive investments where lots of capital can be deployed to get a healthy return. This is a function of multiple problems, of which uncertainty is one.
It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
Correct, but they still don't spend money. The very wealthy are known to hoard money, it doesn't matter in which "vehicle" they store their money in.
>There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
It's not wasted capital, but it doesn't stimulate the economy either. They are not contributing to investment, in the real economic sense.
>Even Apples massive cash hoard is put to good use, somewhere.
Wrong.
>It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
It's still not real investment. I think you don't understand what the "I" component in GDP is. [0]
[0] http://en.wikipedia.org/wiki/Gross_private_domestic_investme...
>The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
Wrong again. Greece cut their government spending a lot, they don't seem to be in great shape. The reality of the matter (while counterintuitive) is that deficit spending helps stimulate the economy. As long as Japan wants to devalue their currency, government spending is the last option left to stimulate their economy.
If they store it in a bank, it boosts the lending capabilities of that bank.
If they buy stocks, it provides financing for public companies.
Even if the rich hide their cash under a mattress for a long time, they provide a purchasing power boost to other consumers by reducing the freely available supply of currency.
Saying that the parent is wrong about Apple's cash, does not actually prove they're wrong. "Wrong." is not an argument.
There's practically nothing a rich person can do with their hoard to harm the economy, other than to take that capital out of the domestic economy or invest into a ponzi scheme or asset bubble.
Here's another imperfect analogy: Movie marketing. My rule of thumb is: If a motion picture is marketed with more intensity than the average picture it is almost certainly bad. Let's equate the marketing to QE. While marketing is in place lots of people go to see the movie. Artificially. Once it stops, the foundation is so weak (the movie is so bad) that viewer traffic pretty much evaporates.
This is not intended to be an accurate analogy. Please don't waste any time tearing it apart with minutiae arguments because it is flawed in a million ways. The point is to make an attempt to illustrate that an artificially stimulated market is exactly that, an artificially stimulated market that might not be able to remain healthy on it's own
So, people buy homes because interest rates are low yet their station in life, their salary, their income, their savings don't improve one iota and when QE stops, interest rates come in and inflation follows and quite a few of these people simply can't afford what they bought. This, of course, isn't a new concept.
Interest rates have been low -- very close to zero -- for a long time now (two decades?). Real interest rates have been negative over the same time period. Interest rates can't really be lowered in any way that is meaningful to the middle class.
If you talk to "regular" people, overall economic confidence is extremely low. People with super-secure jobs (e.g., with the government) are rat-holing their money away while it earns little interest and negative real interest. Many folks don't consume even within their means due to the desire not to appear to be a conspicuous consumer to their peers and/or irrational economic fears (e.g., losing their unlosable job).
Said another way, the velocity of money in Japan is extremely low, and it doesn't show any signs of recovering.
> If your point is that Japan needs more production and less consumption
I don't want to speak for the OP, but the reality is exactly the opposite -- they need to consume more, and there is tons of excess capacity right now.
> lower interest rates also allow businesses to borrow and invest at lower rates.
So few businesses are borrowing money compared to those in a healthy economy. Investment is often put off until (or past) the time it is needed due to the perception of economic uncertainty. Any investment in a business that can be delayed or done cheaply (i.e., penny-wise pound-foolish) is delayed or done cheaply... no amount of low-interest money can incentivize them more. They need to see real signs of a long-term strengthening of the economy before they are willing to take the long-term approach that Japan is so famous for.
The one potential "good" outcome for QE is that the yen will weaken (e.g., I fully expect ~180 yen per dollar or more to happen) and this will make Japanese manufacturing extremely competitive internationally. The problem is that this weakening of the yen creates other forms of turmoil and uncertainty in the rest of the economy.
That said, I'm not seeing 180 yen to the dollar any time soon, by most measures the yen is already undervalued. (With the glaring exception of yen vs national debt, but that particular ticking time bomb is not showing imminent signs of explosion.)
This, plus Japan's anti-immigration policy and rapidly ageing population, spells a pretty bleak future for Japan. They need some really radical reforms, not just economic policies that devalue their citizen's purchasing power and then get cancelled out by a huge raise to the consumption tax less than a few years later.
What Japan really needs is a major reform of their overbloated corporate and banking infrastructure, combined with less-xenophobic immigration policies and improved workforce participation by women, but I'm not holding my breath.
Increased sales taxes which was an especially dumb thing to do. The folks that spend the largest percentage of their income are hardest hit by sales taxes.
I live in Japan for many years and I have never seen such thing as deflation here. Prices have remained stable for most items or have increased a little bit. The idea that stuff becomes cheaper as you wait is ludicrous in Japan.
See e.g. the curve for 1995-2013: http://www.tradingeconomics.com/japan/consumer-price-index-c... or the "index of all items" here http://www.e-stat.go.jp/SG1/estat/ListE.do?bid=000001033700&...
Back in reality, Japan hasn't suffered any real deflation in 25 years. Which is why their prices are among the highest for pretty much everything.
The deflation argument is a fraud cover for the failed Keynesian experiment. It's meant to give them the ability to endlessly print to debase the debt that the failed experiment took on. That's why the US Fed pretends to worry non-stop about deflation, while they massively expand the monetary base and hold rates at zero; it's a lie to provide cover for the massive inflation programs.
A new 150,000/month condo in Tokyo in 2014 has much better facilities than a then-new 150,000/month condo in Tokyo in 1994. Indeed, the latter is probably struggling to achieve rents of half that today.
On top of that, buying a new apartment has nowhere got cheaper than it was 10 years ago. Prices have been pretty much stable until they pumped up the tax recently.
A serious economist is able to differentiate between goods that can (and will) be delayed an a consumable like a can of soda. Cars are an example of a consumer good where consumption observably is affected by deflation.
The Japanese government needs to cut deep in spending, and that's what they have NOT been doing for the past 20 years. As long as they don't try to fix the debt problem, nothing else is going to work in the long term.
In fact, spending as a % of GDP has increased.
http://www.cato.org/blog/where-are-european-spending-cuts
There has been almost zero spending reduction in Europe. They're calling a slow-down in spending expansion, austerity, when in fact there has been no austerity.
>In fact, spending as a % of GDP has increased.
Because e.g. in Greece, GDP shrank over 30% in the last 5 years. Have you ever looked at the things a country spends its taxes on? How should it out-save it shrinkage without destroying the very infrastructure it's economy needs to flourish?
> cato.org
Cato is good PR agency, but you should not take them seriously on anything economics-related. Just look who works there, I wasn't able to find a single phd in economics there, only public relations staff (people who studied politics, sociology etc, practically no one who actually did research in any field before working there).
Sounds like a good thing to me.
I don't think it was a comparison between austerity and QE that was on display. If anything, it's more a comparison between a Keynesian approach and austerity (even given the relatively anemic Keynesian implementation on which we settled). But, even that is not a fully valid comparison.
More to the point, austerity just seemed an insanely bad choice, and I am not sure that it is illustrative of QE being a good choice.
QE was more a boon to the stock market than anything.
Likewise (and ironically), the record profits that companies are realizing is due to automation and increased productivity--two things that are largely responsible for the stubborn unemployment that has actually dogged a broader recovery.
To my mind, the jury is still out on QE and, for that matter, on the sustainability of this "recovery" in the long run.
You cannot isolate variables in two separate economies; any conclusions assuming you can are bogus.
That leaves us with untested partisan theories pushed by ideologues.
I mean, how can it be that all the American conservative economists that have been predicting massive inflation since 2008 have not changed their theories at all?
Agreed.
> That leaves us with untested partisan theories pushed by ideologues.
The theory I responded to was not "tested" either. What double-blind study did the citizens of the U.S. and Europe take part in?
The employment-to-population ratio has't recovered and is near the 30 years low.
What they need to do is figure out a way to grow the population locally or through large-scale immigration. I'm afraid this is the fate that awaits the developed world (or countries with low population growth).
Japan is like a canary in the mine of post-industrialism. It'll be interesting to see what they figure out for their society and the lessons they might have for us.
That doesn't sound like a long-term solution. There'll be a limit to population growth at some point.
I guess the reason helicopter drops are not done is that it kinda breaks some illusions people have with money. People generally don't know that central banks buy second hand government bonds, basically giving money to those who hold that kind of asset. In short, there's no law of physics that say you have to work for money. I guess they don't think the plebes would respond well to knowing this.
Even countries that are relatively open to (legal) immigration, like Canada and Australia, tend to limit immigration to working-age adults qualified to work in technical, professional or otherwise white-collar jobs. So I think it's fair to say that you do increase per-capita income.
I wouldn't put the US in the same boat as Japan, though. Between green cards and naturalizations, the US receives well over 1 million immigrants per year (that doesn't count non-immigrant visas like H1B etc):
http://www.voanews.com/content/us-issues-million-green-cards...
Even in China, on the east coast, in certain sector, especially high-tech and finance, local companies can offer competitive salary and a better potential for career progress.
It is not like in 80s, when Japan is the envy of all kids in the class, the interests is quickly fading, with a aging population and stale economy.
It is pretty much like Asians in US sometimes being called as perpetual foreigners, even if some of them might been in this continent for generations.
Assume Japan is ever going to change its immigration policy, it will surely starts from developed countries and its neighboring states. But as I said in the above comment, the charm around Japan is vanishing, so even with a more friendly immigration policy, how much it could help Japan step out of painful declining is questionable.
That said, mass immigration is unlikely, as you say.
The vast majority of the American public don't want it either, but businesses do, so it happens anyway.
I've lived in America for just 3 years, yet have never felt unwelcome. In fact, most Americans I meet are very curious to know about my origins and the country I grew up in. But maybe that's because I live in a very liberal city (Austin) and can communicate well in English.
I've lived in Korea for some time and unfortunately never learned much Korean to be considered fluent. So I did have a hard time. Its also a very homogenous country so I guess it makes sense why they're so exclusive; I think its the same case in Japan too.
Historically, Koreans and Japanese ( and to an extent, the Chinese) have placed an almost absurd weight on purity of their race. I don't know the situation for other places.
I must just not understand. It seems pretty simple.
That said, Japan has to try something --they are entering 25 years of being in a standstill, so relatively speaking, they are in decline. They (politicians and population, by large) may not have the will to try anything radically different from the status quo --which is a quasi neo-liberal economic model, so they may just end up crashing hard or slowly becoming kind of irrelevant, economically speaking.
This can also create a return of experience, business investments and money from the rich country to the poor one. Some poor countries are so backwards that what they need most is not more people, but people who have seen a better way of doing things and can apply at home.
What makes you think they will find a "smart way out" of the situation ? Japanese politicians have been incapable of handling pressing issues for years. They just care about the next elections, as usual. Since no-one expects any drastic change of political climate to happen soon, it's more likely that Japan goes in the wall.
Or drastically increase productivity, or have more people join the workforce. Women are massively under-used in Japan. There's no need for immigration as long as there is a large untapped segment of the population not actively employed.
Japan has great productivity and has automated moreso than any other country --it's had to due to a retiring population. They need a younger population with disposable income who are willing to spend their disposable income.
I'm sorry but the myth about Japan productivity has to stop :) I work in Japan and there are the most ineffective and honestly useless jobs out there. People guarding plastic cones on the road. People waiting at the car park exits everywhere to ensure no accident occurs. People at the front of numerous stores and train stations paid to salute everyone passing by. I understand it's all a part of customer service but this is just bringing actual productivity down. And I'm just citing obvious examples here, inside corporations there are tons of underemployed or useless jobs as well and since companies cannot fire people in Japan they carry on the deadweight for decades.
There's so much fat in every Japanese organization out there they have enough to skim out for 20 years and still be in shape.
Granted, construction is a big waste of money -but a lot of that is done by itinerant workers and pouring concrete over riverbeds and seashore is hardly useful endeavor, except to line the pockets of connected (all) politicians.
How would that help? People who are not employed (not "unemployed", but they simply don't need to work) still spend money (that their working relatives make), so by having them enter the workforce, you would not increase consumption at all, while reducing the average wage (making it impossible for a single working spouse to sustain a family).
huh, by adding another income to the family ? So, that should lead to a least a little more consumption.
Even if the average wage is reduced, I doubt it would be cut by half and result in 2 people working to reach the same salary as a single person before. You are not being very realistic here, since in Western countries putting Women to work has been a very effective way to increase households' levels of life.
I'm not an economist, but in their position, what would mass immigration solve?
No discussion of Japan's economy (whether it's government debt, inflation rates, recession, etc.) is complete without mentioning that the unemployment rate is 3.6%, the 2nd-lowest (behind South Korea) in the OECD.[0]
So all the doom-and-gloom about Japan's future prospects and what they're doing and should be doing has to be balanced by the continued commitment by the successive Japanese governments to maintaining full employment.
Japan is the poster-child for what's happening to the US and Europe: Keynesian economics has failed. QE, inflation, central bank stimulus, debt accumulation - none of it actually grows an economy or increases productivity. It's all fake, all of these measures are meant to keep the fraud going a bit longer, and now the clock has run out and the consequences are being paid.
It's kind of funny how much of a content-free buzzword Keynes has become. None of the measures you mentioned are originally tied to the original Keynesian idea of anti-cyclical government behaviour.
That said the situation is not terrible for workers. I found a job here even though nobody in the company could even talk with me (my Japanese was really bad at the time). The first few months were interesting, we were just communicating with signs and drawings... Programming skills are few and far between in Osaka.
Conversely I know immigrants who took 5 years to find a job in France, which is in the opposite situation: population up, gdp flat, gdp per capita down.
[1] At shitty wage, as you can imagine...
I just don't buy the story that post-industrialist societies are somehow more enlightened and therefore prefer to have less or in case of Japan often no children at all.
Reproduction is one of the strongest needs a human being can have after survival and security.
Googling the URL/title of the paywalled article will almost always give you access the full article (or at least a copy somewhere else).
Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different?
I honestly don't know, but I think in news, time is a factor.
Use this post as a test: what non-paywall link would you submit?
Not sure how they differ since non-paywall wsj link does not work for me (still has paywall in 2 different browsers).
By posting urls to good articles that are behind pay-walls, you do provide a place to discuss the information, etc., and everyone can still learn. That is assuming at least some of us can read it.
I pay for the wsj. Why wouldn't I pay for good research, good writing, knowledge, etc.? People need to earn a living.
The WSJ is the last remaining quality paper. They increase their prices every year, but I still pay for it. I highly recommend that you do too.
[1] https://addons.mozilla.org/en-US/firefox/addon/refcontrol/
Personally I'm against submitting paywall links to HN because it makes it harder for everyone to read, but I have no problem (either overall morally or or a personal level) with content like the WSJ being behind a paywall.
The bigger problem is actually long term weaknesses that this trend will expose.
Another huge problem is consumer lending. Most Japanese banks are actually pretty stringent when it comes to lending to their own people. So even if low interest rates might encourage consumer borrowing appetite, there's very little supply out there. I think the PM and the central bank needs to address these, even if loosening lending might be contrary to what Japan has done in the past.
Shouldn't a weak yen make it cheaper to invest at home relative to abroad? What's the mechanism that causes the opposite effect?
Abenomics is attempting to stimulate demand through a combination of fiscal stimulus (direct demand from the Government) and monetary stimulus (long term interest rates unattractive make local investments more attractive). A weak Yen is actually great for Japan as it's a net exporting country.
1. It has 200% debt-to GDP ratio
2. It has near zero interest rate and negative to zero inflation
3. It has near zero growth rate.
It's important to understand how this trap works: Japan simply can't have meaningful growth. If there's real growth, that will force the interest up, otherwise there will be mass misallocation and high inflation. But given a 200% debt to GDP, the government just can't afford a higher interest rate, as the debt servicing cost will eat up most of the budget. So, assuming growth rate and interest rate is about the same (big if, i know), for just maintaining the status quo (regarding debt burden), for every x% the economy grows, the government has to raise 2x the amount to cover the interest expense. That's how scary it is.
That's why there's this sales tax hike and the consequent gdp dip. While other country with lower debt to gdp ratio can keep stimulating for a long time and only deal with the debt problem after recovery, Japan can't. It has to increase the government revenue relatively early, because it has a much smaller buffer to begin with.
Is there any way the government could have predicted that the windfall from stock market rise and exports would not trickle down to the general public?
The common ground:
* The government of Japan faces budget constraints; it cannot tax more than a certain amount and that includes seigniorage (taxing using inflation).
* Right now Japan doesn't seem to be immediately close to those constraints since interest rates and inflation are low.
* Lowering taxes, spending more and depreciating the currency will expand the economy, but rates will increase and so will inflation (among with wages).
* Inflation expectations can create actual inflation. It can be generalized that different people will demand higher prices in advance if they can, since they know their costs will rise. The same applies to interest rate and there is a link between them (investors demand higher yields if inflation is expected).
* Default and excessive inflation can be a result of too much expansionary policy (eventually, what is too much is up for debate), but they can destroy the gains and make the economy worse off.
The disagreement (you can see that its actually a spectrum of opinion and there are differences between the details of the policies, but for clarity I've divided them neatly into two camps):
* School A believes expansionary policy will make Japan default because the government will have lost control, since expectations can make interest rates and inflation jump rapidly. They site that the level of Debt to GDP is over 200% as evidence. They say the government should not lose credibility or else.
* School B believes that the expansionary policy is so hard to actually pull off that some expectations of inflation and higher rates are desirable. Since rates stay low and deflation is always around the corner it seems that the government can easily reverse too much expansionary policy, far before a default appears to be likely. Additionally Increased GDP will bring more revenue, decreasing the need to rely on inflation after a certain point. They joke that the "government should credibly promise to be irresponsible" to get out of the bad equilibrium that is the lost decades.
-----
A political compromise appears to have been made by mixing expansionary policy with the decision to increase the sales tax. Since this caused a recession school B feels vindicated - getting to a default and inflation path is really hard. Interest rates and inflation refuse to bulge.
However the lack of progress will add even more to the debt to GDP, perversely aiding school A (even thought some of them might agree that B were right in the previous period). So the end result has been 20 years of the government oscillating between those two positions, without reaching a point where either side can victory (default or significant GDP growth).
The thing is with the current policy you won't get much increased GDP. Prices are going up in Japan now, which will lead to decreased consumption, decreased savings (or maybe actually an increase in savings vs spending if Japanese feel the worst is yet to come) and negatively impact GDP.
Wherever it's going, it's not good anyway.
The annualized growth[1] in between these two periods has been greater than 2%, with falling unemployment, despite a declining workforce. The growth right before Abenomics was negative and falling.
[1] For this comparison, make sure to use annualized QoQ figures. Data-illiterate people have been using YoY figures to argue Abenomics doesn't work, but these are distorted by the pre-Abenomics recessionary plunge in 2012.
Monetary policy is considered neutral in the long run. The real economy is definitely not. Monetary shocks are a passing phenomenon. Loss of GDP hurts for a very long time.
In real terms, their stock market has gone down, and their GDP has contracted even more than the nominal terms show.
"Real GDP" is some kind of economic truther term. If you can sell debt at a low interest rate, whatever paper you've generated is "real" because the market is still buying it.
In general though, you are right that especially "real growth", as the antonym of "fake growth", is often used in a way that has economic truther feel to it.
"Default and excessive inflation can be a result of too much expansionary policy."
While I understand how too much expansionary policy can lead to excessive inflation, I'm curious how it can result in a default.
* At some level of inflation, seigniorage revenue will fail to increase.
* If the government borrows money in a foreign currency to spend too much, depreciation makes loans harder to repay and there is no seigniorage.
* If a government refuses to loose monetary policy while spending too much, it will not be aided by monetizing debt, which makes default even quicker, since interest rates will rise regardless. Expectations of default can lead to capital flight, which if money is tight will wreck even more damage to revenue.
So yeah, in practice creditors can alter rates.
If you have a citation for that, I'd love to read it. But I think cats and dogs will start raining from the sky first.
You don't go anywhere if consumers expect prices to remain the same or deflate.
Enjoy reading Kenneth Rogoff:
http://www.project-syndicate.org/print/austerity-and-debt-re...
A close reading will show him admitting, quite begrudgingly :
* we aren't that close to a "sudden stop" after all.
* homework shows that rates do seem to stay low, when having high debt. It is "sobering".
* more inflation is desirable (to be fair, this was always his position)
* balancing the budget "tomorrow" is "facile"
But if you look at my post carefully, the case for him looks stronger:
* Cumulative costs - more debt, more problems. Now its worse.
* there are other factors beside monetary and fiscal policy (this is definitely true, but a distraction, no reason why B shouldn't agree)
* no admission that inflation is hard to do
So here you go, Rogoff admits he was wrong, but finds his case only strengthened. Since he was wrong the other side was right, correct? Not exactly, since he invents a straw-man (simplistic Keynesian) to deny how much common ground there actually is. There might be a better admission somewhere, maybe in private or after a bit more time, but this is pretty close.
edit: for a typo
It is trivially possible to keep making money selling computers even if the total market share doesn't expand.
Please, provide us with examples of a sustained deflation that didn't harm the economy.
The supply of money has to grow at the same rate as the real economy, otherwise you can end up with "problems" associated with having "too few dollars". In other words, we need to keep increasing the supply of dollars to buy the growing output of goods we produce. This is common sense. Because it's impossible to hit that growth target exactly, we err on the side of caution and produce some inflation, which has the side benefit of preventing the hording of currency, as it naturally diminishes in value over time. For whatever reason most governments have decided on ~2% to be a safe, stable target.
One of the common misconceptions of deflation is that the lower prices should be good for consumers. Which is true, if terms of consumer goods. But keep in mind that wages and debt are also affected, which is where the real pain from deflation for the average person stems from.
Price-inflation means our purchasing power decreases. We're all better off if we get moar stuff for our money instead of less, but governments would like us to believe the opposite.
We ordinary people clearly don't benefit from inflation, but who does? -Might it be the same people who are telling us inflation is good?
How are us ordinary people benefiting when our wages fall and our debts become more onerous, both products of a deflation?
Even if wages do fall, as long as your purchasing power increases more than your wage drops, you're just fine.
People take on massive loans exactly because prices have been inflated. That certainly doesn't mean deflation is bad.
Even if you're paying off a loan, price deflation is not a problem because though the loan is becoming more "onerous", you'll have more money left over for paying the loan after you've bought everything else you need.
Price inflation is from currency inflation - ie: more $ around today chasing approximately the same number of goods than yesterday. Agreed?
When currency deflates, there are less dollars chasing those goods so dollars are harder to come by and prices necessarily decrease to allow the remaining dollars to cover the goods being exchanged. Yes goods 'get cheaper' in dollars. That's just a side show and not the problem.
So what happens to debtors in a currency deflation? Dollars are harder to come by, debts cannot be repaid and debts default. Debt default is the destruction of currency. More deflation. Positive feedback.
Savers today save in dollar accounts which rely on debtors to pay back their debts. With debt collapse, so goes bank assets (debt) and now their liabilities (savings accounts) outweigh their assets which makes them insolvement.
Debtors crushed. Banks collapse. Savers crushed. Credit disappears. Systemic financial collapse.
If today's savers didn't save in bank accounts for the promise of more dollars tomorrow then we wouldn't have this problem. Save in fine art and collectibles, save the world.
If money doesn't lose value fast enough, people, companies and banks invest in government sponsored fiat instead of the real economy. This distorts the markets.
Money should be there to allow transactions and contracts without having to do barter. It has no choice being a store of value to do so, but it should not artificially keep value at a rate that makes it desirable enough so that it replaces private markets for investments. To do so is a subsidy to economic idleness and a promotion of investment in fiat instead of the real economy.
Money doesn't have intrinsic value. It should not artificially be made to seem like it keeps so much value by governments. It should be made stably declining and just valuable enough to allow for low friction transactions and contracts. More than that and you are throwing a wrench in the gears of private markets.
It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.
The literal sense of the word "literally"?
Yes, I think that's exactly what was meant!
Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification?
Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen?
Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds.
So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return).
At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt.
I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.
Banks are not going to be super happy when the government tells them that their bonds are worth nothing through giga-inflationist measures. Or are they ? Default is better than nothing, at least you can pick up the pieces, while inflation is literally destroying your economy for any foreseeable future.
Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
Germany in the '20s (not the '30s - hyperinflation was over by the '30s - just in time for Germany to be sucker-punched by the Great Depression) was a special case. They hyper-inflated in order to default. Namely, the Triple Entente had imposed massive war debts onto Germany at the end of World War 1, and Germany resorted to printing currency in order to pay off its war debts. When formal default justifies military invasion and the annexation of your territory (which was the French argument when the Weimar Republic talked about default), hyper-inflation begins to look awfully attractive.
While it's a trope to use the Weimar Republic as an cautionary tale about inflation, we can't really learn very many lessons from it, because of the relatively exceptional historical circumstances preceding the founding of the Weimar Republic.
(In the end, it was all moot, of course. Hitler unilaterally canceled Germany's debt payments, essentially calling the French on their bluff about invading the Rhineland. The French didn't invade, and Hitler was emboldened to pursue further expansionism.)
I grew up in an Eastern-European post-communist country which was very badly affected by inflation in the '90s (it ran in the high double-digits for almost all the decade, and in one year it actually surpassed 100%). Let me tell you that to see your life-savings absolutely annihilated in a matter of 2-3 years it's much, much, much worse than deflation. Japan got into the current mess after 20 years and it still manages to build Maglev trains and to be an economic power, but in a country affected by very high inflation all that goes out of the window (see the Soviet Union implosion).
And anecdotal recollection, I remember when my parents had asked me to be the one in charge of answering the family's phone (I was 14 or 15), and to tell whomever was calling that they were not home (they had borrowed money from lots of their friends to buy food and to pay for basic apartment maintenance and there is no-way to pay it back). One day a lady judge called, asking my parents to pay back the money they owned her because she did not have money to buy bread. Now, you can imagine that in a country where even judges cannot afford to buy bread for their family things are worse than worse.
Instead of actually addressing quanticle, you went into an irrelevant inflation/deflation rant. It would be nice if we could actually talk with each other rather than at each other in this kind of discussion.
Edit to point out once again: Default and deflation are not the same thing. By bringing up deflation in this particular sub-thread, you are further reducing the signal-to-noise ratio in a comment thread that is already of low average quality.
As I was trying to say, after 20 years of a shitty deflationary economy the Japanese people still pretty much have their pensions more or less intact, while in a highly inflationary economy (like the one I experienced) the pensions become almost null in a matter of maximum 5 years. So your point, "So, when it comes to your life-savings, both can be utterly destructive" is actually demonstrably false, based on recent historic examples. I agree, we can start the discussion from here, i.e. from demonstrable economic facts.
Granted, English is my second to third language, so I try my best at holding a conversation.
This definitely doesn't mean that it is impossible; at a minimum, a country might choose to do it. In fact as others have pointed out, default is sometimes preferable to hyperinflation and extreme devaluation. After all, all countries, Japan included, rely on imports to get at least some essential goods (think about food, fuel, medicine and tools); autarky is possible, but very inefficient and painful.
Japan's interest on the public debt is around $250B/year, or around 5% of GDP.
5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone).
$250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable.
Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false.
Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
Back in the real world: When I said earlier that Japan has to pay $250B this year to service their debt, that means there is an actual no-kidding line item in their fiscal year 2015 budget for the Ministry of Finance to pay that money to bondholders. They've budgeted the money already and it will be paid out starting in April just like it was in 2014, 2013, 2012, and so on.
The government of Japan is plainly bankrupt. People that own Japanese government debt are already being paid back in devalued Yen. The only options left for Japan are to either openly default, or dramatically increase the debasement of the Yen - the last option is exactly what they will choose. So rather than an open default, they will default by destroying their currency.
Abenomics will be followed by a call for Abenomics 2, and a more dramatic destruction of the Yen. Japan has been living on borrowed time for 15+ years, maintaining a fake standard of living that was dependent on perpetually greater amounts of debt; the bill has come due. The exact same process is occurring in several of the biggest economies of Europe.
You may consider it a "moral" default if the debt is paid back in inflated currency, but it is in no way a technical default and you can't just redefine long standing meanings of the word "default" to suit the point you're trying to make.
I'm not saying that nobody cares if debt is paid back in debased currency, but if it's paid back according to the letter of the contract, then it's not a default.
That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false. Japan could default on debts if it chose to (many countries have in the past).
This is slightly pedantic. The argument was about whether incurring ever-greater amounts of debt would result in the default of Japan, a country with a sovereign currency. It's a fallacy that is often repeated. As long as the debts are denominated in said currency, the answer is: no. A country with its own currency will always be able print more money to fulfill these obligations, making default practically (not literally, I guess) impossible.
The fact that they can choose to default, or that we may run out of trees, or ink, or whatever, is a bit outside of the scope of the argument.
False.
Many countries have defaulted on debt denominated in local currency. E.g. Brazil in 1990 and Russia in '98.
In Brazil's case, part of the debt was indexed to inflation, so inflating away the debt wasn't easy.
AFAIK most of Japan's debt isn't inflation-linked. Still, a high enough rate of inflation isn't substantially different from partial default.
PS: See the table on page 30. http://www.cass.city.ac.uk/__data/assets/pdf_file/0009/21997...
I think you're both right. When you can print your own currency it is literally impossible to default on your debts, unless you choose to.
Often times defaulting has benefits to the debtor, like the Russians escaping from ridiculous fixed exchange rates in 1998.
Because they decided to issue it, mainly to instill confidence in a currency with a history of big inflation. But this isn't the norm.
It doesn't change the argument that it is impossible to be unable to "pay back" something that you have an infinite supply of.
Japan's military spending is 7th or 8th largest in the world, depending on who's measuring it. [1]
Any conflict with China that actually goes beyond posturing is going to be a small scale skirmish. If that happened both countries would rapidly seek to de-escalate (behind the scenes). The two economies are too closely linked for either country to want full scale war. Their existing military is already more than adequate to deal with any small scale skirmishes.
[1] http://en.wikipedia.org/wiki/List_of_countries_by_military_e...
Nevertheless, we should also keep in mind Japan's proven ability to utterly transform itself in a short time. Meiji and post-WWII are two precedents. Each of these change events required the following conditions:
- clear development model to proceed towards
- external pressure creates (perceived) existential threat
Such conditions do not pertain in Japan now, yet they may do so again in the future. I feel sure that the first is a necessary condition to transformative change. The second condition is perhaps optional.
Why take conflicting measures ? How increasing sales tax is going to make consumers and middle class spend more ?
Have Japan's economists not considered it ?
"We need to encourage women to have more babies in order to avoid a population crisis!"
Welcome to the government of contradictions.
So, one proposal: institute a small yearly wealth tax.
Avoids a lot of the problems with inflation-based approaches, and doesn't penalize people nearly as much for having liquid assets.
Japan's savings rate has collapsed, and is in dire condition.
Via the WSJ:
http://i.imgur.com/vYsbHWg.jpg
That formerly high savings rate was the only thing that enabled the Japanese government to borrow as much debt as they did.
Now that the Japanese are no longer able to save enough money, the government can't continue to borrow from that source, and accordingly the govt. has been forced to turn to the last measure available: currency debasement.
The thing is, though: the Japanese government isn't trying to debase the Yen because of their high debt. The reason they're trying to debase the Yen is to encourage growth via exports. Somebody has still been buying plenty of Japanese government debt all those last years. It would be interesting to know who.
I believe this is something that governments should support[0] rather than just taxing the savings away. Granted, however, that an unequal distribution of those savings can become problematic. Perhaps a compromise can be reached with a wealth tax that is indexed to median wealth?
[0] Which does mean that demand gap needs to be plugged somehow; the most straightforward way to do so is via a government deficit.
Also, the debt to GDP ratio is insane, I am still stunned they didn't default 10 years ago.
Maybe a default is the only way for them to get out of the decades of stagnation at this point, even though it will be very painful in the beginning.
http://www.paulcraigroberts.org/2014/11/14/global-house-card...