Some information on Japan’s economy
Here is an article from The Economist. We have received a number of questions regarding where Japan stands and this is a good synopsis. Japan has been going down the road of easy money and low interest rates for longer than the US but has not truly gotten back on track. However the country has also not collapsed either.
I think there are two takeaways… 1) Monetary policy can not spur inflation and solve all economic problems and 2) can go on for much longer than most would believe…
Click here to visit the original post over at The Economist.
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Despite Shinzo Abe’s best efforts, Japan’s economic future will be a leap into the unknown
THERE are four kinds of countries in the world, the Nobel-prize-winning economist Simon Kuznets supposedly said: developed, undeveloped, Argentina and Japan. Yet much of the rich world now looks remarkably Japanese, with chronically low interest rates and inflation, and eye-watering levels of sovereign debt. Many governments are therefore watching keenly as Shinzo Abe, the prime minister elected in 2012 on a platform of economic rejuvenation, takes on Japan’s economic mess. His task is harder than many appreciate. What is needed is not simply growth, but growth fast enough to allow Japan to come to grips with its massive public debt.
Mr Abe promised three expansion-boosting “arrows”—fiscal, monetary and structural—to deliver a much more powerful stimulus than the half-measures taken by previous governments. In September of this year he gave a clearer sense of the end-goal: a 20% rise in Japan’s nominal GDP (NGDP), to ¥600 trillion ($5 trillion) from the current ¥500 trillion, where it has stood for the past 20 years, more or less.
Mr Abe’s archery has moved the economy in the right direction. NGDP, which measures growth without adjusting for inflation, is up by about 6% since the end of 2012. Higher prices account for about half of the increase. The unemployment rate has also fallen, from 4.3% to 3.4%. Yet this progress is still woefully inadequate. The recovery has been halting: growth slumped in the second quarter. Prices are falling again, and even the “new core” inflation index cooked up by the Bank of Japan (BoJ) over the summer remains short of its 2% inflation target. A return to monetary-policy normality looks as distant as ever. The BoJ disappointed markets on October 30th by failing to increase the pace of its asset purchases, but it is still buying ¥80 trillion in government bonds a year, and may add to that if inflation stays weak.
Meanwhile, Japanese sovereign debt, at more than 240% of GDP, is easily the highest in the world and still growing. Bond markets have been remarkably tolerant of this: the yield on Japan’s 30-year bonds is just 1.36%. That is partly because the Japanese, prodigious savers, own so many bonds. The central bank owns most of the rest. Yet few economists reckon the borrowing spree can continue for ever. As more Japanese workers retire, domestic saving is falling and spending on the old soaring. Even a modest rise in borrowing costs could bring insolvency.
Mr Abe had hoped that a quick return to rapid growth would allow for an eventual turn to austerity, but the pivot to parsimony is proving tricky. Japan will run a structural budget deficit of more than 5% of GDP this year. After a rise in the country’s consumption tax in April of 2014, from 5% to 8%, both household spending and GDP tumbled, leading the government to postpone a second rise to 10% that had originally been scheduled for October of this year. That experience is especially worrying given the modesty of the rises. An analysis published in 2013 estimated that stabilising Japan’s debt would require tax revenues of between 30% and 40% of total consumption, equivalent to a consumption tax rate of about 60%. Other studies are less dire, but nonetheless suggest that far bolder measures than anything under consideration will be needed to stabilise the debt.
At current growth rates, any big tax rises or spending cuts would tip Japan straight back into recession. Yet generating faster growth is a tall order. Supply-side reforms could be more vigorous: Japan remains far too willing to protect favoured sectors, like agriculture and cars, despite some recent concessions in trade negotiations. Yet the scope to improve productivity in Japan is smaller than might be imagined. Real output per worker is similar to that in Germany and the Netherlands. A more welcoming attitude to immigrants would help: recent growth in output per person has been offset by Japan’s shrinking population. In 2012 net migration to Japan was equivalent to just 0.3% of the existing population, compared with 1.6% in America. Yet Mr Abe has shown little interest in admitting a rush of new workers.
The price is wrong
The only way out is higher inflation. Had NGDP grown at even 2% a year since 1992, its debt-to-GDP ratio would be just 82%—close to America’s. Yet pushing up wages and prices has proved devilishly hard. In the past year alone the BoJ’s asset purchases lifted the share of Japanese government debt that it owns from 23% to 32%. Despite low unemployment, a tumbling yen and soaring stock prices, inflation has barely poked its head above zero at any point in the Abenomics era. A more ambitious inflation target, of 4% perhaps, would help if markets believed it. But having failed to hit the 2% mark it adopted in January of last year, the BoJ lacks the credibility to make bolder promises without further action to prove its resolve.
Japan is not without options, however. At the current pace of purchases, the share of government bonds held by the central bank will rise to two-thirds by 2020. Were purchases to rise to ¥100 trillion a year, the BoJ would own nearly all of the government’s outstanding debt by 2026. The government would in effect owe the money to itself; debt payments made to the BoJ would be returned to the government as seigniorage.
A plan to monetise the debt meets any standard definition of economic insanity. Orthodox economics suggests it must inevitably generate rapid inflation. Yet given that faster inflation is what Japan has sought in vain for two decades, and that the only alternative seems to be waiting patiently for a debt crisis, monetary madness does not look so bad. It has the further advantage of following the path of least resistance.
Other governments would understandably recoil should Japan take this route or stumble into it inadvertently. Monetisation would open a Pandora’s box of economic risks. Yet recent experience suggests that where Japan leads, other economies may eventually follow.
I like the work VisualCapitalist does. Thanks for posting again Excelsior. Since this is a dedicated Japan post it should get some more views.
Cory – Thanks for covering Emerging Markets yesterday and Japan today. It’s a big world out there.
Only, added comment………… DIDN’T Mitsubishi leave the comex on silver? I think this happened two or three weeks ago.
Thanks for this Excelsior.
Glad to share Tad. Best to you!
Great. Thanks Cory. You asked Tres Knippa for his timescale on this all falling apart?
Amazing to me how Japan continues to operate………………
ditto
These last 2 lines from the article I posted have me wondering the same thing Dai Uy:
“Japan now has the world’s highest debt-to-GDP ratio of 243% as well as the world’s highest debt-to-revenue ratio.
Despite this, they’ve started an even more potentially dangerous experiment known as Abenomics, which is the three-headed beast of unprecedented quantitative easing, monetary stimulus, and reforms.”
I would argue that any government can create inflation at the drop of a hat. They just have to put the freshly printed money in the hands of consumers first rather than bankers.
Bankers put the money into asset markets. Consumers put the money into commodities and consumption.
A perfect example was the rebate checks in 2008. In reality that was helicopter money. Where did it go? Straight into gas tanks and food. That was where the inflation showed up. It all depends on who gets first use of the money as to where the inflation will materialize.
But since bankers run the world I suspect all helicopter drops from now on are going to land in the banks rather than consumer mail boxes.
good points on who gets first use of the helicopter money (and where inflation shows up); and yes the banks seized the reigns a few years back and likely won’t let go.
helicopter money………….will be the student loans, traded in for a 4 yr. hitch in the ARMY, doing the grunt work for the bankers.
THE new college degree,…. military hard ware, and…..how to polish and spit shine your master banker’s shoes.
It’s a brave new world……..
brave to slave…………..and you have the NEWWORLD in order.
🙂 funny OOTB. I was referencing the book though….
Brave New World is a novel by Aldous Huxley of ideas which takes place in a densely imagined dystopian state.
The World State
The vast majority of the world population lives under the World State. In geographic areas not conducive to its system, “savages” are left to their own devices. These “savage reservations” are similar to reservations established for the Native American population during the colonization of North America.
The World State is a benevolent dictatorship headed by ten World Controllers. In this respect it is similar to the societies imagined by Huxley’s near-contemporaries H. G. Wells and Olaf Stapledon. The World State has established a stable global society where the population is permanently limited. The basis of that stability is the conditioning of citizens to accept their station in life. This is achieved by:
An abundance of material goods. However (presumably because of advanced technology) conditions of work are not onerous, in contrast to the contemporary Metropolis in which the workers are forced to arduous exertions. To maintain the World State’s command economy, citizens are conditioned to promote consumption (and hence production) with platitudes such as “ending is better than mending”.
The programme has been successful. The lower castes’ restricted abilities, ambitions and desires make them contented with their lot. There is no dissatisfaction because each caste member receives the same workload, food, housing, and soma ration.
Nor is there any desire to change caste; conditioning reinforces the individual’s place in the caste system. The upper castes (with a few exceptions) revel in the hedonistic and materialistic lifestyle provided for them.
Discouragement of critical thinking. The lower castes are bred for low intelligence and conditioned not to think; in the upper castes, this is achieved by conditioning and social taboos. “High” culture has ceased to exist; serious literature is banned as subversive, as is scientific thinking and experimentation. The only cultural element mentioned, movies with added tactile sensations, deal in pure emotion.
Abolition of natural reproduction. Human embryos are raised artificially in “hatcheries and conditioning centres”. The breeding and development of children predestine them to fit into one of five ranked castes with Greek letter names, from Alpha (the highest) to Epsilon (the lowest) which fulfill different economic roles. Alpha and Beta fetuses are allowed to develop relatively naturally, but Gamma, Delta and Epsilon fetuses are subjected to chemical interference to stunt their intelligence and physical growth. Members of lower castes (but not Alphas and Betas) are created using ‘Bokanovsky’s Process’ which allows up to 96 clones to be produced from one fertilized ovum.
Educating children by the hypnopaedic process, which provides each with appropriate subconscious messages to mold the child’s self-image appropriate to their caste.
Discouragement of individual action and initiative. Spending time alone is considered abnormal and even reprehensible, and well-adjusted citizens spend their leisure in communal activities requiring no thought. This leads to a lifestyle which readers may see as shallow and hedonistic. It is promoted by the ready availability and universally-endorsed consumption of the hallucinogenic drug soma (an allusion to a ritualistic drink of the same name consumed by ancient Indo-Aryans), and by the promotion of recreational sex, often as a group activity. Emotional, romantic relationships are obsolete; chastity and fidelity are causes for disapproval or mockery; and marriage, natural birth, parenthood, and pregnancy are considered too vulgar to be mentioned in polite conversation. Spiritual needs are met by mock religious services in which twelve people consume soma and sing hymns. The ritual progresses through group hypnosis and climaxes in a sex orgy. The symbol worshiped is the “T”, in homage to Henry Ford who had recently introduced mass production of automobiles with the Model T.
People enjoy perfect health and youthfulness until death at age 60.[17] Death is not feared; the population is confident that everyone is happy, and since there are no families, there are no strong ties to mourn.
“Brave New World” is a great companion to “1984” and “Fahrenheit 451”.
The movie “Equilibrium” borrows ideas from it heavily.
EX…….thanks for the followup…….since you supplied the spark notes, I will be able to pass the exam, if questioned…………. 🙂
I posted this yesterday regarding Japan’s economy, but it seems relevant to repost:
Leapfrogged by the Four Asian Tigers
JEFF DESJARDINS on November 9, 2015
http://www.visualcapitalist.com/japan-officially-gets-leapfrogged-by-the-four-asian-tigers/