Japan Starts to Recharge After Two Lost Economic Decades

http://www.nytimes.com/2013/05/19/your-money/japan-starts-to-recharge-after-two-lost-economic-decades.html?pagewanted=all&_r=0

by w1ntermute • 13 years ago

28 49 13 years ago

nytimes.com

ekianjo7• 13 years ago

Yeah, making the yen lose 30% of its value in less than 3 months is nothing short of a miracle !

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.)

pekk• 13 years ago

How strong is it necessary for the yen to be?

w1ntermute5• 13 years ago

That's why it wasn't done until now. Things had to get so bad for so long that people would be willing to put up with short term pain for long term gain.

adventured• 13 years ago

Devaluing your currency to fake economic results is short term and long term pain. There is no longer term gain to be had from it.

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.

rayiner5• 13 years ago

The yen is currently at 100 to a dollar, consistent with historical norms.

ekianjo7• 13 years ago

The dollar has been lost value in the past few years because you had extra inflation compared to other currencies. Now Japan is just printing back all the money they needed to catch back, but that's hardly a good thing, oil was cheaper when the yen was stronger than the dollar and oil price drives everything else.

jvm• 13 years ago

Re: the first point, it actually is surprising, at least to some, because under Keynesian doctrine, Japan was supposedly in a "liquidity trap" slash "zero lower bound" where monetary policy is supposedly ineffective, but obviously it was thoroughly effective.

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-...

cromwellian• 13 years ago

By "monetary policy ineffective" they mean slashing interest rates. Keynesians have been saying for a long time that the only effective monetary policy in a liquidity trap is to cause people to credibly believe you are raising the inflation rate.

It's not really surprising at all, Ben Bernanke and Paul Krugman have basically been calling for this (in Japan) for over a decade.

mvkel• 13 years ago

Isn't this an artificial benefit because other countries are. Intentionally suppressing their respective currencies to help Japan out? The long term pays off, but the yen has been hit so hard, it needed a break.

rayiner5• 13 years ago

People who espouse bitcoin: see Japan for a textbook example of why deflation is a bad thing. See: http://www.telegraph.co.uk/comment/personal-view/3563614/Wha....

ekianjo7• 13 years ago

Care to explain your thought a little more? Bitcoin as a decentralized currency and a centralized bank in Japan is not really comparable.

rayiner5• 13 years ago

That distinction is irrelevant. Decentralized or not, Bitcoin is an inherently deflationary currency, and deflationary currencies are bad for the reasons you can see by observing Japan. Deflationary currencies create an extreme incentive to save, since your money will be worth more tomorrow than it is today, which suppresses what really makes an economy move: spending and investing. Whether it's centralized bank policy or an algorithm that causes the deflation is an irrelevant distinction.

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.")

bdcs4• 13 years ago

Here[1] Nobel-laureate Milton Friedman, argues that the majority of money, specifically the stuff industry and consumers touch, should be constant-supply -- that is to say, identical to bitcoin's model.

"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...

rayiner5• 13 years ago

You're taking the quote out of context. "High powered money" is not what consumers touch, and it is not the majority of money. In the very next paragraph he says: "Now, you would think that that's a bad idea because there would be no provision for expansion; however, high-powered money [currency plus bank reserves] is a small fraction of total money and the ratio of total money to high-powered money has been going up over time."

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).

blakerson• 13 years ago

Man, the mainstream press (NYT and WSJ in particular, since their Japan reporting is still around and regular) has been very quick to grab their Jump to Conclusion Mats just because the markets have responded strongly to a drastic change.

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.

rluhar4• 13 years ago

Around 90% of Japan's debt is held on-shore, either by pension funds or by the mega-banks. The interest rates on JTBs (Japanese government treasury bills) have already spiked, albeit from a very low base. This has resulted in falling JGB prices (there is an inverse correlation between interest rates and bond prices).

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_

J_3• 13 years ago

A lot of hedge funds (e.g. Kyle Bass and George Soros) think that we've reached a tipping point in Japan. Their government already spends 1/4 of all revenue on debt service because their debt is monstrously huge. If inflation happens, their debt bomb is going to go off because no one will want their money in low yield bonds in an inflationary environment. If JGBs (I've never heard them referred to by the JTB abbreviation before) move 200 basis points (which is what the government is targeting for inflation), the government's debt service will exceed revenues. Yields spiked 25 points in 3 days last week.

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.

rluhar4• 13 years ago

I have heard and read similar analysis. I reckon the Government could force the mega-banks and pension funds to just take the pain and keep hoarding JGBs. Not having to deal with external yield hungry investors has it's advantages.

I can imagine the government making an appeal to patriotism, which may be more successful in Japan than in other places.

hudibras4• 13 years ago

"If inflation happens...": that's a huge caveat you've got buried there.

Let me guess: You think I should buy either gold or bitcoins, right?

ddeck2• 13 years ago

Bass' thesis is basically sound. Japan is well beyond the tipping point and as he notes, JGB yields will eventually become untenable for the government. Unlike the European nations facing similar issues though, Japan prints it's own currency. As such, it will never default. Given a choice between default and monetization, monetization is always the lesser evil.

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.

kaonashi2• 13 years ago

Why would the entity that has the Yen printing press need to look overseas for Yen?

rluhar4• 13 years ago

Excellent question - they wouldn't. But firing up the printing presses would cause inflation. This is bad news when Japan is not self-sufficient for energy or for some food production.

Pitarou• 13 years ago

Abe has bought Japan some breathing space. Now comes the hard part: structural reform.

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.

Japan Starts to Recharge After Two Lost Economic Decades

Related Stories