Japan Falls into Recession

http://online.wsj.com/articles/japan-falls-into-recession-1416182404

by ssclafani • 12 years ago

187 199 12 years ago

online.wsj.com

skwirl• 12 years ago

Here's an article that's not behind a paywall: http://www.bbc.com/news/business-30077122

Here's the thing: you actually need a strong middle class to buy your products. No amount of artificially inflating the value of the stock market through quantitative easing will give you a healthy economy. QE is like putting a fresh coat of paint on a house with a rotten interior: it makes things look pretty, but the structural integrity of the building is almost non-existent.

Employees working themselves to death for little pay is only aggravating the problem, rather than solving it.

lkrubner• 12 years ago

But quantitative easing lowers interests, so that people can more easily take out a housing loan, so they can fix the "rotten interior" -- they can replace the rotting wood, they can replace the moldy roof, and by doing so, they stimulate the economy.

"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.

pastProlog• 12 years ago

people can more easily take out a housing loan

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.

efjhewjfnkew2• 12 years ago

I didn't mean for it to be interpreted too literally.

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.

rebootthesystem• 12 years ago

Not that simple. Not that simple at all. You can't prop-up anything artificially. Once the artifice disappears --and it always does-- if a solid infrastructure isn't in place failure is almost guaranteed.

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.

csa• 12 years ago

But quantitative easing lowers interests

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.

jusben1369• 12 years ago

You only have to look at the US and Euro economies post 2008 to see the real world benefits of QE. Europeans went down the austerity route and are stuck with consistently underperforming economy and the threat of deflation. The US has turned the corner and is a job creating machine again including the first real signs of inflationary pressure through rising wages. The most unusual thing I can see about Japan is it's trying to take the US and Euro approach together at the same time. Their problem is deflation. Deflation tells consumers not to buy as you wait 6 months and it'll be cheaper. It's a deadly downward spiral. So the Japanese are trying to stoke their economy to create inflation which in turn spurs consumption. Yet they go into this with a massive amount of debt already so are raising consumption taxes at the very time they need consumption. Something has to give.

kyledrake• 12 years ago

I agree. They eased and increased taxes at the same time, which was not a smart move. Now they're back to square one, and they don't have much room left to maneuver because of the already high debt. If they wanted to accomplish their goal (more inflation) they should have stuck with the hail mary, rather than changing the play right in the middle of it.

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.

ekianjo15• 12 years ago

Deflation tells consumers not to buy as you wait 6 months and it'll be cheaper.

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.

ekianjo15• 12 years ago

Yet they go into this with a massive amount of debt already so are raising consumption taxes at the very time they need consumption

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.

unclebucknasty• 12 years ago

You only have to look at the US and Euro economies post 2008 to see the real world benefits of QE. Europeans went down the austerity route and are stuck with consistently underperforming economy and the threat of deflation.

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.

gw2• 12 years ago

You only have to look at the US and Euro economies post 2008 to see the real world benefits of QE.

You cannot isolate variables in two separate economies; any conclusions assuming you can are bogus.

RivieraKid• 12 years ago

The US has turned the corner and is a job creating machine again

The employment-to-population ratio has't recovered and is near the 30 years low.

http://data.bls.gov/pdq/SurveyOutputServlet

mc3211• 12 years ago

Quantitative easing, Yen depreciation...

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.

gst• 12 years ago

What they need to do is figure out a way to grow the population locally or through large-scale immigration.

That doesn't sound like a long-term solution. There'll be a limit to population growth at some point.

mc3211• 12 years ago

Yes, you're right. It depends on what we mean by long term. In the end we'll hit some natural population limits. It'll be interesting what they devise in order to have a viable economy in conjunction with a stagnant or declining population. We can all learn from their success or failure in that regard.

sliverstorm• 12 years ago

Well, their population looks about ready to take a nosedive, so it's not like they "just aren't growing fast enough".

dmritard96• 12 years ago

I really hope that we do not rely on population growth to stimulate or sustain an economy for too much longer. At some point humans will need to think about carrying capacity and understand how to structurally reconfigure such that we can maintain a high quality of life for us and other earth inhabitants.

chvid• 12 years ago

Had it not been for immigration from the 3rd world most 1st world countries would have a population in decline.

TazeTSchnitzel• 12 years ago

With the way Japanese society feels about immigrants, I doubt it'd be politically palatable.

tormeh• 12 years ago

I agree, but QE is not a dumb idea per se, it's just the way that it's done is severely lacking. What you want is inflation, which means you want to increase the amount of money in circulation. A simple way to do that is for the central bank to make money up and give, say, 20000 yen to each citizen every year until deflation went away. This is called a helicopter drop in finance-speak, and seen as very radical. Deflation should be cause for celebration: It means the central bank can print money without hurting the economy. The money thus printed could be used for all kinds of good purposes, but it's not done.

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.

techdragon2• 12 years ago

Australia did one and it worked wonderfully. We rode out most of the brunt of the impact of the 2008 'GFC' with little disaster. The worst of it for most of us was that getting a home loan got a bit tougher, but really this was more a case of returning to earlier norms than really getting "harder"

georgeecollins• 12 years ago

I agree that Japan (and the US) would benefit from more immigration for a lot of reasons. But if you can only grow your economy by adding people, you aren't really increasing per-capita income, at least for the working class.

nandemo3• 12 years ago

you aren't really increasing per-capita income,

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...

techdragon2• 12 years ago

Immigration is painfully unlikely due to cultural issues. It's oft suggested by non Japanese people looking at the problem but at least from what I can see, the majority of the Japanese voting public don't want immigration. There's reasons if you want a fun read. Particularly interesting is the history of people of Korean decent who are native Japanese residents for a generation or two.

mc3211• 12 years ago

It's true Japanese aren't very accepting of immigration, historically --and having to be blood to be a true national is a bit of an odd theory for citizenship; however, unless they (or anyone else) devise an alternative to neo-liberal capitalism which provides a decent living for its population while that population is in decline, the Japanese may have to reconsider their position on immigration.

deciplex3• 12 years ago

It's often suggested that Koreans in Japan are somehow deprived of Japanese citizenship. This is not true. Rather they are not allowed to naturalize in Japan while retaining their Korean citizenship (yes, I realize that is not the whole story and there is a lot of history there - nevertheless, there is nothing stopping a Korean who has lived in Japan long enough, or was born there, from acquiring Japanese citizenship if they choose). Many countries have this sort of policy yet somehow it's controversial when Japan does it.

That said, mass immigration is unlikely, as you say.

a8da6b0c91d• 12 years ago

the majority of the Japanese voting public don't want immigration

The vast majority of the American public don't want it either, but businesses do, so it happens anyway.

aphexairlines• 12 years ago

It's already easy to immigrate to Japan. It takes less than a month to get a work-sponsored visa. Much easier than the US H1B.

bpodgursky• 12 years ago

Large scale immigration is just passing the buck down onto a currently-poorer country. But poor countries aren't going to stay human-meat factories forever, and sooner rather than later someone is going to have to figure out a way to maintain an industrialized society with a stable population.

toomuchtodo2• 12 years ago

The end of consumerism, less income inequality, and automation.

I must just not understand. It seems pretty simple.

MarkMc2• 12 years ago

I imagine that currently-poor countries would love to have the buck passed down to them if it improves their standard of living.

visarga• 12 years ago

Large scale immigration is just passing the buck down onto a currently-poorer country

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.

minikomi• 12 years ago

As someone who has lived in Japan for the past 8 years.. I still feel like an outsider in many many ways. Unfortunate to have to say it, but there's much deeper issues than immigration law at play.

ekianjo15• 12 years ago

It'll be interesting to see what they figure out for their society and the lessons they might have for us.

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.

j_lev4• 12 years ago

I don't agree that increased immigration/population growth is necessarily the key (for Japan or other developed nations). Technology should be able to go a long way to replace the workers who support the nation. Japan, of course, is doing its utmost to prove this wrong.

ekianjo15• 12 years ago

What they need to do is figure out a way to grow the population locally or through large-scale immigration

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.

mc3211• 12 years ago

Integrating women into the workforce is a different issue. It would help to some degree --and the government is making a greater effort in having this happen. As paternalistic as Japan is, given the choice of making life easier for women to join the workforce or allow greater legal immigration in Japan, they have chosen to encourage women to stay in the workforce and to try to make it easier for them to succeed. As good as that is for society, it still will not make up for the structural problems bought on by a declining but aging population _and_ a large and growing retiree population. They need a younger population. Bringing in 10 million retirees from Florida would not help Japan's economy's structural problems. they need young, eager and enthusiastic immigrants to bring some vibrancy to their flagging economy.

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.

tomp5• 12 years ago

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.

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).

MLR• 12 years ago

They have 5% unemployment, and, after a quick check, it seems like a similar labour force to population ratio to the UK and US.

I'm not an economist, but in their position, what would mass immigration solve?

hudibras5• 12 years ago

(Twenty-five minutes too late...)

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.

[0]http://stats.oecd.org/index.aspx?queryid=36324

adventured9• 12 years ago

Japan's biggest problems are extreme debt, and poor allocation of capital via government spending (Japan's famed public works programs, which have net resulted in zero real GDP growth for 20 years).

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.

Xixi• 12 years ago

3.6% unemployment and virtually every store has an "help wanted" sign [1] on its front door. Japan is facing an incredible demographic challenge: Japanese population decline has really started 3 to 5 years ago (depending on the source), and it will be getting worse and worse in the next few decades. It means its internal market is essentially shrinking, which makes a terrible case for large investments.

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...

DominikR2• 12 years ago

In my view low birthrates are a result of financial insecurity and the fact that now both parents have to work full time to make a decent living while 50 years ago it was sufficient to have only one parent working.

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.

rrggrr3• 12 years ago

Demographics. Fukishima. China. Japan faces enormous challenges. Aging population means increased healthcare costs supported by a (temporarily) declining workforce and decreased tax revenues. Fukishima's costs are incalculable but impact broadly healthcare, manufacturing, farming and fishing. Much Japanese manufacturing has moved to China and adding to that expense is Japan's need to increase its defense spending to provide a small measure of balance in its territorial disputes with its neighbor. A wave of investment and entrepreneurship is required in Japan that I'm not sure the country is capable of fostering at this time. Bearish.

oska• 12 years ago

adding to that expense is Japan's need to increase its defense spending to provide a small measure of balance in its territorial disputes with its neighbor

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...

rrggrr3• 12 years ago

I would categorize Russia's incursion into Ukraine as small scale, and with that deescalated conflict as a recent guide, I think it makes sense for Japan to invest heavily in defense for regional stability.

lovemenot• 12 years ago

These challenges are indeed real and enormous, as you point out.

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.

rrggrr3• 12 years ago

It will be about 10 years before, demographically speaking, Japan can literally work its way into growth. Others have posted about the country's reluctance to embrace immigration and I'm afraid that is the necessary transformation unless they can find a way of innovating or enhancing productivity on a massive scale.

shard• 12 years ago

Non-paywall WSJ link through Google: https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web...

kristofferR• 12 years ago

Yeah, this trick works for most paywalled articles out there.

Googling the URL/title of the paywalled article will almost always give you access the full article (or at least a copy somewhere else).

gear54rus2• 12 years ago

What I don't really get is how people on this tech-savvy resource still submit links to sources which go against the very idea of free information.

Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different?

techtivist• 12 years ago

Here's the biggest underlying problem. Contrary to what one would expect, Japanese firms are actually flush with money, but due to Abenomics, the weakness of Yen means they are investing more and more abroad, rather than putting the resources in improving its own infrastructure. We all know about Softbank's recent investments in India and South East Asia. And it's not just limited to Tech or even the private sector, even infra firms are investing in troves abroad, especially in South East Asia. In a way the Japanese growth rate doesn't take into account the rent its entities are receiving from abroad. So the short term picture might actually be rosier than the numbers of would suggest.

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.

jvm• 12 years ago

the weakness of Yen means they are investing more and more abroad

Shouldn't a weak yen make it cheaper to invest at home relative to abroad? What's the mechanism that causes the opposite effect?

tsotha2• 12 years ago

If your investment generates profit you'd rather have that profit in USD or Euro than a weak yen, particularly if the yen is weaker when the investment pays off than when you invest.

jim_greco• 12 years ago

Japanese companies are flush with money, but the problem is demand and not supply. Japan has an declining population and even faster declining working age population. Combine this with the sales tax increase and a slowdown in China and you have a lot of headwinds facing their economy. Companies in the rich world are investing abroad because there are just a lot better opportunities for growth abroad.

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.

dimitar4• 12 years ago

Here is the common ground and controversy between most economists on the situation, I think it is interesting how much common ground there is:

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).

ekianjo15• 12 years ago

Additionally Increased GDP will bring more revenue

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.

cynicalkane2• 12 years ago

This is incorrect. GDP growth in Japan jumped when it became clear Abenomics was going forward, and un-jumped when the recent tax increase went in.

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.

JamesBarney• 12 years ago

While I think your post for the most part did a good job of summing up the issues I am a little confused by the following.

"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.

dimitar4• 12 years ago

* If creditors see that you are trying to monetize debt too quickly, they will demand higher rates.

* 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.

hindsightbias2• 12 years ago

even thought (sic) some of them might agree that B were right

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.

dimitar4• 12 years ago

Oh wow, it is certainly a challenge to find a public intellectual to admit something like that, especially considering that not everyone can be neatly placed in one of the two camps. But you can get close to that by reading between the lines, by the viewing the context.

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

cturner• 12 years ago

Why is this? Computers get rapidly cheaper for example.

hudibras5• 12 years ago

There's so much about your post which is incorrect that I don't have time to debunk it all. So let me just hit the biggest error, so that others don't have to waste their time:

It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.

jpatokal2• 12 years ago

It's "literally impossible" only in a very literal sense of the word. In other words, yes, Japan can indeed get out of a debt of 17 gazillion yen simply by printing 17 gazillion yen, but I'm not sure flooding the money supply like this would cause much less damage than an actual default (=the Japanese government telling its bondholders that it's not going to repay them).

ekianjo15• 12 years ago

It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.

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.

dimitar4• 12 years ago

This a really strong statement and is either a misunderstanding or exaggeration. The received wisdom is either that a country issuing debt in its own currency cannot be forced to default or that it is not as vulnerable to sudden stops of confidence in its debt. There are various levels of conviction in these statements.

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.

nandemo3• 12 years ago

It's literally impossible for Japan to default on their debts, which are almost completely in Japanese currency.

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...

akg_67• 12 years ago

We have been traveling in Japan for past 4 weeks (another 2 weeks to go). Talking to regular folks, there seems to be divergence between what regular folks thinks need to be done compared to government.

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.

azernik• 12 years ago

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 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.)

ekianjo15• 12 years ago

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.

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

tomp5• 12 years ago

> 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.

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).

retrogradeorbit• 12 years ago

Paul Craig Roberts on Japan, America and QE.

http://www.paulcraigroberts.org/2014/11/14/global-house-card...

j_lev4• 12 years ago

21st century activism: refusing to spend money in defiance of the government.

econew99• 12 years ago

I don't understand following - Japan had QE measure in place thus increasing money supply. But then they also increased sales tax from 5% to 8%.

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 ?

j_lev4• 12 years ago

"We need more women in the workforce to stimulate the economy!"

"We need to encourage women to have more babies in order to avoid a population crisis!"

Welcome to the government of contradictions.

arandomafrican• 12 years ago

It's the Politicians who have not considered it.

nichtich• 12 years ago

Before Abe, Japan is in a trap:

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.

kenshiro_o• 12 years ago

I read a similar article on the BBC which stated that Abenomics rejuvenated the Japanese stock market and improved the country's exports, so the government was expecting that companies which generated additional income thanks to their import would increase their employees' salaries, which seems not to have been the case.

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?

zkhalique• 12 years ago

Why Japan, WHY!

leot• 12 years ago

Japan is a country with too many people saving too much money.

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.

adventured9• 12 years ago

That's incorrect.

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.

nhaehnle7• 12 years ago

Interesting, thanks for sharing that graph.

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.

nhaehnle7• 12 years ago

While I appreciate your comment, why don't we think outside the box a bit? Isn't it good when people save a lot of money? As long as the savings are fairly well distributed, this means people become more economically independent. In other words, they have more freedom.

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.

DominikR2• 12 years ago

Hasn't Japans central bank started last week to buy 100% of all newly issued government bonds? I fear this will end very badly for them since the Yen doesn't have the status as a global reserve currency like the US Dollar.

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.

Japan Falls into Recession

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