The Japanese government for the last twenty three years has employed the Keynesian tools of deficit spending and more recently the monetarist policies of expanding money supply in an attempt to stop the economy from sliding into recession and to develop some growth. On paper, it has only achieved the former objective; in reality it has emasculated the productive capability of her domestic economy.
Before the speculative bubble of the late-1980s the Japanese economy was driven by savings. Her strong savings flow gave Japanese industry access to a stable low-cost source of real capital with which it was able to produce high-quality goods for export at competitive prices. While there was, in the free market sense, much wrong with Japan this characteristic more than compensated for her economic sins. However, the bubble came along, fuelled by the institutional greed of the Zaibatsu which through their banks sanctioned a spectacular expansion of credit, and as bubbles go this one went pop spectacularly. Since then the government has done everything it can to stop banks folding and industrial malinvestments from being liquidated.
The result is an economy which has barely progressed since. Japanese investment in manufacturing has been directed elsewhere, particularly other South-east Asian states and China. So the result of deficit spending has been a mountain of public sector debt with no domestic economic progress to show for it. Now that government debt-to-GDP is at 240%, or over one quadrillion yen, Japan is resorting to accelerated money-printing as the only and final solution.
This will destroy her currency; and Japan also has another problem with its aging population. Those savers of yesteryear are now drawing down on their nest-eggs at an accelerating rate. This means the genuine capital for Japanese industry to use for industrial investment is no longer there. The switch from accumulating savings to savings drawdown is also beginning to be reflected in the Japanese trade figures. They are now moving into deficit, a reflection of the change from net private-sector saving accumulation, to net private sector consumption.
This is bound to lead to a growing pool of yen in weak foreign hands, and a need for the government to import capital to cover its deficit. No longer is Japan self-financing. This implies that interest rates will have to rise, but think of the cost for the world’s most indebted nation.
There is little new in my analysis, and it should certainly come as no surprise. Her detractors have cited Japan’s deteriorating age demographics for at least the last decade, and it has been obvious to the markets that Keynesian and monetarist solutions have made no positive difference. After all, the Nikkei Index is still bumping along at about a quarter of its December 1989 peak. The economy has simply been in a prolonged slump.
The difference today is the move towards a trade deficit, which will put increasing amounts of yen into weak foreign hands. For this reason 2013 is likely to be the year when the accumulation of government deficits and the ramping-up of money supply between them finally undermine the yen.
This article was previously published at GoldMoney.com.
In some ways this is oddly similar to what happened in Japan in the 1920s.
In the United States the World War One bubble bust in 1921 – and President Harding allowed the slump to happen, malinvestments to be liquidatesd and markets to clear (thus the economy started to recover within six months).
However, when the World War One credit-money bubble bust in Japan the government there refused to allow the malivestments to be liquidated – refused to allow markets to clear.
Thus the Japanese economy was trapped – with banks and the enterpries dependent upon them stuck (dependent upon the government and Central Bank).
The Japanese economy limped along for years – before collapsing in 1927 (yes BEFORE the Wall Street Crash).
The Japanese government learned nothing and continued to desperatly try and PREVENT markets clearing. Of course this ended in military dictatorship and war.
i would point out that Japan’s GNP is bigger than its GDP beacuse of all that same foreign investment. The income routinely transferred back to the country as a result is still enough to leave the external accounts in surplus to the tune of roughly $55 billion a year. Part of the deficit is also the result of the understandable but still irrational decision to shut down ll the nuclear reactors and to import hugely expensive LNG and fuel oil instead. Abe may partially reverse this embargo in coming months. Thus, the short term picture is not quite as parlous, perhaps, as the above suggests.
I do agree, however, that the LDP team does not seem to understand that ‘deflation’ – i.e. a mild, chronic fall in the cost of living – confers a great benefit on a populace which is both ageing and which holds a good part of its financial assets in the form of money, much of which is backed by bank holdings of JGBs.
If Abe succeeds in losing the implicit trust on which this based, the consequences could be dire
Sorry, para 2 should have read “part of the TRADE deficit” … A phenomenon which is new and somehwat troubling but which does not yet completely exhaust the investment income gains.
Of course what Japan needs to do is to radically reduce GOVERNMENT SPENDING.
In this way the budget can be balanced, without increasing taxes, and the “private sector” (i.e. civil society) take on the job of economic development.
This means an end to the government “infrastructure” schemes (which have been going on for decades – “fiscal stimulus” which is really Corporate Welfare) and a reversal of the changes in the structure of Welfare State schemes (which, I believe, hwas changed in the early 1970s in such as way as to make spending explode out of control over time).
Sadly there appears to be no chance of the above happening. After all cutting government spending has “failed” in Europe.
The fact that government spending has not been really cut since the crises started appears to be unknown.
So, instead of really cutting government spending, the Japanese government will try yet more “monetary stimulus” – under the theory of “create more money [from nothing] and people will be richer”.
Though Japan’s government spending has been horrendous and must one day cause serious problems, there is another side to this story. Until just a few months ago, the BOJ had maintained a remarkably stable [by int’l standards] money supply and price inflation had been nil for a decade.
This, of course, led to what mainstream economists called a stagnant economy. If the money supply’s not increasing, then GDP can’t increase, either. That doesn’t mean, though, that the production of goods and services was necessarily stagnant.
By all appearances, Japanese unemployment has remained low [~4.5%] and living standards are still quite high. I think some of the moaning over Japan’s problems has been a mistaken Keynesian interpretation of its GDP. Of course, now that the BOJ has decided to resume monetary inflation, all bets for the future are off.