
Japan Falls into Recession - ssclafani
http://online.wsj.com/articles/japan-falls-into-recession-1416182404
======
akg_67
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
> 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.)

~~~
ekianjo
> 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

~~~
bildung
> 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 ?

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.

~~~
ekianjo
That does not mean it hurts the economy as a whole. Capitalism never predicts
that growth should be skyrocketing every single year. When there are reasons
for the consumption to decrease, it does and that's when new market
opportunities arise for companies to grab new consumers, either by providing
more affordable products, competing on features, or providing new payment
options to make easier for consumers to scale their purchases.

~~~
bildung
> That does not mean it hurts the economy as a whole.

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.

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

------
efjhewjfnkew
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.

~~~
jusben1369
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.

~~~
ekianjo
> 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.

~~~
hudibras
No serious economist believes the old wives tale about deflation keeping
consumers on the sidelines while they wait to save 1 cent (or yen) on a can of
soda next year. But it's got "truthiness" so it keeps getting brought up in
these HN discussions.

~~~
bildung
> No serious economist believes the old wives tale about deflation keeping
> consumers on the sidelines while they wait to save 1 cent (or yen) on a can
> of soda next year.

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.

------
mc32
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.

~~~
techdragon
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.

~~~
a8da6b0c91d
> 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.

~~~
pm90
American society is much more accepting of outsiders than any other, as far as
I know. Its not like others are deliberately racist, but just that America's
history has been one of accepting immigrants from all over the place, so I
guess having people who don't look like you or have the same
beliefs/culture/language is more accepted than in other countries. At least
that's my theory.

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.

~~~
IndianAstronaut
It is not just race but cultural as well. Brazillian Japanese who immigrated
to Japan also face discrimination, even though they are ethnically Japanese.

------
shard
Non-paywall WSJ link through Google:
[https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web...](https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CCcQFjAD&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fjapan-
falls-into-
recession-1416182404&ei=VVZpVMWmJoW6uATjj4G4Dw&usg=AFQjCNHuI4sPUXsYPK6eWe3jz6dSrgaW8Q&bvm=bv.79142246,d.c2E&cad=rja)

~~~
kristofferR
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).

~~~
gear54rus
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?

~~~
8ig8
> 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?

~~~
gear54rus
Just above this comment tree, there's a link to BBC:
[http://www.bbc.com/news/business-30077122](http://www.bbc.com/news/business-30077122)

Not sure how they differ since non-paywall wsj link does not work for me
(still has paywall in 2 different browsers).

~~~
melling
It doesn't seem to provide nearly as much information. Not everyone's business
model is to give self-entitled individuals free stuff.

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.

------
techtivist
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
> 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?

~~~
tsotha
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.

------
nichtich
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
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?

------
dimitar
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).

~~~
hudibras
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.

~~~
jpatokal
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).

~~~
xorcist
You're not sure financial institutions would prefer being paid _something_
rather than _nothing_. Could you please elaborate?

~~~
nandemo
At a high enough rate (e.g. war time Germany, 1980s Brazil, Zimbabwe),
hyperinflation will turn your nominal returns into next-to-zero real returns.
Conversely, default doesn't have to be "we won't pay nothing". A country can
partially default.

------
rrggrr
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.

~~~
lovemenot
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.

~~~
rrggrr
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.

------
econew99
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_lev
"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.

------
leot
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.

~~~
adventured
That's incorrect.

Japan's savings rate has collapsed, and is in dire condition.

Via the WSJ:

[http://i.imgur.com/vYsbHWg.jpg](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.

~~~
nhaehnle
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.

------
DominikR
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.

------
retrogradeorbit
Paul Craig Roberts on Japan, America and QE.

[http://www.paulcraigroberts.org/2014/11/14/global-house-
card...](http://www.paulcraigroberts.org/2014/11/14/global-house-cards-paul-
craig-roberts/)

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

------
zkhalique
Why Japan, WHY!

