

Japan Starts to Recharge After Two Lost Economic Decades - w1ntermute
http://www.nytimes.com/2013/05/19/your-money/japan-starts-to-recharge-after-two-lost-economic-decades.html?pagewanted=all&_r=0

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blakerson
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.

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rluhar
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_
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.

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ddeck
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.

~~~
hudibras
"there seems little chance of any other outcome"

Except for Japan's economy to grow faster than its debt burden, causing its
debt ratio to decrease. There's a denominator in that ratio, don't forget.

~~~
rluhar
I think there are real structural problems that need to be overcome for the
economy to grow. Debt monetization is OK - but what about a shrinking
population, stagnant productivity and very low immigration levels?

Japan's economy has got a nice jump-start due to the unprecedent monetary
stimulus. But, as others have commented, there are also issues are energy
prices and the negative effects of inflation. Japan still remains an expensive
place to do business. I wonder where the economic growth will come from
without further reforms.

~~~
pyre

      | very low immigration levels
    

It doesn't help that (politically at least), Japan treats immigrants/foreign
workers with distrust (even though the terrorist attacks that _have_ happened
in Japan were by Japanese nationals).

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ekianjo
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.)

~~~
jvm
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-...](http://www.reuters.com/article/2013/05/16/japan-economy-gdp-
idUSL3N0DX04U20130516)

~~~
cromwellian
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.

~~~
bdcs
To expand further, lowering interest rates at the ZLB doesn't do anything
because people will hold money rather than deposit it at a nominal interest
rate at or below zero. Hence, central banks must buy assets: treasuries in the
case of the Fed and JGB/ETFs in the case of BoJ. Buying assets is effective at
the ZLB, according to Keynesians anyhow.

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rayiner
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...](http://www.telegraph.co.uk/comment/personal-
view/3563614/What-Japan-can-teach-us-about-deflation.html).

~~~
bdcs
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...](http://www.econlib.org/library/Columns/y2006/Friedmantranscript.html)

~~~
rayiner
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).

~~~
bdcs
Thank you for the reply. I don't believe I took the quote out of context, as I
wrote what Friedman said, almost verbatim without commentary. The monetary
base is the stuff consumers touch because -- literally -- if you're touching
it, then it is monetary base (cash, etc).

> 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).

Fractional reserve banking with bitcoins works exactly the same as it does
with anything else (modern USD, USD 110 years ago [gold-backed], etc.)

Friedman explicitly says, keep the amount of currency constant, and use
fractional reserve to increase the amount of monetary supply, as needed for
expansion. We can do exactly this with bitcoin. Do you disagree?

~~~
apu
_I don't believe I took the quote out of context, as I wrote what Friedman
said, almost verbatim without commentary._

"Out of context" means you omitted other text that changes the meaning of the
text you did quote. See rayiner's comment about this ( _the very next
paragraph..._ )

 _The monetary base is the stuff consumers touch_

No, it is not. See the wikipedia link and Rayiner's comment, which explicitly
refutes this ( _The monetary base must not be confused with the money supply
which consists of currency circulating in the public_ )

It is hard to take your arguments on good-faith if you make such blatantly
false statements.

~~~
bdcs
Milton Friedman meant monetary base, in your nomenclature. From Wikipedia's
"Money Supply" article:

"MB: is referred to as the monetary base or total currency. This is the base
from which other forms of money (like checking deposits, listed below) are
created and is traditionally the most liquid measure of the money supply."

Please reread that last sentence before replying.

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Pitarou
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.

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mvkel
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.

