And there's a large stretch between trying to boost the economy by encouraging female labor force participation and feminism. By that standard, Saddam Hussein might have been called a feminist in some periods of his reign.
Opinion is sharply divided over whether Abe's economic policies make any sense. I'm in the "they're insane" camp. I've likened Abe to the captain of a ship who, seeing an iceberg looming, calls out, "Full steam ahead! We're going to smash our way through." But all observers agree on these two points:
1. Abenomics will be a disaster without large-scale structural reform.
2. The reform we've seen so far isn't nearly enough.
Optimists believe that this reform is just round the corner ... that even as we speak Abe is busy quietly building the necessary consensus in key organisations, because that's the way reform is done in Japan.
The pessimists want proof.
Finally, there is a terrible, terrible paradox at the heart of Abe's economic policies. This is a complex matter, so forgive me for skipping most of the details and implications.
No matter how you measure it, the Government of Japan is up to its neck in debt, and is still sinking. The only reason it can keep going is because it pays remarkably low interest rates. But the first "arrow" of Abenomics is to push up inflation, and you can be sure that this arrow will meet its mark because they can always "print" more yen. One of the iron laws of economics is that, when inflation goes up, so do interest rates.
Now, to cut a long story short, it looks like the government's going to get out of this bind by directing the Bank of Japan to print even more money to buy it's debt at below-market prices. In fact, if you follow the bond market news, it's clear that this is already happening. And that, my friends, is a recipe for collapse in confidence in the yen.
Speaking for myself, as a Japanese resident, I believe that the yen is an increasingly risky asset to hold. I make a point of keeping at least 50% of my savings out of yen, and away from the Japanese financial system. When the shit hits the fan, I don't want my money to be stuck behind Iceland-style capital controls.
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EDIT: Changed "recipe for inflation" to "recipe for collapse in confidence in the yen" in response to comments below.
No matter how you measure it, the Government of Japan is up to its neck in debt, and is still sinking.
Thing is, you need to measure the dept against some measure of economic activity ( or actually against some measure of pay back capability), and then the funny thing is that the higher the dept, the easier it is to get to sustainable levels by deficit spending. So dept goes from D to D + d and GDP goes from G to G + x d, solving for a critical multiplier x0 where the ratio stays constant,
x0 = G/D
So the more dept you have, the less productive need your stimulus program to be to reduce dept. Additionally, for this you can replace the measures by inflation adjusted measures and you get the same result, with some dependence on the real interest rate. ( Which can be negative.)
Additionally it is surprisingly hard to get hyperinflation, just printing a few percent of GDP in new money per year will not do the trick. ( Try occupation of a major industrial region, after the end of price controls plus a lost world war.)
That's a nice macroeconomic model you have there. But what happens when G/D < x0 and then you increase D?
But you're right about the hyperinflation thing. I was being overly dramatic. I should have said: And that, my friends, is a recipe for a collapse in confidence in the yen. But the effects are pretty similar.
I would call it rather a back of the envelope calculation, but if the multiplyer is too small, then you increase dept more than GDP. So yes, the policy of a stimulus program still needs to be good enough, my point is that after a certain point you will not get out of financial trouble by cutting spending.
Not to be pedantic or anything, but what do you mean by "dept"? It's an honest question. Are you referring to debt or is it a different concept I'm not familiar with?
And that, my friends, is a recipe for hyperinflation.
Perhaps, but given that the situation over the last 15 years has been deflation there is a big, big distance to cover before hyperinflation should be thought of as a significant risk.
Something needs to be done to combat the chronic deflationary cycle Japan has suffered in over 15 years. I'm unconvinced this is as bad an idea as you seem to believe.
Like I said, it's a complex matter, and opinions differ.
But ultimately, it boils down to demographics. The Japanese haven't been having enough babies. One way or another, the people who think they're going to retire comfortably are in for a nasty shock, because there just aren't enough young people to produce what they expect to consume. And inflation looks like the most likely mechanism for this to happen.
As for the government debt, there are two ways out of the mess: inflation or default. And there's no way they're going to opt for default when they can just keep printing more money.
The only real solution (real in the economists sense of the word) is mass immigration, and that's not going to happen until Japan is absolutely desperate. The "200,000 immigrants" the article mentions isn't nearly enough. And in any case, Japan has such a poor record on immigration policy that I confidently expect them to bungle this one, too. Look at the failure of their recent "skilled migrants" program, or their disastrous program to recruit trained Philippino nursing staff, or the abuse and corruption in the "trainee worker" program, or ... I could go on.
Deflation and wage stagnation wasn't caused by the Japanese not having babies.
The wage stagnation and deflation was THE CAUSE of the Japanese not having babies.
If you ask most young Japanese today working McJobs (a large and growing number) if they are hopeful about the future they will say no.
THIS is the real problem with Japan today and at its heart it is the problem with the west too. It's why they aren't having babies.
If the Japanese government wants the younger Japanese to start having babies again they need to actually provide decent jobs. They can do that by printing/borrowing yen and spending it on employing people, EXACTLY as the US did following the great depression.
>The only real solution (real in the economists sense of the word) is mass immigration
This will make things worse. It will simply ensure that the already crappy McJobs the Japanese young are increasingly doing are paid even less thanks to Fillipino competition.
Want the Japanese suicide rate to skyrocket from its already high level? Start bringing in dirt cheap labor competition from the 3rd world.
I think the main cause is the stark choice Japanese women face: keep your career and status that you've worked so hard for, or give it all up and raise children for a man you'll hardly get to see.
About immigration: go look up "lump of labour fallacy".
>I think the main cause is the stark choice Japanese women face: keep your career and status that you've worked so hard for, or give it all up and raise children for a man you'll hardly get to see.
This is part of it too. As is the migration towards cities (because that's where all the jobs are). Huge crowds and a lack of space has the same effect on humans as it does on rats.
Mix those things up with the younger generation's feelings of hopelessness and/or insecurity about their careers and it's no wonder they've stopped having children.
This can be reversed with a government funded jobs program / public works program, EXACTLY like the one Milton Friedman took full advantage of.
It won't be reversed with immigration.
>About immigration: go look up "lump of labour fallacy".
I never said that there was a fixed amount of work in Japan.
If you think that bringing in 3rd world workers as competition isn't going to drag down wages, though, you're dreaming.
> keep your career and status that you've worked so hard for
Let me disagree here. Most women don't have a career in the first place in Japan. They have office jobs, yes, but a career leading them to higher positions? Certainly not, for most of them.
But often economic management is delaying a crisis until another problem makes it go away.
If Abe can get the economy growing again it makes it more likely other changes will occur - like the female participation rate increasing.
The consequences of that are unpredictable. One possible scenario is that it could partially reverse the trend of a shrinking workforce.
Economic growth also makes inflation unnecessary to repay debt (since tax receipts increases with growth giving the government an alternate path to repaying debt).
Also worth noting is that some inflation (non-hyperinflation, but higher than comparable nations) would help devalue the Yen, which would make Japanese exports more attractive again.
Anyway, I guess my whole message is that focusing too much on too long-term consequences is often unhelpful in economics. The system is too chaotic to predict that far, and usually tends towards equilibrium.
If I wanted to be upbeat about Abenomics, I think I'd say pretty much the same things you are. I think I just have a gloomier outlook than you.
So I hope you're right, but I'm still keeping my savings overseas in case you're not. Because there's one thing I've learnt from other financial catastrophes: by the time ordinary people like me learn that the shit has hit the fan, it's already too late to respond.
>No matter how you measure it, the Government of Japan is up to its neck in debt, and is still sinking.
Japan's debt is a trailing indicator of economic malaise, not a leading indicator.
>The only reason it can keep going is because it pays remarkably low interest rates.
It ought to be obvious to anybody with an ounce of sense that any country that prints the currency it borrows in can choose its own interest rates. This is precisely what Quantitative Easing does.
>But the first "arrow" of Abenomics is to push up inflation, and you can be sure that this arrow will meet its mark because they can always "print" more yen.
Yes, this is true.
>One of the iron laws of economics is that, when inflation goes up, so do interest rates.
This is totally utterly false. As long as QE continues (and so far it has continued), interest rates on Japanese bonds will be held at zero.
>Now, to cut a long story short, it looks like the government's going to get out of this bind by directing the Bank of Japan to print even more money to buy it's debt at below-market prices. In fact, if you follow the bond market news, it's clear that this is already happening. And that, my friends, is a recipe for hyperinflation.
This is not just false, it is absurdly false. Hyperinflation hyperventilators have been predicting Japanese hyperinflation since 1997 when their debt went over 80% and they continued deficit spending. What happened instead? Deflation.
They couldn't have been more wrong then just as you couldn't be more wrong now.
Like any economic variable, inflation can be targeted. In Japan, it simply wasn't targeted and it wasn't aimed for during the last 20 years. They just engaged in QE, which swapped bonds that represented Japanese savings earning subinflation interest for cash savings which also earned subinflation interest. And they thought this money was magically going to be spent?
For inflation to happen you need spending. PART of what is new about abenomics is that it actually does do a bit of that, but not very much.
Less of the "anyone with an ounce of sense" type language, please. Not everyone who disagrees with you is stupid.
What you say is correct as far as it goes but ... well ... I could write:
> Only a driveling idiot does not understand that a government that prints its own currency doesn't need to borrow money at all.
And it would be completely true. They tried that in Zimbabwe, didn't they?
I'm wall aware that Japan has a few magic charms (high savings rates, strong balance of trade, and so on) that enabled the government to run up far higher debts than would be possible elsewhere. But it looks to me like those charms are all used up now.
>Less of the "anyone with an ounce of sense" type language, please. Not everyone who disagrees with you is stupid.
Not stupid, but brainwashed perhaps. The fact remains that these predictions of Japanese hyperinflation using the EXACT same argument as yours have continued for two whole decades.
When are the predictions going to cease? How many more decades of zero inflation / deflation are needed before it becomes clear that continued deficit spending DOESN'T inevitably lead to hyperinflation? Three decades? Four decades? A century?
At what point do you start to consider your model broken and your predictions useless?
>And it would be completely true. They tried that in Zimbabwe, didn't they?
ABSOLUTELY WRONG. What they tried in Zimbabwe was borrowing a currency they DIDN'T print (US dollars). They were then reliant upon foreign food imports (because they ruined their farm indsutry) and had no real resources to service their FOREIGN debt. So they printed money and tried to exchange it for USD with predictable consequences.
Japan did not borrow USD. It will NEVER borrow USD. It will NEVER end up like Zimbabwe. Not now. Not in ten years with 300% debt. Not even with a trade deficit and 500% debt. NEVER.
Weimar was like Zimbabwe (its debts were denominated in Gold). Argentina was like Zimbabwe (it pegged its currency to the USD). Greece was like Zimbabwe (it can't print Euros any more than it can print gold).
Japan is NOT like Zimbabwe. It controls its debt. It controls its currency.
>I'm wall aware that Japan has a few magic charms
Japan has no magic charms and its trade balance is irrelevant to its capacity to borrow. It borrows in its own currency so it can borrow as much as it likes at whatever interest rates it likes. End of story.
For it to escape its economic rut this idea that it has to first pay off its huge debt needs to die. It actually needs to ramp up spending on jobs, just like the US did at the end of the great depression.
People need to stop seeing sky high Japanese debt as the cause of its stagnation and start seeing it as the result of its stagnation. Cause and effect flows the other way.
One could argue that you're the one that's brainwashed.
>Japan's currency will never inflate because it's always been that way
I think you're going to change your tone very quickly over the next year or so. Japan's government has never set targets for inflation until now. They are sitting on the largest debt stack to gdp in the world right now at ~245%. They spend almost half their revenues on debt service ALONE.
What happens when inflation hits two percent? What do you think all of these people holding JGBs bringing in 60bp are going to do? They're going to run, not walk.
There was a day and a half when not a single person bought a Japanese government bond because the government wasn't purchasing. The government is buying ALL and I mean ALL the bonds right now.
They are printing as much money as the fed in an economy that is a third our size (~70 billion USD per month). They are going to double the monetary base in two years.
This is clearly unsustainable and the yen is in for some serious devaluation in the very near term when people start running from JGBs.
>>>Japan's currency will never inflate because it's always been that way
Why are you quoting me? I NEVER said this.
In fact, I said the OPPOSITE - inflation is already rising in Japan and it is likely to continue to rise.
It's hyperinflation that I ruled out.
>This is clearly unsustainable
No it isn't. It's been said that it was unsustainable 20 years ago as I said above. This is why the ratings agencies IDIOTICALLY predicted Japanese default in 1997. Cue 20 more years of zero percent interest rates. They were a little bit wrong.
It wasn't unsustainable then which is why it continued for 20 more years. And it's not now either.
"How many more decades of zero inflation / deflation are needed"
That's pretty much what you said.
So what if predictions 20 years ago have turned out to be incorrect? That's really not relevant. Japan's government has never said they will do anything to achieve 2% inflation before.
No you weren't. You created a straw man and then set it on fire.
>So what if predictions 20 years ago have turned out to be incorrect?
So you're making the SAME predictions based upon the SAME model that the last 20 years has proven to be utterly wrong.
We've already proved that 20 years of deficit spending and the highest public debt in the world doesn't automatically cause hyperinflation. It doesn't even necessarily cause inflation at all.
If your model cannot sufficiently explain why that happened then your model is wrong. And it can't. If we went back in time, you'd be making the exact same predictions in 1997.
>Japan's government has never said they will do anything to achieve 2% inflation before.
Japan started inflation targeting in March 2001. Is 13 years enough time?
> No you weren't. You created a straw man and then set it on fire.
I just quoted your exact words and you said exactly what I summarized. You're being a bit ridiculous.
It's actually a pretty simple explanation. The market can remain irrational for a long time, and Japan has never had a monetary policy as insane as its current one.
They are going to DOUBLE their money supply in TWO years. I'm not sure that you understand that massively monetizing your debt has consequences.
It's a massive experiment that is going to end badly.
I think it's more like 25% of revenues, not 50%, but otherwise you're spot on. BTW, the bond futures market froze up last week, too.
But what you're forgetting is that our friend crdoconner has no problem with the idea that the government can print money and then lend it to itself at whatever interest rate it chooses. (Either that, or he doesn't understand the difference between benchmark interest rates and government bond prices.)
Hehe. I love Kyle. He's really good at explaining himself.
I think you would have been right a couple years ago. Japan is projected to spend $257 billion on debt service this year. They bring in about $500 billion in revenues.
>I'm obviously too "brainwashed" to have anything of value to say.
That depends. Do you still think that hyperinflation is even a remote possibility in Japan?
>But I would like to point out that I never said government debt was the cause of Japan's economic stagnation.
Nope, you didn't, but austerianism IS still the default economic mode of thought these days amongst Japanese and western elites, and it is strongly linked to the belief in impending hyperinflation.
> austerianism IS still the default economic mode of thought these days amongst Japanese and western elites,
austerianism?? Where? Japan is overspending by large amounts every single year and I have yet to hear any Japanese politician (apart from Hashimoto) talking about making economies. Abe's program is all about spending to death.
Many among the Japanese elites (not to mention American and European) feel the same way as you. Even among the neoconservatives they're somewhat schizophrenic about spending.
Haha. That's not austerianism. Austerity is when you cut down to the levels of spending you can afford. What Japan (and many other countries around the world) are calling "austerity" is just digging the hole a little less fast. But they are still actively digging the hole, year after year, producing more and more debt.
Austerity is just an over-abused media buzzword to say you are cutting a small piece in your obese amount of spendings. Nothing to do with the actual meaning of the word.
The tax hike will have nil effects on the fact that there are deep changes in Japan's structure to stop overspending, without mentioning the fact that increasing tax will bring diminishing revenues (and lower consumption) after a certain limit.
The fact that you invented a new definition of austerity used only by you changes nothing.
Japan has been practicing austerity for decades because many among the government erroneously believe (like you) that a government's capacity to borrow in a currency it prints is limited and will some day reach a limit.
"a situation in which there is not much money and it is spent only on things that are necessary"
Yeah, Japan spends ONLY on things that are necessary. Building dams, renovating administration buildings from scratch right after the 3.11 Earthquake is damn necessary.
He may have used a lot of caps, but his points ring true: after two decades of deflation and low growth, I find it utterly surprising that people keep arguing for a certain, continued pain in the present, to stave off some potential future pain.
Pretty much what Europe has been doing since 2009, by the way - maybe I don't see the full picture with my limited understanding of economics, but it kinda sounds crazy to me.
I'm not actually arguing for much at all. (Note to crdoconner: if you really want to attack me, I'm wide open on that flank.) But I believe that the best way forwards starts with an honest acceptance of our situation now. And our situation is that a lot of chickens are coming home to roost.
I think the deflation and low growth are structural problems. Japan can't really stomach the creative-destruction necessary for a capitalist economy to thrive, and so on. I'm sure you've heard it before.
nl thinks that, if we can just hold it together for a bit longer, something will turn up. And maybe nl is right. Maybe, next week, someone will discover a wonderful new technology that will usher in 20 years of miraculous economic growth, and we'll all be saved. But I'm not counting on it.
With the moralizing about Japan's debt, you're forgetting one absolutely key fact: what Japan owes is something that Japan is the monopoly issuer of. If you leave out this fact, then everything that follows is just going to be off-base.
Because the BoJ is going to keep on funding the government's debt forever with freshly printed yen, right? Which is just a complicated way of saying that the government is going to print money to pay for it's spending program.
Merely printing money does not cause inflation, if that's what you're aiming at. As long as Japan's present economic conditions continue, there will be no inflation. This has been verified in the real world multiple times in multiple countries.
Elsewhere you mention concerns about the rate of increase in Japan's monetary base. The US has quadrupled its monetary base since 2008. [1] The US has experienced everything from very low deflation to very low inflation since 2008. The trendline on the Consumer Price Index hasn't changed _at all_. [2] The current US inflation rate is 2%.
And inflation is, at least, a relatively easy problem to deal with economically, barring some political/military/resource crisis. It is certainly not an evil in itself.
Japan has been engaged in QE for a long time. Abenomics involves more than QE. Recent experience (and older research, c.f. Krugman) shows monetary policy simply isn't going to make any real difference in situations like this. It's better than _nothing_, maybe, and might hold you steady, but that's about it.
That said I don't think Abenomics is going to be a resounding success. There's just not that much changing in terms of fiscal policy, which is the only thing that's going to have real short/medium-term impact. There's a little, and it's an improvement, but not a lot. So I'd expect to see small gains.
We're assuming here that the Japanese government has the capability of lowering as well as raising spending if they feel inflation is too high. They can also raise interest rates and end QE.
So yes, explain why that would be a problem, exactly. In terms of real effects on the economy that the Japanese would experience.
http://www.bbc.com/news/world-asia-25901572
And there's a large stretch between trying to boost the economy by encouraging female labor force participation and feminism. By that standard, Saddam Hussein might have been called a feminist in some periods of his reign.
Opinion is sharply divided over whether Abe's economic policies make any sense. I'm in the "they're insane" camp. I've likened Abe to the captain of a ship who, seeing an iceberg looming, calls out, "Full steam ahead! We're going to smash our way through." But all observers agree on these two points:
1. Abenomics will be a disaster without large-scale structural reform.
2. The reform we've seen so far isn't nearly enough.
Optimists believe that this reform is just round the corner ... that even as we speak Abe is busy quietly building the necessary consensus in key organisations, because that's the way reform is done in Japan.
The pessimists want proof.
Finally, there is a terrible, terrible paradox at the heart of Abe's economic policies. This is a complex matter, so forgive me for skipping most of the details and implications.
No matter how you measure it, the Government of Japan is up to its neck in debt, and is still sinking. The only reason it can keep going is because it pays remarkably low interest rates. But the first "arrow" of Abenomics is to push up inflation, and you can be sure that this arrow will meet its mark because they can always "print" more yen. One of the iron laws of economics is that, when inflation goes up, so do interest rates.
Now, to cut a long story short, it looks like the government's going to get out of this bind by directing the Bank of Japan to print even more money to buy it's debt at below-market prices. In fact, if you follow the bond market news, it's clear that this is already happening. And that, my friends, is a recipe for collapse in confidence in the yen.
Speaking for myself, as a Japanese resident, I believe that the yen is an increasingly risky asset to hold. I make a point of keeping at least 50% of my savings out of yen, and away from the Japanese financial system. When the shit hits the fan, I don't want my money to be stuck behind Iceland-style capital controls.
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EDIT: Changed "recipe for inflation" to "recipe for collapse in confidence in the yen" in response to comments below.