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.
> 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.)
> > 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).
> 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
> 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.
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.
> 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.
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.
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.
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.
>> They eased and increased taxes at the same time, which was not a smart move.
Increased sales taxes which was an especially dumb thing to do. The folks that spend the largest percentage of their income are hardest hit by sales taxes.
>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.
Then we can never look at any real world examples for guidance because there are always too many variables.
That leaves us with untested partisan theories pushed by ideologues.
I mean, how can it be that all the American conservative economists that have been predicting massive inflation since 2008 have not changed their theories at all?
> 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.
Inflation/deflation indexes are massively skewed if you don't incorporate the right things into it. How sure are you that these indexes are factually correct?
Keynesian economists think that Japan's real estate implosion was deflation.
Back in reality, Japan hasn't suffered any real deflation in 25 years. Which is why their prices are among the highest for pretty much everything.
The deflation argument is a fraud cover for the failed Keynesian experiment. It's meant to give them the ability to endlessly print to debase the debt that the failed experiment took on. That's why the US Fed pretends to worry non-stop about deflation, while they massively expand the monetary base and hold rates at zero; it's a lie to provide cover for the massive inflation programs.
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.
> 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.
Yes. This whole "deflation makes customers delay their purchases" thing is annoying precisely because there really are much better reasons for worrying about deflation, and serious economists are warning against deflation all the time. It is just for different reasons, mostly having to do with the fact that the economy runs on debt, and deflation kills debtors.
Yeah, economics has become very political and it doesnt help that the subject is pretty poor anyway in terms of evidence. The HN economics discussions are cringeworthy, just people shoving half understood falsehoods around.
The deflation is often masked by advances in technology.
A new 150,000/month condo in Tokyo in 2014 has much better facilities than a then-new 150,000/month condo in Tokyo in 1994. Indeed, the latter is probably struggling to achieve rents of half that today.
That has virtually nothing to do with deflation. This has to do with housing/land regulations in Japan, causing the value of apartments to decrease over time. There was an excellent article about that on HN a couple of months back, by the way.
On top of that, buying a new apartment has nowhere got cheaper than it was 10 years ago. Prices have been pretty much stable until they pumped up the tax recently.
> 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.
There has been almost zero spending reduction in Europe. They're calling a slow-down in spending expansion, austerity, when in fact there has been no austerity.
how me the countries in Europe that have substantially reduced government spending over the last six years.
In fact, spending as a % of GDP has increased.> Show me the countries in Europe that have substantially reduced government spending over the last six years.
>In fact, spending as a % of GDP has increased.
Because e.g. in Greece, GDP shrank over 30% in the last 5 years. Have you ever looked at the things a country spends its taxes on? How should it out-save it shrinkage without destroying the very infrastructure it's economy needs to flourish?
> cato.org
Cato is good PR agency, but you should not take them seriously on anything economics-related. Just look who works there, I wasn't able to find a single phd in economics there, only public relations staff (people who studied politics, sociology etc, practically no one who actually did research in any field before working there).
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.
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.
This is correct. The concentration of capital grows so large that the owner literally cannot spend it faster than it grows. If it was simply vaulted and ignored, deflation would result, from that cash being removed from circulation.
Thanks to our central banks, any deflation pressure is seen as a license to print more money, which is a tax on non-circulating savings. To avoid this, holders of cash do their best to invest as much as possible.
Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
> Investment is emphatically not economically equivalent to spending. It's a lot like spinning your cash around in place so everyone knows you can still spend it. It does not create jobs or help the middle class; only actual spending does that.
This is a little strong, isn't it? Investment can certainly lead to job creation for the middle and working classes, if that investment is going into enterprises that need more labor and have the potential for growth. Whether there is much potential for growth after decades of regressive tax policies and hoarding by the upper and ruling classes, with everyone else living paycheck to paycheck, is quite debatable (my money is on 'no'), as is how much new labor is actually needed in the first place. But private investment can certainly create jobs and economic growth.
In theory investment creates jobs by providing companies the cash they need to grow. But right now the government is flooding the financial markets with newly created money, so investments by wealthy people probably aren't having any effect.
You're right that QE erodes the savings and income of not-rich people - the middle class and the poor.
You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases.
There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
Even Apples massive cash hoard is put to good use, somewhere.
What there is a shortage of, is productive investments where lots of capital can be deployed to get a healthy return. This is a function of multiple problems, of which uncertainty is one.
It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
>You're wrong in your theory that accumulated wealth does nothing. In a QE world, the very rich don't sit on cash - that would mean losing money through currency decreases.
Correct, but they still don't spend money. The very wealthy are known to hoard money, it doesn't matter in which "vehicle" they store their money in.
>There is no such thing as 'wasted capital' - rich people store their wealth in a variety of vehicles - whether in banks (where it is re-lent out for many uses), public stock ( where it is used for company investment and operations), and private investment, such as investing in pre-IPOD start ups and private equity.
It's not wasted capital, but it doesn't stimulate the economy either. They are not contributing to investment, in the real economic sense.
>Even Apples massive cash hoard is put to good use, somewhere.
Wrong.
>It's a very cartoonish model to imagine a daddy warbucks with a big pile of cash saying 'I just don't have time to spend this'. In actual fact, there would be a team of investment managers saying 'we can't find any good places to invest, so we're letting the bank invest it for us, for the time being'.
It's still not real investment. I think you don't understand what the "I" component in GDP is. [0]
>The answer to Japan's problems is cutting government spending and debt. This has always been the answer, this will always be the answer, whether you're an individual with 20k in debt or a country with 200b in debt. The key is to realise that there is no magic Keynes multiplier.
Wrong again. Greece cut their government spending a lot, they don't seem to be in great shape. The reality of the matter (while counterintuitive) is that deficit spending helps stimulate the economy. As long as Japan wants to devalue their currency, government spending is the last option left to stimulate their economy.
It absolutely does matter what vehicle the rich store their wealth in.
If they store it in a bank, it boosts the lending capabilities of that bank.
If they buy stocks, it provides financing for public companies.
Even if the rich hide their cash under a mattress for a long time, they provide a purchasing power boost to other consumers by reducing the freely available supply of currency.
Saying that the parent is wrong about Apple's cash, does not actually prove they're wrong. "Wrong." is not an argument.
There's practically nothing a rich person can do with their hoard to harm the economy, other than to take that capital out of the domestic economy or invest into a ponzi scheme or asset bubble.
When the ECB introduces such things as negative interest rates then yes, sometimes large amounts of capital does essentially sit and do nothing but be savings (in a healthy real-market economy this would naturally reduce interest rates), large institutional wealth is often as interested in capital preservation as it is in capital growth -- this pretty much what the bond market is all about.
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.
Manufacturing is only ~18% of the Japanese economy, and that share is shrinking fast as Japan outsources its factories to China and SE Asia. For the rest, 180 yen to the dollar would just drive higher inflation through eg. fuel prices despite stagnant wages, further weakening the economy.
That said, I'm not seeing 180 yen to the dollar any time soon, by most measures the yen is already undervalued. (With the glaring exception of yen vs national debt, but that particular ticking time bomb is not showing imminent signs of explosion.)
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.
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.
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.
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.
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"
Australia has just delayed it, we are still letting people borrow more money than they can ever hope to repay (interest only loans on owner occupied places) now with our relationship with China growing tenuous (they're making deals with the USA and Russia instead of Australia), it spells bad news.
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.
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.
Well if they change their mind on immigration, they better be quick. Japan's neighboring countries are quickly catching up, if not surpassing, in a lot of respects, such as PPI and HDI.
Even in China, on the east coast, in certain sector, especially high-tech and finance, local companies can offer competitive salary and a better potential for career progress.
It is not like in 80s, when Japan is the envy of all kids in the class, the interests is quickly fading, with a aging population and stale economy.
Well, lets face it.If Japan is so reluctant to accept Chinese/Korean/Other Asians, whose appearance and culture are perhaps much closer to its own than other countries, it will only be harder for it to embrace the rest of the world.
It is pretty much like Asians in US sometimes being called as perpetual foreigners, even if some of them might been in this continent for generations.
Assume Japan is ever going to change its immigration policy, it will surely starts from developed countries and its neighboring states. But as I said in the above comment, the charm around Japan is vanishing, so even with a more friendly immigration policy, how much it could help Japan step out of painful declining is questionable.
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.
It is the same for the US. People that naturalize are "required" to sever citizenship they hold with other nations. However, many people fail to follow through and notify previous host nations.
Nah, almost all Americans are fine with at least a moderate amount of immigration. The contention about immigration is mostly about whether we want to let in huge numbers of skilled workers in, and what to do about undocumented immigrants.
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.
It is not just race but cultural as well. Brazillian Japanese who immigrated to Japan also face discrimination, even though they are ethnically Japanese.
It's more than not wanting immigration in Japan --they're allergic to it. It's very, very hard to be in Japan illegally. Police do immigration raids routinely --the only way to be in Japan illegally is to work for the local mob --where they take a cut of your measly income. And legal immigration is less than one tenth of that of the US, for example. the situation is not comparable.
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.
Show me a society/country who has actually made a go at making it work in the last 40 years. If you're not attempting to execute theory in the real world, you're not trying hard enough.
I'm not sure I'd agree with you. It's not the kind of thing you try in order to see if it sticks. Communism tried with two out of your three criteria and it didn't turn out all that well --mostly ended up a terrible 'experiment' for those whom it affected. So, I don't think 'trying' is the way to go, when otherwise what you have is working well enough.
That said, Japan has to try something --they are entering 25 years of being in a standstill, so relatively speaking, they are in decline. They (politicians and population, by large) may not have the will to try anything radically different from the status quo --which is a quasi neo-liberal economic model, so they may just end up crashing hard or slowly becoming kind of irrelevant, economically speaking.
> 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.
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.
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.
Be that as it may, the other option, to export their way out of this is not going to happen. They are not a cheap-labor based economy --and they don't have known viable reserves of natural resources. So, what are they to do?
The general answer every country seems to have is "knowledge-based economy". Except it never works. Knowledge flees countries the moment it presents more than a small advantage, as the knowledge moves with workers and companies.
> 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.
> 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.
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.
> 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.
I'm sorry but the myth about Japan productivity has to stop :) I work in Japan and there are the most ineffective and honestly useless jobs out there. People guarding plastic cones on the road. People waiting at the car park exits everywhere to ensure no accident occurs. People at the front of numerous stores and train stations paid to salute everyone passing by. I understand it's all a part of customer service but this is just bringing actual productivity down. And I'm just citing obvious examples here, inside corporations there are tons of underemployed or useless jobs as well and since companies cannot fire people in Japan they carry on the deadweight for decades.
There's so much fat in every Japanese organization out there they have enough to skim out for 20 years and still be in shape.
Retirees working redundant jobs are not the issue. People staying in the office (twiddling thumbs) till the boss leaves is more of an issue.
Granted, construction is a big waste of money -but a lot of that is done by itinerant workers and pouring concrete over riverbeds and seashore is hardly useful endeavor, except to line the pockets of connected (all) politicians.
> 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).
> The simplicity and modernity that is often seen in Western Web Design gave these users the impression of not providing enough information, which made them uneasy and engendered a lack of trust.
huh, by adding another income to the family ? So, that should lead to a least a little more consumption.
Even if the average wage is reduced, I doubt it would be cut by half and result in 2 people working to reach the same salary as a single person before. You are not being very realistic here, since in Western countries putting Women to work has been a very effective way to increase households' levels of life.
Well, yes, it depends on the assumptions. Honestly, I have no idea how it worked out in the West, as I come from a country where 2 working parents has been the norm already for my grandparents. Maybe there is lack of production, and more employees could produce more, and hence get paid more (in average). On the other hand, (as I think you implied in another reply) there might be too many employees already, wasting time at work, and a lack of consumption. In that case, the only thing that 2 working spouses would cause is a redistribution in income (2-working-parent families would be getting comparatively more money, 1-working-parent families comparatively less).
In the short term, yes, but in the long term, that's questionable... AFAIK, 50 years ago, it was very simple to raise a middle-class family with just one working parent (in the US), whereas nowadays it's almost impossible for the majority of professions.
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.
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.
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.
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.
> Keynesian economics has failed. QE, inflation, central bank stimulus, debt accumulation
It's kind of funny how much of a content-free buzzword Keynes has become. None of the measures you mentioned are originally tied to the original Keynesian idea of anti-cyclical government behaviour.
"Keynesian" as used by the mainstream today is only very weakly related the writing and thinking of John Maynard Keynes. I've seen it suggested in more than one place that if Keynes was alive today he wouldn't be a Keynesian.
Even modern Keynesians are usually the first to tell you the central bank is going to be pretty much helpless in a liquidity trap, that QE isn't going to make a big difference, etc.
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.
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.
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.
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):
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.
The quality is night and day. The BBC has unfortunately lost the plot in recent months (go to their homepage and see how many stories are headlined with quotations), and every other free source needs to pander to the clicks-for-advertisers market, so stories are rushed, content is emotional, and quantity is prized over quality.
The WSJ is the last remaining quality paper. They increase their prices every year, but I still pay for it. I highly recommend that you do too.
There may be a big overlap, but "tech-savvy" and "think all information should be free" are not synonymous.
Personally I'm against submitting paywall links to HN because it makes it harder for everyone to read, but I have no problem (either overall morally or or a personal level) with content like the WSJ being behind a paywall.
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.
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.
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.
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.
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?
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).
* 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.
Creditors can't raise rates on bonds. When you issue a bond, you get paid then, and the creditor gets paid later. They can raise rates on new issuance, but the inflation rate is determined by monetary policy, not so much fiscal policy.
Nation-states are constantly refinancing or issuing new debt, sometimes daily. The pool of potential creditors for this sort of debt is very limited, and will react pretty quickly to changes in almost any area of public policy by shunning your debt if rates are not to their liking. Also, some of this debt is auctioned, with results indicating what the market thinks of proposed rates.
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.
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.
It is more about currency deflation rather than price deflation. Without currency inflation the current system collapses.
Price inflation is from currency inflation - ie: more $ around today chasing approximately the same number of goods than yesterday. Agreed?
When currency deflates, there are less dollars chasing those goods so dollars are harder to come by and prices necessarily decrease to allow the remaining dollars to cover the goods being exchanged. Yes goods 'get cheaper' in dollars. That's just a side show and not the problem.
So what happens to debtors in a currency deflation? Dollars are harder to come by, debts cannot be repaid and debts default. Debt default is the destruction of currency. More deflation. Positive feedback.
Savers today save in dollar accounts which rely on debtors to pay back their debts. With debt collapse, so goes bank assets (debt) and now their liabilities (savings accounts) outweigh their assets which makes them insolvement.
If today's savers didn't save in bank accounts for the promise of more dollars tomorrow then we wouldn't have this problem. Save in fine art and collectibles, save the world.
When people know there's deflation they hoard money rather than spending - which can then push into further deflation. Currency ceases to be liquid because no one wants to sell - you're making a free profit by just holding onto your cash. In a world with only one currency you end up with the rentier class that has money capturing all economic productivity. Given that the Japanese have other options... I don't know. Interesting times to be sure.
It's a myth propagated by certain economists who believe there is an optimum inflation rate and that this optimumum is around 2%. They also predict a great calamity if inflation falls below zero. In practice, experimental evidence tells us that this theory is complete rubbish.
>In practice, experimental evidence tells us that this theory is complete rubbish.
Please, provide us with examples of a sustained deflation that didn't harm the economy.
The supply of money has to grow at the same rate as the real economy, otherwise you can end up with "problems" associated with having "too few dollars". In other words, we need to keep increasing the supply of dollars to buy the growing output of goods we produce. This is common sense. Because it's impossible to hit that growth target exactly, we err on the side of caution and produce some inflation, which has the side benefit of preventing the hording of currency, as it naturally diminishes in value over time. For whatever reason most governments have decided on ~2% to be a safe, stable target.
One of the common misconceptions of deflation is that the lower prices should be good for consumers. Which is true, if terms of consumer goods. But keep in mind that wages and debt are also affected, which is where the real pain from deflation for the average person stems from.
Currencies are government made artificial stores of value.
If money doesn't lose value fast enough, people, companies and banks invest in government sponsored fiat instead of the real economy. This distorts the markets.
Money should be there to allow transactions and contracts without having to do barter. It has no choice being a store of value to do so, but it should not artificially keep value at a rate that makes it desirable enough so that it replaces private markets for investments. To do so is a subsidy to economic idleness and a promotion of investment in fiat instead of the real economy.
Money doesn't have intrinsic value. It should not artificially be made to seem like it keeps so much value by governments. It should be made stably declining and just valuable enough to allow for low friction transactions and contracts. More than that and you are throwing a wrench in the gears of private markets.
I think because while average prices for individual devices go down, you make up for that with volume in an expanding market. Once you saturate the market, then you have to diversify, create new markets or consolidate (buy more market share).
A computer manufacturer doesn't need to increase their market share to keep the same profit when a process technology matures and therefore gets cheaper.
It is trivially possible to keep making money selling computers even if the total market share doesn't expand.
As an entity, yes, but overall as an economy this does not work. How will you be able to afford giving employees raises? Cut the workforce, and then what happens when everyone 'cuts the workforce'? what happens to total buying power?
Price-inflation means our purchasing power decreases. We're all better off if we get moar stuff for our money instead of less, but governments would like us to believe the opposite.
We ordinary people clearly don't benefit from inflation, but who does? -Might it be the same people who are telling us inflation is good?
Even if wages do fall, as long as your purchasing power increases more than your wage drops, you're just fine.
People take on massive loans exactly because prices have been inflated. That certainly doesn't mean deflation is bad.
Even if you're paying off a loan, price deflation is not a problem because though the loan is becoming more "onerous", you'll have more money left over for paying the loan after you've bought everything else you need.
> 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.
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.
Or rather, instead of putting more money into their economy by printing it, which was working extraordinarily well, they instead decided to pull money back out with a huge rise in a regressive tax.
"Real GDP" is some kind of economic truther term. If you can sell debt at a low interest rate, whatever paper you've generated is "real" because the market is still buying it.
To be fair, "real GDP" has a somewhat precise economic meaning as measuring GDP while taking inflation into account; i.e., take nominal GDP and divide it by some measure of inflation (it is only somewhat precise because one can quibble about which inflation measure should be used).
In general though, you are right that especially "real growth", as the antonym of "fake growth", is often used in a way that has economic truther feel to it.
I'm not talking about short-term changes in GDP. I'm talking about longer term ones, obviously. Nothing in Economics is worth measuring on a 6 month scale. Political decisions on the Economical climate take dozens of years to take their toll and have marking impact.
Monetary policy is considered neutral in the long run. The real economy is definitely not. Monetary shocks are a passing phenomenon. Loss of GDP hurts for a very long time.
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.
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.
A country defaults when it can no longer service the interest on its debt.
Japan's interest on the public debt is around $250B/year, or around 5% of GDP.
5% is a higher percentage than most countries (U.S. is around 2.5%) but less than, say, Greece at the height of their crisis. And Greece ended up not defaulting and not devaluing their currency (obviously, being in the Eurozone).
$250B is around 25% of the annual government budget for Japan. Again, this is higher than most countries but manageable.
Additionally, 92% of Japan's sovereign debt is held domestically. This means that the interest paid on those bonds don't go to Wall Street or Beijing but rather to Japan's own banks and pensioners. As a comparison, 47% of the U.S. debt is held by foreigners.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
In summary, Japan is in absolutely no danger of defaulting under current conditions, without even taking the additional step of "printing more money" to pay its future debts.
That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false. Japan could default on debts if it chose to (many countries have in the past).
>That statement is far more reasonable than 'It's literally impossible for Japan to default on their debts', which is false.
This is slightly pedantic. The argument was about whether incurring ever-greater amounts of debt would result in the default of Japan, a country with a sovereign currency. It's a fallacy that is often repeated. As long as the debts are denominated in said currency, the answer is: no. A country with its own currency will always be able print more money to fulfill these obligations, making default practically (not literally, I guess) impossible.
The fact that they can choose to default, or that we may run out of trees, or ink, or whatever, is a bit outside of the scope of the argument.
A country defaults when it either can no longer make the payments, or when it can't pay back the real value rather than just the nominal value.
eg If I devalue my currency by 99%, and then attempt to pay off debts in that currency, that is a default, regardless of if a country were to try to pretend otherwise. The alternative to that context, would be that any nation can just freely debase their currency, pay back debts in worthless paper, and nobody cares because it's not a default - that's false.
Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
> Japan has to debase the Yen to pay its bills. Their government is insolvent due to the extreme debt. They have already defaulted.
Back in the real world: When I said earlier that Japan has to pay $250B this year to service their debt, that means there is an actual no-kidding line item in their fiscal year 2015 budget for the Ministry of Finance to pay that money to bondholders. They've budgeted the money already and it will be paid out starting in April just like it was in 2014, 2013, 2012, and so on.
Japan can only fund their government through debasing the Yen, because 50% of tax revenues are being consumed by interest payments, and that's rising by the year. That's a death spiral that is only going to get worse.
The government of Japan is plainly bankrupt. People that own Japanese government debt are already being paid back in devalued Yen. The only options left for Japan are to either openly default, or dramatically increase the debasement of the Yen - the last option is exactly what they will choose. So rather than an open default, they will default by destroying their currency.
Abenomics will be followed by a call for Abenomics 2, and a more dramatic destruction of the Yen. Japan has been living on borrowed time for 15+ years, maintaining a fake standard of living that was dependent on perpetually greater amounts of debt; the bill has come due. The exact same process is occurring in several of the biggest economies of Europe.
Please find me a single CDS contract that allows that definition of "default"? Or a law or a solvency judge who would agree? If your contract stated that you are to pay back 100 USD or JPY or whatever, on a certain date, and you pay exactly as stated, then that cannot be a default, regardless of the prevailing FX or inflation rate at the time. You should have FX or inflation hedged if you were worried about those risks...
You may consider it a "moral" default if the debt is paid back in inflated currency, but it is in no way a technical default and you can't just redefine long standing meanings of the word "default" to suit the point you're trying to make.
I'm not saying that nobody cares if debt is paid back in debased currency, but if it's paid back according to the letter of the contract, then it's not a default.
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).
Japanese government creditors as a whole will never want to get rid of Japanese bonds in the kind of mass-selloff that you're implying unless the Japanese government does tell its bondholders that they're not going to be repaid.
The reason is simple: individual holders of Japanese government bond may want to get out of Japanese government debt. These individuals then hold Yen in a bank account (if they're regular individuals or institution) or in a central bank account (if they're banks). What happens with those Yen?
Maybe they'll buy some other bonds, or sell those Yen for another currency, or something else entirely. But no matter what they do, those Yen will still be around. It is impossible for them to disappear, unless somebody buys Japanese government bonds.
So those Yen might circle around a bit in the financial system, but at some point, they will end up with somebody who sold some asset and does not want to buy anything else. This somebody now has a choice of keeping Yen (which guarantee no loss of principal but have zero nominal return) or of buying government bonds (which also guarantee no loss of principal and which have a - however small - positive nominal return).
At this point, buying the government bonds is clearly the superior option. This hot potato effect of money is why there will never be the need to print gazillions of Yen to get rid of the debt.
I would point out that one might say that your statement is based on a fundamental misunderstanding anyway: Whether you hold Japanese government bonds or Yen, both are forms of government debt! The only difference between them is in maturity and interest rates.
>It's "literally impossible" only in a very literal sense of the word.
The literal sense of the word "literally"?
Yes, I think that's exactly what was meant!
Has the word "literal" been so badly abused across the internet (true) that you thought a correct use of the word needed clarification?
Or is contemplating the fact that Japan's govt. debts are entirely in its own currency, which can be issued at will with no constraint from the financial markets, so shocking and nonsensical to orthodox thinking that you thought that the original statement couldn't possibly have meant what it said?
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.
I'd imagine, it's that the damage caused by massive inflation does not start and stop at what financial institutions would prefer. (For that matter, financial institutions would probably prefer a haircut on their Japanese bond holdings, over the 3rd largest economy going up in smoke.)
> 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.
>inflation is literally destroying your economy for any foreseeable future.
Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default. They're both very painful, but it's not clear to me that one is especially worse than the other.
> Is that actually true? Is inflation really worse than default? I mean, we don't have any samples from "advanced" economies, but from the what I've seen, high inflation, in the long run, doesn't seem to be that much worse for economic health than default.
I grew up in an Eastern-European post-communist country which was very badly affected by inflation in the '90s (it ran in the high double-digits for almost all the decade, and in one year it actually surpassed 100%). Let me tell you that to see your life-savings absolutely annihilated in a matter of 2-3 years it's much, much, much worse than deflation. Japan got into the current mess after 20 years and it still manages to build Maglev trains and to be an economic power, but in a country affected by very high inflation all that goes out of the window (see the Soviet Union implosion).
And anecdotal recollection, I remember when my parents had asked me to be the one in charge of answering the family's phone (I was 14 or 15), and to tell whomever was calling that they were not home (they had borrowed money from lots of their friends to buy food and to pay for basic apartment maintenance and there is no-way to pay it back). One day a lady judge called, asking my parents to pay back the money they owned her because she did not have money to buy bread. Now, you can imagine that in a country where even judges cannot afford to buy bread for their family things are worse than worse.
Your response completely misses quanticle's point. Quanticle was talking about the choice between inflation and default. (So, when it comes to your life-savings, both can be utterly destructive.)
Instead of actually addressing quanticle, you went into an irrelevant inflation/deflation rant. It would be nice if we could actually talk with each other rather than at each other in this kind of discussion.
Edit to point out once again: Default and deflation are not the same thing. By bringing up deflation in this particular sub-thread, you are further reducing the signal-to-noise ratio in a comment thread that is already of low average quality.
> (So, when it comes to your life-savings, both can be utterly destructive.)
As I was trying to say, after 20 years of a shitty deflationary economy the Japanese people still pretty much have their pensions more or less intact, while in a highly inflationary economy (like the one I experienced) the pensions become almost null in a matter of maximum 5 years. So your point, "So, when it comes to your life-savings, both can be utterly destructive" is actually demonstrably false, based on recent historic examples. I agree, we can start the discussion from here, i.e. from demonstrable economic facts.
Granted, English is my second to third language, so I try my best at holding a conversation.
Have you heard of Malaysia or Mexico in the '90s? They didn't like default too much either.
Germany in the '20s (not the '30s - hyperinflation was over by the '30s - just in time for Germany to be sucker-punched by the Great Depression) was a special case. They hyper-inflated in order to default. Namely, the Triple Entente had imposed massive war debts onto Germany at the end of World War 1, and Germany resorted to printing currency in order to pay off its war debts. When formal default justifies military invasion and the annexation of your territory (which was the French argument when the Weimar Republic talked about default), hyper-inflation begins to look awfully attractive.
While it's a trope to use the Weimar Republic as an cautionary tale about inflation, we can't really learn very many lessons from it, because of the relatively exceptional historical circumstances preceding the founding of the Weimar Republic.
(In the end, it was all moot, of course. Hitler unilaterally canceled Germany's debt payments, essentially calling the French on their bluff about invading the Rhineland. The French didn't invade, and Hitler was emboldened to pursue further expansionism.)
What I've read is that inflation in Germany in the 1930s was actually very usefull. They had an enormous amount of debt they were incapable of servicing. The huge inflation cut the debt to pieces very efficiently. The inflation was not the cause of German problems, it was a symptom of problem of having a too large debt. It is sort of like blaming the flu on the fever. The fever might feel bad but it is actually your body's way of fighting the flu.
Probably you should read another version of how inflation "helped" Germany. When you have hyper inflation like that it may be good for paying back your debts, but your creditors soon realize that their payments are worth nothing (because you just print paper, you don't create value like that), and you disintegrate all private investment in your country. Why do you think the Third Reich nationalized every industry out there?
My understanding is that German debt was not denominated in paper, but that they had to print money to buy gold at whatever rapidly falling rate people would give. Presuming my understanding is correct, the debt was certainly the root problem, but the inflation wasn't helping - it made it harder to buy the next payment's gold.
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.
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:
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.
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.
> 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.
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.
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.
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.
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.
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.
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.