Don't Shoot the Messenger

The Real Experiment That Is Being Carried Out In Japan

The future never resembles the past – as we well know. But, generally speaking, our imagination and our knowledge are too weak to tell us what particular changes to expect. We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act.John Maynard Keynes

Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems.
– Gunnar Myrdal

Last Thursday the yen broke through the psychological threshold of 100 to the US dollar. On Friday the slide continued (see chart), even dropping very close to 102 to the USD at one point before strengthening slightly on the run in to the G7 finance ministers meeting.

The ostensible source of the sudden shift was a news release from the Japanese Ministry of Finance detailing the fact that Japanese investors bought a net total of 514 billion yen ($5.2 billion) in foreign bonds during the two weeks to May 3. Speculation had been rife that Japanese money funds would start to respond to continuing yen weakness and low Japanese yields by investing abroad. It is still far from clear that this is really going to happen in the short term, but nonetheless the news was sufficient to spark bets on more yen weakness.

Naturally the fall has drawn comment, especially during the run up to last weekend’s G7 meeting. US Treasury Secretary Jack Lew told CNBC that while Japan had “growth issues” that needed to be dealt with its attempts to stimulate its economy needed to stay within the bounds of international agreements to avoid competitive devaluations.”I’m just going to refer back to the ground rules and the fact that we’ve made clear that we’ll keep an eye on that,” he said in a comment that was widely seen as drawing a red line in the sand.

But really, what else do external observers expect? On 4 April Bank of Japan governor Haruhiko Kuroda announced he was going to increase the money base by 1% of GDP per month for the next two years. That is to say Japan’s monetary expansion will be incremental and continuous. Kuroda has even stated he will continue to increase the money base beyond the initial 24 months if the targeted inflation doesn’t come. It was always clear that the country was going to have a difficult time trying to generate inflation and that one of the knock-on consequences would be to continually weaken the yen. So you can’t realistically expect him to turn round and say now, “sorry, we didn’t know it would offend you so,  I’m cancelling the policy”. Anyway, that move would throw financial markets straight into turmoil. Didn’t they understand what they were signing up to when they accepted “Abenomics” at the last meeting?

Obviously there is still a considerable amount of confusion around about what exactly Japan’s problem is, and what the policy is trying to achieve. I have tried to examine the more theoretical background to the problem in my  A-b-e of economics post, but looking through the comments to that piece I realised that I was very tightly focused on one, examining only one aspect of what has come to be known as Abenomics, the inflation targeting component and its theoretical justification. Since ideas about what exactly it is the Japanese government is trying to achieve seem to be many and various, I thought it might be worth coming back and taking a second look at the experiment.

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9 Responses to “The Real Experiment That Is Being Carried Out In Japan”

TomMay 15th, 2013 at 11:30 am

You seem to be stating that GDP growth is more important than GDP/capita growth, and I don't understand why.

Please if you can leave aside the problem of aging societies, ie people living longer, as that I think is a separate issue.

Say there's two societies, one more fertile than the other but otherwise the same. Both increase productivity at 1%/year, one has a population shrinking by 1%/year, the other growing by 1%/year. The first thus has zero GDP growth, the second 2% growth. But GDP/capita of both is growing by 2%/year.

Are you saying the second is better off than the first? Why?

Are you saying the first society will have more difficulty achieving that 1% productivity growth rate than the second society will? Why?

Edward Hugh Edward_HughMay 17th, 2013 at 6:55 pm

Tom growth in GDP per capita is fine as a measure, but normally the statistics office releases are in real GDP growth. My focus is on neither of these directly, but on the dynamics of debt. The Japan problem is the out of control upward movement in government debt, which only will get worse in per capita terms as population shrinks, and in debt to GDP per capita terms as nominal GDP per capita shrinks. This is a real problem, and I don't think it is one it is possible to simply argue away.

I can't leave aside the problem of ageing societies since I think this is the whole problem we are facing.

In your example what matters is working age population, not population per se. In each case you need to know what is the percentage of the dependent population to the working age population before you can make any assessment as to who is doing better. You need to be careful to specify which type of productivity you are talking about. If we are talking about labour productivity, then naturally, a 1% increase in productivity means a1% growth in GDP, since this is how labour productivity is defined, ie by dividing total GDP by the size of the workforce. But this excludes the capital side, which could, for example, be financed externally. Maybe the two societies have different capital financing costs, so you seem to be doing OK on productivity till you look at what it is costing you.

What I am saying is simply that the issue is a much more complex one than appears at first sight. Debt is the important point. Do we assume that both societies you mention run zero government deficits? That is, that government debt doesn't grow. What about household debt, do we put that in the equation? And so on.

jack strawMay 22nd, 2013 at 2:48 am

Japan could be on the verge of total collapse. QE is designed to prevent that. I know this because the Emperor himself has come out on the air…vis a vis Fukushima…to say just that. this is not about formulas…this is about "will it work." if the USA announces an exit strategy for asset purchases tomorrow the word on the Street is "sianara." these folks on Wall Street haven't missed a single shot since the 2008 fiasco…i don't have to explain to you or anyone else in the world what that means when they smell blood in the water. "this is their job"…it's what they do. my personal view is that the United States is working VERY closely to provide security assurances….but as i said before "this is all about Lincoln and necessity." toss the formulas out i'm afraid. obviously "pray for success."

jack strawMay 23rd, 2013 at 7:35 pm

"and you know who i am." this is not some parlor game either. the effects of a total collapse of the JGB's is beyond belief immeasurable. that's why you can't even bring it up. NONE OF YOU CAN. "collapse cannot be allowed anywhere." give me a break. is Spain itself next? Italy looks like a sitting duck to me. i'd say "unbelievable" but it is too much so is not?

BWildsMay 27th, 2013 at 12:05 pm

I wrote a post not long ago,

But this post fails to go into much depth about why the yen could lean towards being worthless, again we have to ask, compared to what! None of the worlds major currencies are backed with anything of real value. Concerns about the Yen should center on Japans large debt, this has been offset till recently by year after year of trade surpluses. You have a valid point, the yen could collapse. I feel that secret currency swaps have been holding the currency markets together for some time.

KathrynMay 24th, 2013 at 6:26 am

Since the 1980's here in Silicon Valley we used to joke that "technology is the answer, but what was the question." And we can see today that statement still applies in that we have "invented" so many productivity "improvements," but the externality is that whole industries of workers are losing their jobs (camera's, , bookstores, and many brick&mortar industries) and therefore purchasing power, from this and offshoring, outsourcing, insourcing etc… technological "productivity" advances also are shrinking national demand. Add to that shrinking demand due to needing to buy less while aging (boomers), and pretty soon the only growth you get is from legal and illegal immigration. Oh, and "credit" bubbles of every kind.

So CEO's listening to economic model producers think: I'll just focus on selling to China and India where all the future growth in demand will be. Hmmm. I have a feeling, once the East masters production, they wont wanna buy stuff from us. What do you think?

jack strawMay 25th, 2013 at 8:44 pm

definitely pays a third read. very well written piece. "escape velocity" doesn't sound like a good monetary term. the other variables as i have mentioned are "historically closed society, weak free press, internal oriented rather than "blame gamers."" after Japan defeated the Russian Navy in the early 1900's "the sky was the limit." quite the amazing empire they built in a surprisingly short period of time. deep into Manchuria, all the way down to Indonesia and Burma. this created outstanding economic growth numbers up until the B-29's appeared…"and that was it." Germany in spite being on the losing side of two World War's…both of which it started i might add..appears to be doing fine (note to Spain…attack next time.) And the USA…while anemic at best is moving Forward. lots to upset the geopolitical apple cart of course…but in the cases of Germany and USA economics does not appear to be one of them. we'll see about Greater Britain as well….but if the strike season is now upon them…"look out there" as well. again…thanks for your input.

nmmaierJune 2nd, 2013 at 8:03 pm

Mr. Hugh, thank you for a very well written article and in particular for pointing out the unique aspects of the Japanese economy vis-a-vis their population. I had no idea how few Japanse are invested in the Stock Market and how many are invested in JGBs. It is amazing to me that Abe supporters are "shocked" that input costs are rising rapidly and will likely negate any increase in exports. Japan has to import nearly everything including energy and steel. This is going to end very, very badly in a currency default for the Japanese.