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.

The remainder of this post can now be found in my Kindle e-book published with Amazon.

You don’t need to buy a Kindle to read this book. You can download a free app from Amazon.

This entry was posted in A Fistful Of Euros, Economics, Economics and demography, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

29 thoughts on “The Real Experiment That Is Being Carried Out In Japan

  1. Pingback: Assorted links

  2. Pingback: The Real Experiment That Is Being Carried Out In Japan: "there is an experiment being conducted in Japan, but the experiment isn’t Abenomics (which I suspect won’t work)…the experiment is about learning to grow old with dignity, not as individu

  3. I find your series of articles insightful — even thrilling, in a perverse kind of way.

    One possible typo:
    “as working age population slides there might be a permanent, structural excess of demand over supply”

    Either you are talking of a structural excess demand of _manpower_ over _manpower_ supply, or, if you are referring to economic transactions (i.e. demand of goods/services vs. supply of goods/services), the sentence should be:
    “as working age population slides there might be a permanent, structural excess of supply over demand”.

  4. I have three points of disagreement:

    1)
    “[…] you can’t target wages.
    Put another way, it simply isn’t clear what the mechanism which fuels the extra wages that some people are expecting actually is, or why company CEO’s should be influenced by massive liquidity in precisely this way. ”

    As you point out later, this is the job for the fiscal stimulus (that is, the government hiring a lot of people until wage rise substantially).
    You seem to think thet japanese govenrment can’t stimulate the economy much more than it’s already doing (“But Japan is already running a 10% deficit”), but I dont’t see the problem: they can simply spend more and print more. This is the MMT approach, that says that the amount of demand a government can stimulate (“printing money”) is only limited by the fact that an excessive stimulation leads to hyperinflation.
    Here inflation is exactly what the government wants so I really don’t see the problem, as long as they really mean it.

    2)
    You say that abenomics is supposed to stimulate the economy by both wage inflation and increasing exports because of the falling yen.
    But, If wage rise more than the yen falls, japan has more domestic consumption and less exports; on the other hand, if wages rise less than the yen falls (I.E. wages fall in real terms) Japan has exports but not domestic consumption: the two policies really are opposed.
    It seems to me that abenomics, as is usually explained, points more on domestic consumption than export growth (I might be wrong).

    3)
    I keep repeating myself but, you assume that demografic falls cause deflations, but it is quite obvious that a weak economy with young people that fail to find secure jobs cause demografic falls.

  5. Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration.

    I refuse to accept an argument which boils down to ‘we don’t know how to run the economy in any other way, so let’s fritter away cultural capital’. It’s the current Japanese economics that needs such cultural changes. Japan itself does not need them and I do hope and believe Mr. Abe understands this. Should such sweeping changes be introduced, Japan will cease to be Japan in the same way the West has largely ceased to be the West, and it is not clear what will it gain to compensate for such a tremendous loss. Of course I know the Western elites are sore at Japan for sticking to its national identity and resisting immigration when they are busy throwing away their identities and replacing their native populations with third-world stock. I need not point out that the economics professors who advocate open immigration are comfortably ensconced within their beautiful bubbles, and that their wives are generally and preferably housekeeping and raising children, i.e. ‘not in the labor force’ – a ridiculous distinction, as if the sustenance and continuation of a nation is not labor or not important.

  6. Hi Guest:

    “One possible typo:”

    You are absolutely right. It was a typo and not a convoluted new argument 🙂

    Thanks for pointing this out and being such a meticulous reader as to notice such things. Miraculously, so far there has only been one.

    Edward

  7. Hello Random Lurker,

    “You seem to think thet japanese govenrment can’t stimulate the economy much more than it’s already doing (“But Japan is already running a 10% deficit”), but I dont’t see the problem: they can simply spend more and print more. This is the MMT approach”

    Well, this is exactly the point. Abenomics can work, by for example simply sending people directly extra wages in their home, as long as the MMT people are right.

    I don’t think they are, for reasons which are too lengthy to go into here (see my Japan’s Looming Singularity piece, or my explanation on Hungary about why that country can’t do Abenomics, and why by doing Abenomics Japan could end up more like Hungary), but the beauty of economics is its strong empirical element, so we are really about to see whether MMT works or not.

    “You say that abenomics is supposed to stimulate the economy by both wage inflation and increasing exports because of the falling yen”.

    Not quite actually. I am saying the only mechanism through which Abenomics could work is though driving down the yen. I don’t think they can drive up wages, even those I think this is a popularly held confusion about what Abenomics is trying to do. Abenomics will only generate what some call “bad” inflation. But using this expression is a misconception, since to get out of a liquidity trap any old inflation works, so long as it is sustainable, which I don’t think it will be in Japan.

  8. Pingback: Midweek Mélange » Duck of Minerva

  9. Pingback: The Real Experiment That Is Being Carried Out In Japan: "The central problem in Japan is constant oversupply, given technical change and a stagnant market, and hence there is permanent price pressure on companies to maintain their share of what marke

  10. Edward- Interesting piece. I am sure you have addressed it in other posts, but I don’t find the connection between declining working age population and deflation convincing. Declining working population, all other things equal, means less supply. Increasing dependency ratios imply inflationary pressures, especially if there are unfunded pension schemes.

    Obviously, land and long term durable goods like housing are a different matter. But domestic services, which are non-tradable and therefore more sensitive to domestic labor supply issues, are completely another matter. Goods that are not as easily traded internationally would also show cost pressures. Is there evidence of this pricing dichotomy?

    If not I would suspect more traditional macro variables are what is influencing Japan’s price level.

  11. Great contrarian piece above concerning Abenomics, but a few counter-punches…

    I think you getting to monomanical about demography driving deflation, rather than the reverse. I would argue that the deflation in large part causes demographic decline-see the decline in fertility in the US during the 1930s. So engaging in aggressive anti-deflation monetary policy can reverse in part the demographic decline.

    And increasing inflation will decrease the size of Japanese public and private debt, both real goods, with those debts driving in part demographic decline…

    Also, can you please delineate in detail what the G20 can do if they get upset with Japanese monetary policy? You allude to it as a possibility but never detail it in a convincing way. Due to the WTO and high anti-tariff views amongst OECD policy elites, I don’t see retalitory tarriffs being a likely option…

    What Abe is doing is much better than wallowing in demographic and deflationary dystopia.

  12. Andrew,

    “Declining working population, all other things equal, means less supply”.

    Not really, since other things aren’t equal. Economies are dynamic not static entities. Normally you would expect more technological change to increase productivity in an attempt to try and compensate for the falling workforce. Also, production can become more capital intensive (standard neo-classical theory). Naturally we are talking about the quantity of widgets produced, not their prices or total value. If supply fell as the workforce fell and debt remained the same the economy would almost inevitably go bust.

    On inflation/deflation you need to read through more Japan related posts (on my Japan economy watch blog, for example).

    “Goods that are not as easily traded internationally would also show cost pressures. Is there evidence of this pricing dichotomy?”

    Well, Japan very much has a “dual” economy with a very competitive tradeable sector and a very much less efficient non-tradeable sector. Surely the rate of deflation is greater in the more efficient sectors is greater, but structural reforms in the inefficient sectors (Abe’s third arrow will probably try to achieve this) is likely to accelerate the rate of deflation in the non tradeable sectors. At least this is my opinion.

  13. ” I would argue that the deflation in large part causes demographic decline”

    Well, there was a hell of a lot of demographic decline in countries all over the developed world before deflation became a real serious problem. So not sure the evidence backs you.

    “Also, can you please delineate in detail what the G20 can do if they get upset with Japanese monetary policy? ”

    Easy, the Federal Reserve and the ECB threaten massive and combined intervention in the currency markets to force the Japanese to back off. We would be faced with the threat of a real currency war.

  14. Edward- You wrote, “Normally you would expect more technological change to increase productivity in an attempt to try and compensate for the falling workforce. Also, production can become more capital intensive (standard neo-classical theory). ”

    The reason one would normally expect more capital replacement would be due to a shift in the relative price of capital and labor due to rising wages. Rising wages, of course, are not indicative of deflation. That’s the story after all that we get from the greatest Western demographic decline, the Black Death and its aftermath in England, inflation followed by capital replacement.

    You’re point on nominal debt, however, is a good one, given that even productivity growth those debts may be hard to service with a smaller workforce. But, to me that’s more reason to encourage monetary easing.

  15. It should also be noted that Abe can – at pretty much any time – cut the price of power and improve the trade balance drastically, by turning the reactors back on.

  16. Hi Andrew,

    “The reason one would normally expect more capital replacement would be due to a shift in the relative price of capital and labor due to rising wages”.

    This is the case in a static analysis, assuming other things being equal. But I am talking here about innovation. Innovation means existing capital destruction – think Schumpeter, and the need to move over to new technologies and new products. These are often more capital intensive, not due to the price of labour or otherwise, but simply because without the technology you don’t have the product. You have only last years product. But these technologies may offer huge economies of scale (think internet type things). Basically most companies need growing markets to justify their investment – that, for example is one of the reasons investment is low in Europe at the moment, since the market is stagnant, so you don’t get sales growth. When you have overcapacity and you need to sell, then you have to swallow rising costs by adjusting margins, or wages down. Japan has been in that dynamic since at least 1997, and my argument is that I don’t see anything there that is an essential game-changer at the moment.

    Most of what people are reading out there is pure wishful thinking.

  17. Thomas,

    “It should also be noted that Abe can – at pretty much any time – cut the price of power and improve the trade balance drastically, by turning the reactors back on”.

    Of course, but the problem is not essentially an energy one. Deflation goes back a long way before the Tsumami – approximately a decade and a half.

    Also, and again this is curious, arguably rising energy costs produce inflation. I know some say this is “bad inflation”, but Japan ain’t goin to get “good” inflation due to the demand side issue. But still, if generating inflation is the objective, then why the hell would he throw the switch on on nuclear power – leaving aside the political dynamics of the issue?

    The curious anomaly I am trying to draw attention to is that if inflation is your objective, then inefficiency is a plus, since it raises costs and prices, while structural reforms generating more productivity are a minus since they are disinflationary.

    Weird world, isn’t it?

  18. As a matter of interest for me – Is it possible or even probable that the white tribe in Europe will become extinct to some degree and be replaced by imported breeders in due course.

  19. John,

    “Is it possible or even probable that the white tribe in Europe will become extinct to some degree and be replaced by imported breeders in due course”.

    Robots a more likely outcome, and not just for one tribe, for the whole bloody species. Or possibly a new generation of machine/biological hybrids. Far more productive in the longer run, you know, the one in which Keynes forecast we are all dead. 🙂

  20. Incidentally Frank,

    “I think you getting to monomanical about demography ..”

    Well possibly. But this article is about an experiment. One that is being conducted in Japan, and one which should resolve certain issues for those who are capable of listening. If I am wrong it will become clear – Japan will recover a more or less “normal” trajectory. If it doesn’t that won’t establish that I am right, there could be other reasons why Japan never recovers. But the simplistic liquidity trap argument won’t work any longer, let alone the rebalancing towards domestic consumption one. That is really all I want to establish.

    We are all on an exciting theoretical voyage of exploration of the future. Now we will get to see what happens next, and that will give us more information about where we are headed.

  21. I see the issue of inflation leading to wage increases as a conundrum, a Catch-22 for the Abe’s, Bernanke’s, et al.

    Central banker policies in the democratic world, stated or unstated, post financial “crisis” has been to artificially inflate the perceived value of paper assets. The rise of global equity markets in the face of a prolonged recession or depression in europe’s periphery show their glaring success. Obviuosly to continue this artificial inflating, Central bankers must continue to print or their house of cards collapses in their face and the established status quo will be threatened as it has not in 100 years.

    On the heels of these massive increases in monetry bases if wages begin to increase the risk is very real for inflation to spiral out of control, (though the central bankers have very little control anyway).

    They are damned if they do and damned if they don’t. Their only hope is to keep the plates spinning, the balls in the air, long enough for the IBGYBG, (I’ll be gone you’ll be gone) phenomena to happen as they pursue other pursuits.

    Global democracy’s currently exist in a state of chaos and anarchy. Not only do the governments have very little control over current let alone future events, they also hold themselves less accountable, if at all, then they do their citizens that have been unfairly burdened by the actions intended solely to maintain a failed status quo.

  22. Edward, let’s if I understand you argument. Technological and productivity change combined with shrinking market size (demography) are deflationary forces. I can certainly understand the investment disincentive, in fixed place investment and new products.

    But, I think the counter pressures of shrinking work forces, growing dependent ratios and unfunded pension liabilities can not be dismissed either. Japan is a country currently working to perfect robot nurses for the elderly after all. There are plenty of ‘bad’ inflation pressures coming down the pike.

    But given the debt loads in Japan in the government and corporate sector, and given the state of the real estate market (where real losses can be tolerated but nominal losses can not, as Spain is learning), a little ‘bad’ inflation is probably a net plus.

  23. Frank,

    “Edward, let’s if I understand you argument. Technological and productivity change combined with shrinking market size (demography) are deflationary forces”.

    Exactly. If this isn’t the case it is hard to see how the country has been stuck in deflation for 15 years. There must be some specific reason, or set of reasons. I think now there is more or less some consensus that Japan’s demography plays some part in the deflation story, even if some commentors here show resistance to the idea.

    “Japan is a country currently working to perfect robot nurses for the elderly after all. There are plenty of ‘bad’ inflation pressures coming down the pike”.

    Well fine, if this is the case (your argument not mine), why the hell bother with Abenomics in the first place? That is, after all, what this post is about, the confusions and limitations surrounding just what Abenomics is supposed to achieve, and how exactly it could achieve stated objectives. If the inflation is coming anyway (as I say, your argument not mine) then what the hell?

  24. Hmm. I think the key problem is that inflation is not the solution, except in as far as being the state of not being in deflation. The issue is that without wage increases, increases in productivity produce unemployment, then falling demand and a bad spiral all over. Hitting people with higher electric bills is not helpful – real wages and real disposable income have to increase in order for the economy to grow. Which is nearly tautological – what is economic growth, if it is not the general increase in wages and disposable funds? But seems to be universally ignored.

  25. Thomas,

    “Which is nearly tautological – what is economic growth, if it is not the general increase in wages and disposable funds? But seems to be universally ignored”.

    This is a very interesting, if not key question, and we are in the realm of tautologies. What is economic growth? This is the real issue that is being posed by Japan deflation and shifting population pyramids. You don’t need wage increases if technology brings you a constantly rising quality of life – I refrain from saying “living standard” since that is just another self referential tautology – indeed the former is consistent with ever falling wages. No problem. We can get more out of less, if prices drop sufficiently. But what happens to legacy debt, and what do we do about it? This is the issue that is being posed. The answer that we need more growth is a totally vacuous and tautological one.

    The whole issue of what GDP actually is, and what it really measures, still remains without an adequate and satisfactory answer. Big picture conceptual changes looming.

  26. I did say “real wages”.
    Wage increases via deflation and the sticky wages effect are still wage increases. It is just that this pathway to higher earnings for workers has highly unpleasant side effects, and therefore it would be strongly preferable to increase purchasing power by raising both nominal and real wages. The problem is that policy in the west is currently set by an elite that have acquired the completely insane notion that the path to a wealthier nation is to keep the earnings of that nations citizenry as low as possible. Which simply cannot work – the nation is the citizenry!

    Other things that are obvious but ignored: Quantitative easing to banks: Injust, ineffective. The money quite obviously gets transmitted onwards into circulation extremely poorly. QE sent directly to the citizens, tax rebate style, or used to finance industrial or infrastructure projects directly ought to be far more effective, and would restore the banking sector as a side effect.

  27. “But what happens to legacy debt, and what do we do about it? This is the issue that is being posed. The answer that we need more growth is a totally vacuous and tautological one.”

    Spot on. Protecting creditors has been unduly prioritised ever since the crisis hit.

    Had bail-ins, for example, been used to resolve troubled financial institutions from day one we’d be much further along the road economically and in a far healthier state politically.

    If we keep dodging this question of how to deal with ultimately unsustainable legacy debt, it’s hard to see a tolerable way out of our impasse. Policies will probably become increasingly desperate and often irrational as unintended consequences snowball.

    It’s so rare to see any decent discussion of these critically important issues. If only your series of essays could get some real traction out there.

  28. Pingback: Weekly Round Up June 5th – 2013 | Connect the Dots

Comments are closed.