6 ms·

The Japanese have embarked on an intriguing and desperate monetary policy

50 points by lorax 13y ago

benmmurphy 13y ago
I find it a bit unbelievable that the bank of Japan wants inflation but has been unable to produce it. A simpler explanation is the bank of Japan does not want inflation because it is not politically possible. I also noticed he mentioned that economic textbooks say an aging economy should produce inflation so Japan is confusing. But what do political economy textbooks say about the monetary policy demands of an aging population? I can't see an inflationary monetary policy going down too well politically with older people who have savings in fixed interest. Japan has had low monetary growth because that is what is politically popular.
- chrisgd 13y ago
  Woukdnt most of their savings benefit from inflation as the interest they earned would increase
  - benmmurphy 13y ago
    I think a lot have fixed rate long term bonds that would hurt if inflation increased. 95 % of Japanese bonds are owned domestically (http://m.nber.org//papers/w18287 http://m.nber.org//papers/w18287). Japanese people with wealth (ie old people) would have large direct or indirect exposure to government bonds which are mostly fixed interest.
mpyne 13y ago
These types of strategic economic articles have always fascinated me. But I have to ask, what can the Japanese do about that high retiree:worker ratio? As the article mentions, they aren't the only country with that issue. Presumably there is some solution other than "sit there and suffer" or to push the retirees off onto an ice floe.
- jessedhillon 13y ago
  Encourage immigration from poorer countries with younger workers.
  - Roboprog 13y ago
    The ever popular pro business (multi-national mega corp flavor) type solution: turn your country into a hell hole, and we'll make it a better hell hole, we promise! Like another poster astutely put: create an underclass, and diminish their country's cultural heritage.
    - potatolicious 13y ago
      > "and diminish their country's cultural heritage" Woah woah woah. Careful there, this line of argument has been used in the past. Ditto with a previous mention of immigration making the country "less Japanese", which has shades of certain groups making a certain country "less German".
      - Roboprog 13y ago
        Point taken. But don't they have a right to restrict immigration enough to enable some assimilation of the immigrants, rather than feeling overrun?
        mpyne 13y ago
        They have the right to. Is it a good idea for the long-term though? If the issue is that the birthrate is too low and the deficit you need to make up is, say, 300,000 people per year, then the numbers say you need to let in 300,000 people per year, which may be far above what a xenophobic society can assimilate (I feel like we're talking about Master of Orion 2 here btw :P)
    - cromwellian 13y ago
      We must keep ze culture pure for ze motherland! Really, do immigrants diminish a country's cultural heritage, or enrich it? Freezing culture in stone sounds like a great idea for stagnation.
danmaz74 13y ago
Does anybody have ideas about how a small foreign investor could borrow money in yen? I've got a mortgage too, and it is denominated in the too-strong-for-our-good Euro :)
- dgregd 13y ago
  Banksters will not let small investors to make money in this financial fuss. Credit interest rates for ordinary people are going to be much higher than the expected inflation.
- rfugger 13y ago
  Get a forex margin account and buy EUR against the Yen?
  - danmaz74 13y ago
    Thanks for the suggestion. Someday I could really try :)
elchief 13y ago
Did Maudlin correctly predict the housing bubble and collapse? Otherwise, his opinion is worth nothing.
- rsheridan6 13y ago
  This is sort of off-topic, but it would be nice if there was a convenient way to know if a pundit is a complete buffoon - like a score based on how many correct or incorrect predictions he's made. Points off for saying Iraq would be a cakewalk and had nuclear weapons, and that houses in Las Vegas were a good investment in 2005. You could save a few minutes of your life and a few neurons by skipping articles by people who make those kinds of predictions. I have no idea who Mauldin is, or whether he can be expected to give a balanced view of an issue I don't know much about.
  - bjterry 13y ago
    PunditTracker is a pretty cool site that is trying to solve this problem: http://www.pundittracker.com/ http://www.pundittracker.com/
skybrian 13y ago
This doesn't make sense. Not enough workers but demand for their work output goes down? They can't both be problems.
- VLM 13y ago
  Purchasing power is vaguely bell curve ish centered on middle age. Old people don't buy much other than medical and food. Lets say you lead the world in automobile production, then 20% of your population get too old/poor to buy cars anymore. Whoops. I'm not on the side of doom and gloomers WRT Japan because they're basically the USA in 1970 without a 3rd world nation to the south (no Australia jokes please...). Every year for the median USA worker has been worse, etc, but its not that bad, the rich keep getting richer, its just not the end of the world. As a thought experiment, reread the whole article substituting in the USA in roughly the early 70s for Japan. The USA has a lower number of employed people every year, lower fraction of population with jobs, increased fraction of old people, reduced economic outcome for all but the top one percent, blah blah. Only difference is we've been doing it longer, and we have illegals to boost the population and govt expenses.
- rfugger 13y ago
  The workers, as a group, are the main consumers of their own output.
  - skybrian 13y ago
    A lower ratio of workers to seniors is supposed to be a problem because the workers need to produce stuff both for themselves and for non-workers. It's an argument that there will be too much demand, not enough supply. If you then say that consumers aren't buying enough and there isn't enough demand, then that could also be a problem (recession). But too much consumption and not enough consumption can't both be problems at the same time.
    - snogglethorpe 13y ago
      > But too much consumption and not enough consumption can't both be problems at the same time. What if the the problem is that the demand is for things that Japanese companies have a hard time producing? E.g., oil/energy (which of course actually is a big problem in Japan), iphones, etc...
digitalengineer 13y ago
TL;DR: shorting the Japanese government is the trade of the decade. (According to the author). "Will I succeed? Time will tell, but I am joined by Japanese public pension funds that have announced they will reduce their holdings of local bonds while increasing their share of both domestic and, in particular, foreign equities. No time frame was provided in the data I saw, although indications are that they have already started." Of course- als always- timing is everything.
Roboprog 13y ago
I miss being able to buy high quality electronics from Japan that would last 20 years, instead of crap from China. I recently got a stereo for my home office in the garage. I went to a local thrift store to get an older receiver made in Japan, instead of China. It (still) works great. Japan as a country needs to run a consumer oriented advertising campaign: "Buy stuff from us instead of China, it will last 10 times as long!" They also need to find a way to make their stuff available again in US (and other) commercial outlets.
- olalonde 13y ago
  > instead of crap from China Did you know that iPhones, Xboxes, ThinkPads (the only laptop certified for use on the International Space Station) and loads of other quality electronics are made in China? I wouldn't say "made in China" automatically implies it's crap.
  - ww520 13y ago
    Selective bias. People got what they paid for. They paid little for the cheap stuff and complained about the poor quality.
    - Roboprog 13y ago
      I'm writing this on a MacBook, but who knows how long it will last. Maybe it's a high quality device, and maybe I'm not supposed to care if it starts flaking out after 2 or 3 years. I like the software, and the exterior construction is nice. Stuff made in China might be half price from what things used to be, but it's hard to find any alternatives now.
- activepeanut 13y ago
  Isn't it better for their economy if the things they make is just a /little/ better than the stuff made in China? (Think "planned obsolescence".)
  - Androsynth 13y ago
drblast 13y ago
Given a massive amount of debt and a problem with deflation, isn't Japan in an ideal position for an aggressive negative income tax? Imagine inflating by printing money and distributing equally among all citizens. Domestic price increases would be offset by the extra cash and the real debt would decrease accordingly. Why would that not work?
- anentropic 13y ago
  It probably would, however it sets a terrible example and must never be allowed to happen anywhere at any cost "distributing equally among all citizens." good grief, what a dangerous idea!
- rm999 13y ago
  Many economists agree with you and believe Japan has mismanaged its monetary policy for a long time. In fact, the West's aggressive reaction to the Great Recession of 2008 was largely a lesson learned from what Japan didn't do. From an essay by Paul Krugman (I think from the late 90s): >So why doesn't the Bank of Japan just go out and print lots of money? The best theory I have heard is that the bureaucrats at the Bank of Japan and the Ministry of Finance are still mesmerized by the memory of the "bubble economy" - the wild speculation of the late 1980s, which pushed the prices of stocks and real estate to crazy levels (remember when the grounds of the Imperial Palace were supposedly worth more than the whole State of California?). They believe that loose monetary policy created that bubble - which may be true - and that the bursting of the bubble caused the slump of the 1990s - which may also be true. And so they are afraid to increase the money supply now for fear of repeating the experience. http://web.mit.edu/krugman/www/nikkei.html http://web.mit.edu/krugman/www/nikkei.html Japan did some quantitative easing in the 2000s, but as I understand it it was too little too late.
msluyter 13y ago
So, any time an article like this comes along, I think something like "interesting, I guess I should go out and short the Yen... but wait, if everyone is already shorting the Yen, won't that already be baked into the price?" s/Yen/Gold/g or whatnot. I've sometimes thought that I should just bet against all seemingly persuasive investment articles like this one on the principle that the market will essentially over-indulge in said advice and have to correct in the opposite direction. (Would be interesting to test that theory with historical data.) Case in point: I bought a few silver ETF shares a while ago on the theory stated (by lots of people like SeekingAlpha and the like) that quantitative easing will cause inflation and people will rush to precious metals. (Well, that and I probably have a thing for silver/gold.) Since then, it's dropped over a third. Now I'm a little more cautious about betting on macro-economic trends...
- VLM 13y ago
  "Case in point: I bought a few silver ETF shares a while ago" My dollar cost averaging long term for silver is about $5 per oz and for gold is about $550 per oz... You select your profit when you select your purchase price. Real estate is kinda like that too.
- yajoe 13y ago
  Love the idea. The rub is figuring out which article will influence people (100s are written every day at Seeking Alpha for many views of the same issue) -- if you can predict influence then I think you've found a nice little money machine :)
  - deleted 13y ago
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newobj 13y ago
So practically speaking, how would a normal person go about trying to capitalize on this analysis?
- rfugger 13y ago
  Currency trading.
krakensden 13y ago
The question, 'can a great nation fail to inflate its own currency?', seems a little silly. I'm reminded a little bit of Brad DeLong's 'widowmaker': http://delong.typepad.com/sdj/2013/05/the-washington-super-whale-hedge-fundies-the-federal-reserve-and-bernanke-hatred.html http://delong.typepad.com/sdj/2013/05/the-washington-super-w...
math 13y ago
excellent commentary on situation in Japan by (very successful) hedge fund manager Kyle Bass: http://www.youtube.com/watch?v=ZY6IEpKRA7Y http://www.youtube.com/watch?v=ZY6IEpKRA7Y
slacka 13y ago
>Go ahead and buy stocks, says John Mauldin--if you've got a 10-year time horizon. If you don't, don't. Because it's just another sucker's rally. -John Mauldin March 2009 John Mauldin seems to have a spotty track record. He correctly called the summer 2008 rally as a bull trap.[1] However, he failed to call the 2009 low, and has been calling a top for the past few years.[2][3] Eventually I'm sure he'll get it right, and there will be another market crash. But if you listened to him in 2009 [3], you would have missed out on a 250% increase in your portfolio over the past 4 years. Based on 4 year boom/bust business cycle, I actually think the market is overdue for a serious correction to 1200-1400 S&P in the next year, but I don't see any doomsday scenario playing out in the next 5 years. [1]http://www.businessinsider.com/prepare-now-there-is-so-much-that-could-push-us-into-another-2008-crisis-2011-9 http://www.businessinsider.com/prepare-now-there-is-so-much-... [2]http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/06/16/the-road-to-revulsion.aspx http://www.investorsinsight.com/blogs/john_mauldins_outside_... [3]http://www.businessinsider.com/henry-blodget-just-a-suckers-rally-says-john-mauldin-2009-3 http://www.businessinsider.com/henry-blodget-just-a-suckers-...
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lnanek2 13y ago
If anyone can make more with less workers, it's Japan. Bring on the robots!

50 points by lorax 13y ago

I find it a bit unbelievable that the bank of Japan wants inflation but has been unable to produce it. A simpler explanation is the bank of Japan does not want inflation because it is not politically possible. I also noticed he mentioned that economic textbooks say an aging economy should produce inflation so Japan is confusing. But what do political economy textbooks say about the monetary policy demands of an aging population? I can't see an inflationary monetary policy going down too well politically with older people who have savings in fixed interest. Japan has had low monetary growth because that is what is politically popular.

chrisgd 13y ago
Woukdnt most of their savings benefit from inflation as the interest they earned would increase
- benmmurphy 13y ago
  I think a lot have fixed rate long term bonds that would hurt if inflation increased. 95 % of Japanese bonds are owned domestically (http://m.nber.org//papers/w18287 http://m.nber.org//papers/w18287). Japanese people with wealth (ie old people) would have large direct or indirect exposure to government bonds which are mostly fixed interest.

mpyne 13y ago

These types of strategic economic articles have always fascinated me. But I have to ask, what can the Japanese do about that high retiree:worker ratio? As the article mentions, they aren't the only country with that issue. Presumably there is some solution other than "sit there and suffer" or to push the retirees off onto an ice floe.

jessedhillon 13y ago
Encourage immigration from poorer countries with younger workers.
- Roboprog 13y ago
  The ever popular pro business (multi-national mega corp flavor) type solution: turn your country into a hell hole, and we'll make it a better hell hole, we promise! Like another poster astutely put: create an underclass, and diminish their country's cultural heritage.
  - potatolicious 13y ago
    > "and diminish their country's cultural heritage" Woah woah woah. Careful there, this line of argument has been used in the past. Ditto with a previous mention of immigration making the country "less Japanese", which has shades of certain groups making a certain country "less German".
    - Roboprog 13y ago
      Point taken. But don't they have a right to restrict immigration enough to enable some assimilation of the immigrants, rather than feeling overrun?
      - mpyne 13y ago
        They have the right to. Is it a good idea for the long-term though? If the issue is that the birthrate is too low and the deficit you need to make up is, say, 300,000 people per year, then the numbers say you need to let in 300,000 people per year, which may be far above what a xenophobic society can assimilate (I feel like we're talking about Master of Orion 2 here btw :P)
  - cromwellian 13y ago
    We must keep ze culture pure for ze motherland! Really, do immigrants diminish a country's cultural heritage, or enrich it? Freezing culture in stone sounds like a great idea for stagnation.

danmaz74 13y ago

Does anybody have ideas about how a small foreign investor could borrow money in yen? I've got a mortgage too, and it is denominated in the too-strong-for-our-good Euro :)

dgregd 13y ago
Banksters will not let small investors to make money in this financial fuss. Credit interest rates for ordinary people are going to be much higher than the expected inflation.
rfugger 13y ago
Get a forex margin account and buy EUR against the Yen?
- danmaz74 13y ago
  Thanks for the suggestion. Someday I could really try :)

elchief 13y ago

Did Maudlin correctly predict the housing bubble and collapse? Otherwise, his opinion is worth nothing.

rsheridan6 13y ago
This is sort of off-topic, but it would be nice if there was a convenient way to know if a pundit is a complete buffoon - like a score based on how many correct or incorrect predictions he's made. Points off for saying Iraq would be a cakewalk and had nuclear weapons, and that houses in Las Vegas were a good investment in 2005. You could save a few minutes of your life and a few neurons by skipping articles by people who make those kinds of predictions. I have no idea who Mauldin is, or whether he can be expected to give a balanced view of an issue I don't know much about.
- bjterry 13y ago
  PunditTracker is a pretty cool site that is trying to solve this problem: http://www.pundittracker.com/ http://www.pundittracker.com/

skybrian 13y ago

This doesn't make sense. Not enough workers but demand for their work output goes down? They can't both be problems.

VLM 13y ago
Purchasing power is vaguely bell curve ish centered on middle age. Old people don't buy much other than medical and food. Lets say you lead the world in automobile production, then 20% of your population get too old/poor to buy cars anymore. Whoops. I'm not on the side of doom and gloomers WRT Japan because they're basically the USA in 1970 without a 3rd world nation to the south (no Australia jokes please...). Every year for the median USA worker has been worse, etc, but its not that bad, the rich keep getting richer, its just not the end of the world. As a thought experiment, reread the whole article substituting in the USA in roughly the early 70s for Japan. The USA has a lower number of employed people every year, lower fraction of population with jobs, increased fraction of old people, reduced economic outcome for all but the top one percent, blah blah. Only difference is we've been doing it longer, and we have illegals to boost the population and govt expenses.
rfugger 13y ago
The workers, as a group, are the main consumers of their own output.
- skybrian 13y ago
  A lower ratio of workers to seniors is supposed to be a problem because the workers need to produce stuff both for themselves and for non-workers. It's an argument that there will be too much demand, not enough supply. If you then say that consumers aren't buying enough and there isn't enough demand, then that could also be a problem (recession). But too much consumption and not enough consumption can't both be problems at the same time.
  - snogglethorpe 13y ago
    > But too much consumption and not enough consumption can't both be problems at the same time. What if the the problem is that the demand is for things that Japanese companies have a hard time producing? E.g., oil/energy (which of course actually is a big problem in Japan), iphones, etc...

digitalengineer 13y ago

TL;DR: shorting the Japanese government is the trade of the decade. (According to the author). "Will I succeed? Time will tell, but I am joined by Japanese public pension funds that have announced they will reduce their holdings of local bonds while increasing their share of both domestic and, in particular, foreign equities. No time frame was provided in the data I saw, although indications are that they have already started." Of course- als always- timing is everything.

Roboprog 13y ago

I miss being able to buy high quality electronics from Japan that would last 20 years, instead of crap from China. I recently got a stereo for my home office in the garage. I went to a local thrift store to get an older receiver made in Japan, instead of China. It (still) works great. Japan as a country needs to run a consumer oriented advertising campaign: "Buy stuff from us instead of China, it will last 10 times as long!" They also need to find a way to make their stuff available again in US (and other) commercial outlets.

olalonde 13y ago
> instead of crap from China Did you know that iPhones, Xboxes, ThinkPads (the only laptop certified for use on the International Space Station) and loads of other quality electronics are made in China? I wouldn't say "made in China" automatically implies it's crap.
- ww520 13y ago
  Selective bias. People got what they paid for. They paid little for the cheap stuff and complained about the poor quality.
  - Roboprog 13y ago
    I'm writing this on a MacBook, but who knows how long it will last. Maybe it's a high quality device, and maybe I'm not supposed to care if it starts flaking out after 2 or 3 years. I like the software, and the exterior construction is nice. Stuff made in China might be half price from what things used to be, but it's hard to find any alternatives now.
activepeanut 13y ago
Isn't it better for their economy if the things they make is just a /little/ better than the stuff made in China? (Think "planned obsolescence".)
- Androsynth 13y ago

drblast 13y ago

Given a massive amount of debt and a problem with deflation, isn't Japan in an ideal position for an aggressive negative income tax? Imagine inflating by printing money and distributing equally among all citizens. Domestic price increases would be offset by the extra cash and the real debt would decrease accordingly. Why would that not work?

anentropic 13y ago
It probably would, however it sets a terrible example and must never be allowed to happen anywhere at any cost "distributing equally among all citizens." good grief, what a dangerous idea!
rm999 13y ago
Many economists agree with you and believe Japan has mismanaged its monetary policy for a long time. In fact, the West's aggressive reaction to the Great Recession of 2008 was largely a lesson learned from what Japan didn't do. From an essay by Paul Krugman (I think from the late 90s): >So why doesn't the Bank of Japan just go out and print lots of money? The best theory I have heard is that the bureaucrats at the Bank of Japan and the Ministry of Finance are still mesmerized by the memory of the "bubble economy" - the wild speculation of the late 1980s, which pushed the prices of stocks and real estate to crazy levels (remember when the grounds of the Imperial Palace were supposedly worth more than the whole State of California?). They believe that loose monetary policy created that bubble - which may be true - and that the bursting of the bubble caused the slump of the 1990s - which may also be true. And so they are afraid to increase the money supply now for fear of repeating the experience. http://web.mit.edu/krugman/www/nikkei.html http://web.mit.edu/krugman/www/nikkei.html Japan did some quantitative easing in the 2000s, but as I understand it it was too little too late.

msluyter 13y ago

So, any time an article like this comes along, I think something like "interesting, I guess I should go out and short the Yen... but wait, if everyone is already shorting the Yen, won't that already be baked into the price?" s/Yen/Gold/g or whatnot. I've sometimes thought that I should just bet against all seemingly persuasive investment articles like this one on the principle that the market will essentially over-indulge in said advice and have to correct in the opposite direction. (Would be interesting to test that theory with historical data.) Case in point: I bought a few silver ETF shares a while ago on the theory stated (by lots of people like SeekingAlpha and the like) that quantitative easing will cause inflation and people will rush to precious metals. (Well, that and I probably have a thing for silver/gold.) Since then, it's dropped over a third. Now I'm a little more cautious about betting on macro-economic trends...

VLM 13y ago
"Case in point: I bought a few silver ETF shares a while ago" My dollar cost averaging long term for silver is about $5 per oz and for gold is about $550 per oz... You select your profit when you select your purchase price. Real estate is kinda like that too.
yajoe 13y ago
Love the idea. The rub is figuring out which article will influence people (100s are written every day at Seeking Alpha for many views of the same issue) -- if you can predict influence then I think you've found a nice little money machine :)
- deleted 13y ago
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newobj 13y ago

So practically speaking, how would a normal person go about trying to capitalize on this analysis?

rfugger 13y ago
Currency trading.

krakensden 13y ago

The question, 'can a great nation fail to inflate its own currency?', seems a little silly. I'm reminded a little bit of Brad DeLong's 'widowmaker': http://delong.typepad.com/sdj/2013/05/the-washington-super-whale-hedge-fundies-the-federal-reserve-and-bernanke-hatred.html http://delong.typepad.com/sdj/2013/05/the-washington-super-w...

math 13y ago

excellent commentary on situation in Japan by (very successful) hedge fund manager Kyle Bass: http://www.youtube.com/watch?v=ZY6IEpKRA7Y http://www.youtube.com/watch?v=ZY6IEpKRA7Y

slacka 13y ago

>Go ahead and buy stocks, says John Mauldin--if you've got a 10-year time horizon. If you don't, don't. Because it's just another sucker's rally. -John Mauldin March 2009 John Mauldin seems to have a spotty track record. He correctly called the summer 2008 rally as a bull trap.[1] However, he failed to call the 2009 low, and has been calling a top for the past few years.[2][3] Eventually I'm sure he'll get it right, and there will be another market crash. But if you listened to him in 2009 [3], you would have missed out on a 250% increase in your portfolio over the past 4 years. Based on 4 year boom/bust business cycle, I actually think the market is overdue for a serious correction to 1200-1400 S&P in the next year, but I don't see any doomsday scenario playing out in the next 5 years. [1]http://www.businessinsider.com/prepare-now-there-is-so-much-that-could-push-us-into-another-2008-crisis-2011-9 http://www.businessinsider.com/prepare-now-there-is-so-much-... [2]http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/06/16/the-road-to-revulsion.aspx http://www.investorsinsight.com/blogs/john_mauldins_outside_... [3]http://www.businessinsider.com/henry-blodget-just-a-suckers-rally-says-john-mauldin-2009-3 http://www.businessinsider.com/henry-blodget-just-a-suckers-...

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lnanek2 13y ago

If anyone can make more with less workers, it's Japan. Bring on the robots!