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Japan Falls into Recession

187 points by ssclafani 12y ago

efjhewjfnkew 12y ago
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.
- lkrubner 12y ago
  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.
  - pastProlog 12y ago
    > people can more easily take out a housing loan 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.
    - Animats 12y ago
      So now you have underpaid people creating a housing bubble in Tokyo and going into debt. Which happened in 1989. Japan never came back fully from that. See "https://en.wikipedia.org/wiki/Japanese_asset_price_bubble" https://en.wikipedia.org/wiki/Japanese_asset_price_bubble"
  - efjhewjfnkew 12y ago
    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.
    - logfromblammo 12y ago
      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.
      - tsotha 12y ago
        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.
      - deciplex 12y ago
  - rebootthesystem 12y ago
    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.
  - csa 12y ago
    > But quantitative easing lowers interests 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.
    - jpatokal 12y ago
      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.)
- ohyes 12y ago
  You ever notice how people telling you "how it is" with economics stuff give you vague analogies rather than statistics, because there isn't any evidence to any of it and everything is just theory mixed with opinion? That's kind of like trying to improve performance in a piece of software without taking any profiling data. Sure, you can find some coincidences that might prove your theory about what's wrong, you might even improve things if you are really lucky. But for the most part, you're just engaging in an essentially masturbatory activity.
- jusben1369 12y ago
  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.
  - kyledrake 12y ago
    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.
    - jtbigwoo 12y ago
      >> 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.
  - ekianjo 12y ago
    > 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.
mc32 12y ago
Quantitative easing, Yen depreciation... 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.
- gst 12y ago
  > What they need to do is figure out a way to grow the population locally or through large-scale immigration. That doesn't sound like a long-term solution. There'll be a limit to population growth at some point.
  - mc32 12y ago
    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.
  - sliverstorm 12y ago
    Well, their population looks about ready to take a nosedive, so it's not like they "just aren't growing fast enough".
    - mc32 12y ago
      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?
      - waps 12y ago
        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.
skwirl 12y ago
Here's an article that's not behind a paywall: http://www.bbc.com/news/business-30077122 http://www.bbc.com/news/business-30077122
rrggrr 12y ago
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.
- oska 12y ago
  > 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. [1] http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures http://en.wikipedia.org/wiki/List_of_countries_by_military_e...
  - rrggrr 12y ago
    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.
- lovemenot 12y ago
  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: - clear development model to proceed towards - external pressure creates (perceived) existential threat 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.
shard 12y ago
Non-paywall WSJ link through Google: https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CCcQFjAD&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fjapan-falls-into-recession-1416182404&ei=VVZpVMWmJoW6uATjj4G4Dw&usg=AFQjCNHuI4sPUXsYPK6eWe3jz6dSrgaW8Q&bvm=bv.79142246,d.c2E&cad=rja https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web...
- kristofferR 12y ago
  Yeah, this trick works for most paywalled articles out there. Googling the URL/title of the paywalled article will almost always give you access the full article (or at least a copy somewhere else).
  - gear54rus 12y ago
    What I don't really get is how people on this tech-savvy resource still submit links to sources which go against the very idea of free information. Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different?
    - 8ig8 12y ago
      > Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different? I honestly don't know, but I think in news, time is a factor. Use this post as a test: what non-paywall link would you submit?
      - gear54rus 12y ago
        Just above this comment tree, there's a link to BBC: http://www.bbc.com/news/business-30077122 http://www.bbc.com/news/business-30077122 Not sure how they differ since non-paywall wsj link does not work for me (still has paywall in 2 different browsers).
        12y ago
techtivist 12y ago
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.
- jvm 12y ago
  > the weakness of Yen means they are investing more and more abroad Shouldn't a weak yen make it cheaper to invest at home relative to abroad? What's the mechanism that causes the opposite effect?
  - tsotha 12y ago
    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.
- jim_greco 12y ago
  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.
dimitar 12y ago
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).
akg_67 12y ago
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.
- azernik 12y ago
  > 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.)
retrogradeorbit 12y ago
Paul Craig Roberts on Japan, America and QE. http://www.paulcraigroberts.org/2014/11/14/global-house-cards-paul-craig-roberts/ http://www.paulcraigroberts.org/2014/11/14/global-house-card...
j_lev 12y ago
21st century activism: refusing to spend money in defiance of the government.
econew99 12y ago
I don't understand following - Japan had QE measure in place thus increasing money supply. But then they also increased sales tax from 5% to 8%. Why take conflicting measures ? How increasing sales tax is going to make consumers and middle class spend more ? Have Japan's economists not considered it ?
- j_lev 12y ago
  "We need more women in the workforce to stimulate the economy!" "We need to encourage women to have more babies in order to avoid a population crisis!" Welcome to the government of contradictions.
- arandomafrican 12y ago
  It's the Politicians who have not considered it.
nichtich 12y ago
Before Abe, Japan is in a trap: 1. It has 200% debt-to GDP ratio 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.
- kenshiro_o 12y ago
  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?
zkhalique 12y ago
Why Japan, WHY!
leot 12y ago
Japan is a country with too many people saving too much money. So, one proposal: institute a small yearly wealth tax. Avoids a lot of the problems with inflation-based approaches, and doesn't penalize people nearly as much for having liquid assets.
- adventured 12y ago
  That's incorrect. Japan's savings rate has collapsed, and is in dire condition. Via the WSJ: http://i.imgur.com/vYsbHWg.jpg http://i.imgur.com/vYsbHWg.jpg 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.
  - nhaehnle 12y ago
    Interesting, thanks for sharing that graph. 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.
- nhaehnle 12y ago
  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.
DominikR 12y ago
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.

187 points by ssclafani 12y ago

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.

lkrubner 12y ago
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.
- pastProlog 12y ago
  > people can more easily take out a housing loan 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.
  - Animats 12y ago
    So now you have underpaid people creating a housing bubble in Tokyo and going into debt. Which happened in 1989. Japan never came back fully from that. See "https://en.wikipedia.org/wiki/Japanese_asset_price_bubble" https://en.wikipedia.org/wiki/Japanese_asset_price_bubble"
- efjhewjfnkew 12y ago
  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.
  - logfromblammo 12y ago
    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.
    - tsotha 12y ago
      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.
    - deciplex 12y ago
- rebootthesystem 12y ago
  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.
- csa 12y ago
  > But quantitative easing lowers interests 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.
  - jpatokal 12y ago
    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.)
ohyes 12y ago
You ever notice how people telling you "how it is" with economics stuff give you vague analogies rather than statistics, because there isn't any evidence to any of it and everything is just theory mixed with opinion? That's kind of like trying to improve performance in a piece of software without taking any profiling data. Sure, you can find some coincidences that might prove your theory about what's wrong, you might even improve things if you are really lucky. But for the most part, you're just engaging in an essentially masturbatory activity.
jusben1369 12y ago
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.
- kyledrake 12y ago
  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.
  - jtbigwoo 12y ago
    >> 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.
- ekianjo 12y ago
  > 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.

mc32 12y ago

Quantitative easing, Yen depreciation... 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.

gst 12y ago
> What they need to do is figure out a way to grow the population locally or through large-scale immigration. That doesn't sound like a long-term solution. There'll be a limit to population growth at some point.
- mc32 12y ago
  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.
- sliverstorm 12y ago
  Well, their population looks about ready to take a nosedive, so it's not like they "just aren't growing fast enough".
  - mc32 12y ago
    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?
    - waps 12y ago
      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.

skwirl 12y ago

Here's an article that's not behind a paywall: http://www.bbc.com/news/business-30077122 http://www.bbc.com/news/business-30077122

rrggrr 12y ago

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.

oska 12y ago
> 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. [1] http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures http://en.wikipedia.org/wiki/List_of_countries_by_military_e...
- rrggrr 12y ago
  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.
lovemenot 12y ago
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: - clear development model to proceed towards - external pressure creates (perceived) existential threat 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.

shard 12y ago

Non-paywall WSJ link through Google: https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CCcQFjAD&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fjapan-falls-into-recession-1416182404&ei=VVZpVMWmJoW6uATjj4G4Dw&usg=AFQjCNHuI4sPUXsYPK6eWe3jz6dSrgaW8Q&bvm=bv.79142246,d.c2E&cad=rja https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web...

kristofferR 12y ago
Yeah, this trick works for most paywalled articles out there. Googling the URL/title of the paywalled article will almost always give you access the full article (or at least a copy somewhere else).
- gear54rus 12y ago
  What I don't really get is how people on this tech-savvy resource still submit links to sources which go against the very idea of free information. Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different?
  - 8ig8 12y ago
    > Can't we just look this up somewhere else instead of encouraging this bullshit paywall behavior? Or is the quality of information that different? I honestly don't know, but I think in news, time is a factor. Use this post as a test: what non-paywall link would you submit?
    - gear54rus 12y ago
      Just above this comment tree, there's a link to BBC: http://www.bbc.com/news/business-30077122 http://www.bbc.com/news/business-30077122 Not sure how they differ since non-paywall wsj link does not work for me (still has paywall in 2 different browsers).
      - 12y ago

techtivist 12y ago

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.

jvm 12y ago
> the weakness of Yen means they are investing more and more abroad Shouldn't a weak yen make it cheaper to invest at home relative to abroad? What's the mechanism that causes the opposite effect?
- tsotha 12y ago
  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.
jim_greco 12y ago
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.

dimitar 12y ago

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).

akg_67 12y ago

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.

azernik 12y ago
> 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.)

retrogradeorbit 12y ago

Paul Craig Roberts on Japan, America and QE. http://www.paulcraigroberts.org/2014/11/14/global-house-cards-paul-craig-roberts/ http://www.paulcraigroberts.org/2014/11/14/global-house-card...

j_lev 12y ago

21st century activism: refusing to spend money in defiance of the government.

econew99 12y ago

I don't understand following - Japan had QE measure in place thus increasing money supply. But then they also increased sales tax from 5% to 8%. Why take conflicting measures ? How increasing sales tax is going to make consumers and middle class spend more ? Have Japan's economists not considered it ?

j_lev 12y ago
"We need more women in the workforce to stimulate the economy!" "We need to encourage women to have more babies in order to avoid a population crisis!" Welcome to the government of contradictions.
arandomafrican 12y ago
It's the Politicians who have not considered it.

nichtich 12y ago

Before Abe, Japan is in a trap: 1. It has 200% debt-to GDP ratio 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.

kenshiro_o 12y ago
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?

zkhalique 12y ago

Why Japan, WHY!

leot 12y ago

Japan is a country with too many people saving too much money. So, one proposal: institute a small yearly wealth tax. Avoids a lot of the problems with inflation-based approaches, and doesn't penalize people nearly as much for having liquid assets.

adventured 12y ago
That's incorrect. Japan's savings rate has collapsed, and is in dire condition. Via the WSJ: http://i.imgur.com/vYsbHWg.jpg http://i.imgur.com/vYsbHWg.jpg 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.
- nhaehnle 12y ago
  Interesting, thanks for sharing that graph. 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.
nhaehnle 12y ago
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.

DominikR 12y ago

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.