The True Story of Japan
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Author Topic: The True Story of Japan  (Read 1984 times)
Beet
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« on: January 06, 2012, 03:59:28 PM »

"...Japan’s average life expectancy at birth grew by 3.1 years — to 83 years from 78.8 years — between 1989 and 2009. This means the Japanese now typically live 4.8 years longer than Americans...In a recent survey by Akamai Technologies, of the 50 cities in the world with the fastest Internet service, 38 were in Japan, compared to only 3 in the United States...Measured from the end of 1989, the yen has risen 87 percent against the U.S. dollar and 94 percent against the British pound. It has even risen against that traditional icon of monetary rectitude, the Swiss franc...The unemployment rate is 4.2 percent, about half of that in the United States...81 high-rise buildings taller than 500 feet have been constructed in Tokyo since the “lost decades” began. That compares with 64 in New York, 48 in Chicago, and seven in Los Angeles...Japan’s current account surplus — the widest measure of its trade — totaled $196 billion in 2010, up more than threefold since 1989. By comparison, America’s current account deficit ballooned to $471 billion from $99 billion in that time
...
Why, then, is Japan seen as a loser? On the official gross domestic product numbers, the United States has ostensibly outperformed Japan for many years. But even taking America’s official numbers at face value, the difference has been far narrower than people realize. Adjusted to a per-capita basis (which is the proper way to do this) and measured since 1989, America’s G.D.P. grew by an average of just 1.4 percent a year. Japan’s figure meanwhile was even more anemic — just 1.0 percent — implying that it underperformed the United States by 0.4 percent a year. A look at the underlying accounting, however, suggests that far from underperforming, Japan may have outperformed. For a start, in a little noticed change, United States statisticians in the 1980s embarked on an increasingly aggressive use of the so-called hedonic method of adjusting for inflation, an approach that in the view of many experts artificially boosts a nation’s apparent growth rate
...
“There’s a dramatic gap between what one reads in the United States and what one sees on the ground in Japan,” he said. “The Japanese are dressed better than Americans. They have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models. I have never seen so many spoiled pets. And the physical infrastructure of the country keeps improving and evolving.”
...
It never seems to occur to Western commentators that the Japanese both individually and collectively have chosen their demographic fate — and have good reasons for doing so....Japan’s motivation is clear: food security. With only about one-third as much arable land per capita as China, Japan has long been the world’s largest net food importer."...

Conclusion?

Japan should be held up as a model, not an admonition. If a nation can summon the will to pull together, it can turn even the most unpromising circumstances to advantage. Here Japan’s constant upgrading of its infrastructure is surely an inspiration. It is a strategy that often requires cooperation across a wide political front, but such cooperation has not been beyond the American political system in the past. The Hoover Dam, that iconic project of the Depression, required negotiations among seven states but somehow it was built — and it provided jobs for 16,000 people in the process. Nothing is stopping similar progress now — nothing, except political bickering."

http://www.nytimes.com/2012/01/08/opinion/sunday/the-true-story-of-japans-economic-success.html?_r=1&hp

Obviously a lot of the article is junk but it does provide some balance to the prevailing wisdom.
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Politico
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« Reply #1 on: January 06, 2012, 04:24:48 PM »
« Edited: January 06, 2012, 04:30:03 PM by Politico »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it when you consider their aging population?

Anybody who tells me their infrastructure is unbeatable needs to explain the near-meltdowns following the tsunami last year...
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TheDeadFlagBlues
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« Reply #2 on: January 06, 2012, 04:26:29 PM »

An interesting article that overlooks major societal flaws in Japanese society. The lack of marriage, extremely low birth rate, overwhelmed white collar workers and high volume of psychological disorders suggest a nation that is in decline. The prevalence of luxury items in Japan only underscores this. There is a worship of certain prestigious goods in Japan that trumps all other items: the level of materialistic worship there is troubling imo.

I'm sure Nathan could explain it better than I could.
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Beet
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« Reply #3 on: January 06, 2012, 04:42:14 PM »
« Edited: January 06, 2012, 04:49:57 PM by Beet »

An interesting article that overlooks major societal flaws in Japanese society.

Yes, that is one of the major omissions of the article.

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I'm not sure that lack of marriage by itself indicates a nation in decline. That strikes me as a bit too socially conservative. People can live happy lives, and societies can do well without ubiquitous marriage. The institution of marriage is gently declining across the developed world, largely by choice. To me, the idea that people are not forced into this institution by societal pressure is a positive thing.

The extremely low birth rate is problematic for obvious reasons, but here too, I would say it is not all bad if it is a matter of choice (unlike, say in China). One does not need children to be happy, and if people choose to have fewer children, I don't see why that is inherently bad. It does create problems with economic support later on, but that's a secondary effect. In the very long run however, low birth rates are not only an economic positive but an economic necessity, as the world's population must stabilize if people are to live well on earth on a sustainable manner. Already we have far too many people than could live on the average American lifestyle and not bleed the world dry of resources.

At worst, the low birth and marriage rates are secondary effects to cultural or economic factors (such as psychological disorders you mention), or economic insecurity that prevents household formation for some people who genuinely do want marriage and children but either cannot afford to. Perhaps they are prevented from doing so due to sexist expectations (such as, that a woman will give up her career if she has children) or are prevented from doing so due to psychological depression or withdrawal. These things are the root of the problems at hand here.

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Part of me says yes, but part of me also says that it's a choice and there's nothing inherently wrong with it, so long as these luxuries can be afforded. To me, the relatively high attachment to brand luxury goods in Japan, and also to some extent across East Asia, is a side effect of a relatively hierarchical and group-centered cultural norm (here is where I get accused of 'essentialism'). The brands, help identify both a person's place in the hierarchy and a person's place in a group of similar identifiers.  
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« Reply #4 on: January 06, 2012, 11:05:43 PM »

An interesting article that overlooks major societal flaws in Japanese society. The lack of marriage, extremely low birth rate, overwhelmed white collar workers and high volume of psychological disorders suggest a nation that is in decline. The prevalence of luxury items in Japan only underscores this. There is a worship of certain prestigious goods in Japan that trumps all other items: the level of materialistic worship there is troubling imo.

I'm sure Nathan could explain it better than I could.
Bah. The same is true of Sweden... low birthrates, low marriage rates and high rates of mental illness are part of the trade off all over performing ethnic groups face. Just look at the mental illness rate among Jews... if anything the pattern to be seen is that high rates of mental illness within an ethnic group or country are a positive indicator.
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Nathan
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« Reply #5 on: January 07, 2012, 01:22:53 AM »

An interesting article that overlooks major societal flaws in Japanese society. The lack of marriage, extremely low birth rate, overwhelmed white collar workers and high volume of psychological disorders suggest a nation that is in decline. The prevalence of luxury items in Japan only underscores this. There is a worship of certain prestigious goods in Japan that trumps all other items: the level of materialistic worship there is troubling imo.

I'm sure Nathan could explain it better than I could.
Bah. The same is true of Sweden... low birthrates, low marriage rates and high rates of mental illness are part of the trade off all over performing ethnic groups face. Just look at the mental illness rate among Jews... if anything the pattern to be seen is that high rates of mental illness within an ethnic group or country are a positive indicator.

The problem is that the way East Asian societies are constructed make these things much, much, much harder to deal with. Japan isn't a Confucian society in the same way that China and Korea are but it still has Confucian influence and an incredible amount of pressure to build relatively standardized family structures. What those family structures are exactly has changed from idealization of extended lineages (家 ie, literally 'house') to 'nuclear families', at least in urban areas, in the same way that it did in the West (indeed, it changed in Japan because it changed in the West). This means that everybody in Japan knows and feels particularly keenly that the low birth and marriage rates are a problem. The issue is that because Japan's economic culture is constructed in such a way as to foster outright obsession with one's job as a positive trait (which the economic culture doesn't seem to realize is mutually detrimental with the emphasis on family) most people who are in the standard, corporate Japanese economy perceive it as somebody else's problem. Add to this the fact that even though more and more women are working outside the home childcare services are basically nonexistent, there's a powerful rampaging social meme (partly caused by some of the more questionable aspects of the Victorian bourgeois classes as imported during the Meiji period and after) that expressing religious beliefs of any kind is 'gauche' and 'uncool' even though in terms of actual observation and practice Japan is still one of the most overwhelmingly religious countries on Earth, the fact that half of the people live on five per cent of the land and ninety-eight per cent of the people live on about a third of the land (and this is a land about the size of California but with four times the population), and the fact that the Pacific War is still a huge national trauma even with most of the people who can remember living through it in their last decade or so of life if not already dead, and you get a country where between one and two per cent of the population is or is on the verge of becoming 引き籠もり (hikkikomori, defined as 'people who refuse to leave their house, and isolate themselves from society in their homes for a period exceeding six months....in the most extreme cases....remain[ing] in isolation for years or even decades'), between ten and twenty per cent suffer from a culturally-specific psychosis that's a lot like social anxiety disorder but much much worse and incredibly self-recriminating, and there have been seven Prime Ministers in the past six years.

Japan is certainly not in 'terminal decline' as a civilization but its present culture, particularly in terms of its relationship with the rest of the world, is completely unsustainable and the smarter people in Japan realize that. There's an entire culture of people who are voluntarily living as if they were under austerity or even wartime measures despite the fact that they're manifestly not, a huge part of the serious cultural output (like Miyazaki Hayao anime, for example) is whimsical about the fact that rural Japan, which has gone through rougher sh**t than this by a mile, has more resources to withstand the overall unsustainability and keep its current standard of living more or less intact but because of cultural pressures and corporate employment patterns young people are still moving into the cities, one of the most popular novelists' magnum opus is about a group of night-shift bento factory workers cutting up mob hits in their spare time (with Buddhist subtext!), and in general there's a sense of at least some kind of inevitable crash that will seem apocalyptic for a while but in the long run be something in fact more or less along the same lines as the Genpei Wars or the Sengoku period. Not the sort of thing you'd want to live through twice, but in some ways more of a purifying than a destructive fire.
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anvi
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« Reply #6 on: January 07, 2012, 09:57:23 AM »
« Edited: January 07, 2012, 12:20:11 PM by anvi »

I don't see Japan as being in decline, though it is, like almost everywhere else, a mixed bag that goes through dramatic ups and downs and social reversals in changing circumstances.

Japan's debt burden is a genuine problem.  Its buildup was complicated by its faltering approach to dealing with its own financial crises in the '90's, but its economy was starting to recover until first the American slowdown, then the financial collapse, and then the tsunami, nuclear meltdown and their aftereffects provided over time a devastating 1-2-3 punch to the society.  But its marriage situation is a mixed back.  While around 15% of Japanese women never marry, the divorce rate for first marriages, though higher in recent years, is still only around 25%, far less than in the U.S.  Many of these divorces and the phenomenon of permanently single women are actually a result of expanded economic and educational opportunities for women and the oppressive circumstances that traditional roles of marriage imposed upon women.  True, there are luxury item fetishes in Japan, but also fairly large numbers of people who don't entertain such fetishes.  The rate of disposable income savings of individual Japanese is, even with such fetishes and with often dramatically higher real estate prices, markedly higher than that among individuals in the U.S., so widely addicted to credit and the individual debt it results in.   The U.S. has too many of its own problems with commodity fetishism to be throwing stones at another society where young women buy a few too many expensive purses.  The social disorders that Nathan speaks of are certainly real, and there remain, in my own experience, very serious communication problems between both individuals and generations in Japanese society.  But, whereas Japanese talk with one another too little in the attempt to solve problems, I think Americans (including myself) blather too much and make them worse in the opposite way.

Japan has some serious challenges facing it in the coming decades, but it also has powerful things going for it, including levels of resilience, productivity and large cross-sections of genuinely talented people that will help it marshal through in the long run.

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Nathan
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« Reply #7 on: January 07, 2012, 02:52:51 PM »

I agree entirely, anvi. I was talking about some of the negative features of contemporary Japan, which are there and which are serious, but I do believe in Japan as a country and a culture and its resilience. If I didn't I wouldn't be majoring in it!
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minionofmidas
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« Reply #8 on: January 07, 2012, 03:14:47 PM »

For a start, in a little noticed change, United States statisticians in the 1980s embarked on an increasingly aggressive use of the so-called hedonic method of adjusting for inflation, an approach that in the view of many experts artificially boosts a nation’s apparent growth rate
Yes. GDP figures had issues before, but they have been wose than useless as an indicator of prosperity ever since.
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opebo
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« Reply #9 on: January 07, 2012, 03:29:05 PM »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico. 
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Miamiu1027
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« Reply #10 on: January 07, 2012, 05:49:47 PM »

EMD, psychological disorders are a fact of modern life.  the application of Adorno's negative dialectic, ie. as civilization 'progresses' technologically, alienation increases, leading to a stunted and deformed humanity.
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Politico
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« Reply #11 on: January 07, 2012, 07:05:14 PM »
« Edited: January 07, 2012, 07:06:48 PM by Politico »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico.  

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?
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Nathan
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« Reply #12 on: January 07, 2012, 07:46:51 PM »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico.  

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Moderate inflation would solve at least some of Japan's short-to-medium-term economic problems, actually.
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LastVoter
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« Reply #13 on: January 08, 2012, 12:01:57 AM »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it when you consider their aging population?

Anybody who tells me their infrastructure is unbeatable needs to explain the near-meltdowns following the tsunami last year...
who cares, when there is something called a default(Taken straight out of the Tea party playbook)
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Politico
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« Reply #14 on: January 08, 2012, 12:11:03 AM »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico.  

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Moderate inflation would solve at least some of Japan's short-to-medium-term economic problems, actually.

Higher than 3% inflation is never productive. Inflation beyond that level simply creates inefficiencies in the short-run by distorting the rationing and allocative functions of prices.
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Nathan
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« Reply #15 on: January 08, 2012, 12:53:06 AM »
« Edited: January 08, 2012, 12:54:54 AM by Nathan »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico. 

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Moderate inflation would solve at least some of Japan's short-to-medium-term economic problems, actually.

Higher than 3% inflation is never productive. Inflation beyond that level simply creates inefficiencies in the short-run by distorting the rationing and allocative functions of prices.

There are other problems with the Japanese economy that are a lot worse than distorted price signals would be, and other factors in Japanese society that can serve rationing and allocative functions if prices are confused. The mindset about economics and markets in countries in that part of the world really isn't the same as it is in North America, any more than the mindset in North America is the same as that in Europe.
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opebo
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« Reply #16 on: January 08, 2012, 10:51:29 AM »

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Zimbabwe's crisis was caused by a lack of 'hard currency', Politico, which lack was in itself caused by destruction of a certain export-sector.  The second hardest currency in the world after the dollar is the Japanese Yen, and they can't have a shortage of it - they can create as much as they like.
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Politico
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« Reply #17 on: January 08, 2012, 04:49:04 PM »

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Zimbabwe's crisis was caused by a lack of 'hard currency', Politico, which lack was in itself caused by destruction of a certain export-sector.  The second hardest currency in the world after the dollar is the Japanese Yen, and they can't have a shortage of it - they can create as much as they like.

No, Zimbabwe's crisis was essentially caused by conducting the monetary policy you espouse on this forum.
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Wonkish1
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« Reply #18 on: January 14, 2012, 12:57:43 PM »

What is their debt-to-GDP ratio again? 250% yet? 300% soon? And how are they ever going to repay it...

'debt-to-GDP ratio' never matters when it is in your own currency, Polico.  

Oh yes. I forgot that in opebo's world you can simply erase debt with the stroke of a button without creating inflation. Did Zimbabwe appreciate your consultation?

Moderate inflation would solve at least some of Japan's short-to-medium-term economic problems, actually.

No it wouldn't, actually. 200 basis pt increase in their debt service and they are bankrupt(i.e. their debt service outstrips all of their government revenue). The reason why Japan has gone through numerous finance ministers in the last few years is because they are caught between a rock and a hard place. Their is no way out except print it all away and take their populations wealth by purchasing power or by default(in which case ~90% of JGBs are owned by the Japanese people which is the single largest store of wealth in Japan by a huge margin--so your talking about huge loss of wealth to the Japanese people).

Oh and you can't do a little bit of either one and hope it gets better. A tiny default(haircut) skyrockets the cost of borrowing facilitating more defaults. A little printing changes their economy from a deflationary to inflationary economy causing that to be priced into their JGB rates and also higher cost of capital.

So quite literally they are f***ed!
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Wonkish1
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« Reply #19 on: January 14, 2012, 01:05:26 PM »

And Beet this thread is going to seem remarkably and ironically dumb in the next year or 2(if by some feet of luck they manage to keep things at bay that long), no offense.

I've seen these per capita GDP analysis's years ago on Japan. While technically accurate lets not forget that their entire economy rests on practically one asset class the JGB which today is essentially worthless and all that waits is for the market to assess it as such. Like a set of Bernie Madoff clients just before finding out what the real value of their investments are.

Its Japan that awaits the real human tragedy. Greece, Portugal, Spain, Italy, etc. don't hold a candle. They will make out amazingly well in comparison to the Japanese.

So I would probably refrain from the "how good the Japanese have got it" posts unless you want to eat a lot of foot.
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Politico
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« Reply #20 on: January 14, 2012, 03:19:51 PM »

I've seen these per capita GDP analysis's years ago on Japan. While technically accurate lets not forget that their entire economy rests on practically one asset class the JGB which today is essentially worthless and all that waits is for the market to assess it as such.

Yeah, I have wondered for a couple of years why the market has not accepted this yet. Denial can only last so long until reality sets in.

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This I am not so sure about. Italy, in particular, may be in a world of trouble. Funny enough, Italy's saving grace may be their expansive underground economy. I've always admired their distrust of government, at least by European standards.
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Wonkish1
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« Reply #21 on: January 14, 2012, 03:52:12 PM »
« Edited: January 14, 2012, 04:16:23 PM by Wonkish1 »

I've seen these per capita GDP analysis's years ago on Japan. While technically accurate lets not forget that their entire economy rests on practically one asset class the JGB which today is essentially worthless and all that waits is for the market to assess it as such.

Yeah, I have wondered for a couple of years why the market has not accepted this yet. Denial can only last so long until reality sets in.

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This I am not so sure about. Italy, in particular, may be in a world of trouble. Funny enough, Italy's saving grace may be their expansive underground economy. I've always admired their distrust of government, at least by European standards.

The answer is quite simple and rather quite unique to Japan. Approximately ~90% of JGBs are owned by the Japanese themselves. Their banks, their pension funds, and Japanese citizens. Starting back many years back the Japanese government went on what you would call a PR campaign to convince the Japanese people to buy JGBs because the rest of the world was increasingly less interested in them. In Japanese culture directions from their government are a lot more, umm, important than most of the world. Plus the Japanese had just gotten destroyed in the Japanese stock and property crash so they were interested. Also(and I'm I have some friends that deal with this on a regular basis so I now how bad this is) Japan is extremely strict on money leaving the country so most markets in the rest of the world are very challenging for the Japanese to invest in so there isn't many options.

So you combine this altogether and as long as the Japanese population continued to rollover their governments debt and buy up the new issuance then the Japanese government could continue to self finance at way low interest rates. Furthermore, as long as the trade surplus that manifested itself into savings at the banks and pension funds(and was invested in JGBs) was larger than the annual deficit than their would be enough money to buy the new issuance each year.

So you have right there the true makings of a real ponzi scheme. You have unwitting investors courtesy of the Japanese PR campaign. You have enough new money coming into fund the growth of the ponzi scheme. And you didn't have net sales(redemptions) to cause it to blow up.

Well that all changed in the last couple years For one the highly xenophobic aging Japanese population featured for the first time more people exiting the scheme than entering(people retiring). When people retire their their pension funds and banks need to sell their JGBs to produce income to the retirees making the Japanese economy net sellers not net buyers. Also around that time the size of the debt got large enough that the trade surplus that shows up isn't enough to handle the entire deficit. So if I were to graph this both of these lines have crossed in the last couple of years and now are progressively getting worse. Its like Bernie Madoff's clients slowly starting to pull money out leaving the remaining balance smaller and smaller.

As the Japanese are forced to sell more internationally they will be increasingly at risk of a spike interest rates. Either A) because its just so large and that next margninal investor may just say, "Hey for 200%+ dept to GDP I'm going to want a little more than a couple hundred basis pts" or B) A hard default in Europe causes investors to be spooked around the world about buying government bonds from heavily indebted nations. So that is where they sit.


Sorry for the book.




And in regards to Italy vs. Japan not even close in my mind. Japan's *on balance sheet* debt is the better part of near double Italy's, but the real issue is that Japan's debt is about 90% internally owned and is the principal asset everybody relies on in Japan. Italy has a lot of its debt internationally owned. So if each country stiff's their creditors the Italian people lose a lot of wealth and the Japanese lose the vast majority of their wealth. The math says the Japanese are going to get it far, far, far worse than anybody in Europe. To put it in human terms. When this comes to a head the pictures of average Greeks and Italians will have the faces of those that watched their house burn down, but they have the optimism to build and start again. The pictures of the faces of the average Japanese will look just like after WWII where behind their calm conservative demeanor is a look of utter despair(the look of people in the US during the Great Depression would likely be an improvement for the Japanese when you compare it to what they're heading into) and the scary part is they don't even see it coming.

So when I say real human tragedy, I'm not talking about no more Lexus's and BMWs. I'm actually quite serious. I'm talking about multiple families living in an apartment. I'm talking about 80 year olds returning to work because otherwise the retirement they thought they had might not even be able afford food for the rest of their lives. I'm talking about people taking the furniture out of their homes to trade or sell for the equivalent of a weeks worth of meals. So yes *real* human tragedy not the oh woe is me I can't take my annual vacation this year or go out to dinner a couple times a week.
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opebo
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« Reply #22 on: January 14, 2012, 04:05:24 PM »

Zimbabwe's crisis was caused by a lack of 'hard currency', Politico, which lack was in itself caused by destruction of a certain export-sector.  The second hardest currency in the world after the dollar is the Japanese Yen, and they can't have a shortage of it - they can create as much as they like.

No, Zimbabwe's crisis was essentially caused by conducting the monetary policy you espouse on this forum.

No, not at all.
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Beet
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« Reply #23 on: January 20, 2012, 12:08:23 PM »

I'm coming around to the Wonkish view on this... I don't have access to the inside and professional information he does, but just looking at some pure headline numbers. The Japanese debt is increasingly composed of government JGB as that is the sector of their economy that by far leverages up the most.

While the financial crisis of 2008 stopped the crazy mad leveraging in the US and Western Europe, JGB leveraging has just continued and even accelerated as Japan has run a larger government budget deficit to make up for the 2009 recession, and the Tsunami recession. During the 1990's and 2000's it appears that some of this was counter-balanced by deleveraging in the Japanese private and corporate sectors, as described by Richard Koo in his book 'The Holy Grail of Macroeconomics'. However, in recent years it has reached a point where private sector deleveraging can no longer make up for JGB leveraging because JGB have taken up the lion's share of the total debt market.

Further, now you have that the trade surplus has essentially disappeared, part of which due to global recession, part of due to the Fukushima disaster necessitating a ramp-up of energy imports (although I'm not sure what share this pulls in Japan's total import), and part of due to the strong yen.

So Japan must fall back on its existing net creditor position within the world. You saw this happening at the Fukushima disaster. The yen spiked as there was a sudden repatriation of foreign assets to cope with the disaster. In other words, they may still have one more wind in their sails, which may last who knows how long. But like the cat with nine lives, eventually it will run out.

Wonkish, I know we tend to strongly disagree on this, but what do you think of the possibility of monetary easing and Japan 'inflating' their way out of the situation? It seems that this could happen either to forestall a crisis, or to reflate after a crisis, in a Keynesian style. Hyperinflation is not a concern in my mind because generally, that is the result of a lack of real resources (supply is crushed, as in Zimbabwe and Weimar Germany, the most notorious and extreme historical examples), or in the more likely variant of hyperinflation, as in Latin America (demand and spending exceeds productive capacity) or any country in the wake of a currency crisis, the result of large and sudden foriegn withdrawals of hot money. It does not seem to me that Japan faces these particular problems, and a significantly weaker yen may be just what it needs to regain competitiveness.

The larger problem in Japan has nothing to do with any of this though, it is a general malaise in their society, a sort of fatalistic acceptance of permanent decline, which is quite sad. From that perspective, a total collapse or 'cleansing' of society, WWII-style, might be a good thing.
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Wonkish1
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« Reply #24 on: January 20, 2012, 01:49:54 PM »
« Edited: January 20, 2012, 02:02:08 PM by Wonkish1 »

I'm coming around to the Wonkish view on this... I don't have access to the inside and professional information he does, but just looking at some pure headline numbers. The Japanese debt is increasingly composed of government JGB as that is the sector of their economy that by far leverages up the most.

While the financial crisis of 2008 stopped the crazy mad leveraging in the US and Western Europe, JGB leveraging has just continued and even accelerated as Japan has run a larger government budget deficit to make up for the 2009 recession, and the Tsunami recession. During the 1990's and 2000's it appears that some of this was counter-balanced by deleveraging in the Japanese private and corporate sectors, as described by Richard Koo in his book 'The Holy Grail of Macroeconomics'. However, in recent years it has reached a point where private sector deleveraging can no longer make up for JGB leveraging because JGB have taken up the lion's share of the total debt market.

Further, now you have that the trade surplus has essentially disappeared, part of which due to global recession, part of due to the Fukushima disaster necessitating a ramp-up of energy imports (although I'm not sure what share this pulls in Japan's total import), and part of due to the strong yen.

So Japan must fall back on its existing net creditor position within the world. You saw this happening at the Fukushima disaster. The yen spiked as there was a sudden repatriation of foreign assets to cope with the disaster. In other words, they may still have one more wind in their sails, which may last who knows how long. But like the cat with nine lives, eventually it will run out.

Wonkish, I know we tend to strongly disagree on this, but what do you think of the possibility of monetary easing and Japan 'inflating' their way out of the situation? It seems that this could happen either to forestall a crisis, or to reflate after a crisis, in a Keynesian style. Hyperinflation is not a concern in my mind because generally, that is the result of a lack of real resources (supply is crushed, as in Zimbabwe and Weimar Germany, the most notorious and extreme historical examples), or in the more likely variant of hyperinflation, as in Latin America (demand and spending exceeds productive capacity) or any country in the wake of a currency crisis, the result of large and sudden foriegn withdrawals of hot money. It does not seem to me that Japan faces these particular problems, and a significantly weaker yen may be just what it needs to regain competitiveness.

The larger problem in Japan has nothing to do with any of this though, it is a general malaise in their society, a sort of fatalistic acceptance of permanent decline, which is quite sad. From that perspective, a total collapse or 'cleansing' of society, WWII-style, might be a good thing.

First, I'll say that I wouldn't count on their being that much money outside of Japan to repatriate. In a normal economy, sure. Japan isn't normal though. Do you have any idea how hard it is for Japanese money to get out of their country? I've actually been involved in conversations about this topic for the last several weeks because a small client has a business that sells from the US to Japan and they need to get the money back here. Japan has approved lists for wire or ACH transfers. They have to be initiated at the bank in Japan in person while going through an inquisition of questions that sometimes takes hours(for every single transfer). They don't have checks so you can't mail them. They don't have money orders so you can't mail them. With the exception of things like paypall or a few other creative mechanisms the fact is that you can't get the money out. So with the exception of a handful of large Japanese companies that have given permission to move money freely I doubt there is as much money to repatriate nor the desire to repatriate(given the challenges to get it back out again) in Japan relative to average country.


In regards to your question, I must first establish that me and you see a little bit differently as to where inflation comes from. You can get into demand pull, cost push, real resources, etc. and any other idea that modern Keynesians try to use to justify the complete and utter failure and embarrassment the Philips Curve was(a failure so big that it came close to killing the school in its entirety and the reason why most Keynesians today now refer to themselves as "neo-Keynesians"). For us monetarists our rationale for inflation just makes so much more sense:

Lets say you have 1,000,000 widgets in an economy and you have a money supply of $1,000,000 at that given time. Simple math will tell you that those 1,000,000 widgets will have an average price around $1 a widget. I mean there is a reason why the economy is currently sitting at around $16 trillion and M3 currently is about $15 trillion(keep in mind that their additional near moneys that aren't computed into M3 and so its never an exact calculation). Now if you increase the money supply from $1,000,000 to $2,000,000 and the same number of widgets exist before and after that change then the price will eventually reflect that change and you will see prices at approximately $2 a widget($2,000,000/1,000,000=$2). Now I completely will admit that is definitely an oversimplified explanation because the money supply is affected by fractional reserve banking, to some extent shadow banking, the velocity of money is a key in determining the above, that you can technically export some of your inflation when another country is trying to peg on your, and that temporarily prices can be sticky or spike, but in general over time prices have to approach the fundamentals in the money supply just like a stock price has to eventually reflect the fundamentals of its earnings and balance sheet. Now you can disagree with this if you want, but I would be surprised if you disagreed with the next paragraph.

The principal issue with the question of Japan trying to inflate through monetization is that once they start doing at all in earnest they can't just do it a little bit. Capital markets wont allow it with their current situation they have to print almost all of it. So allow me to play this out for you:
1) Japan's cost of capital rises 50 basis pts and Japan is now worried that if they don't do something the cost of capital could rise another 150 and their debt service will outstrip their revenues forcing a default. So here we have Japanese officials going into crisis mode here and lets say they are going to monetize a chunk of debt to try to keep things under control.
2) So keep in mind they are about 220% of gdp in debt so if they actually want to come close to actually even putting a dent into their debt service they are going to monetize a pretty large chunk. So from a debt service perspective monetizing 20% of gdp in debt probably wont even make up for the 50 basis point move that just happened. Its also only 1/11th of their total debt. But from a money supply perspective printing 20% of your GDP is huge. Its at least going to end their deflationary state overnight. So here lets say they do it and print 20% and lower their debt service a bit.
3) I can guarantee you a quick printing of 20% of your GDP is going to cause foreign exchange losses immediately for foreign any foreign owners and discourage any foreign buyers. That happens day 1. That alone should result in another 50 basis pt rise in their cost of capital making this entire amount of printing meaningless to their debt service. The inflationary affect will be pretty quick. If it only erased the deflation and created 1% inflation(I mean just that little) their cost of capital has to rise because of that as well. Because their whole GJB market rests on deflation to have long term interest rates at only 2%. You eliminate the deflation and market participants aren't accepting below normal interest rates so they'll spike Japan's cost of capital on that as well.
4) So they see this and go owe $hit we need to monetize another 40%. This announcement causes an even bigger firestorm than the first and JGB prices just start crashing and the implied yields just start reaching out of control. So here is guaranteed where you have to end up relatively quickly if you are Japan trying to monetize....
5) Where your going to end up is the amount of monetization necessary to produce budgetary surplus because of lowering of the debt burden because they will not be able issue new debt without extremely punitive interest rates. So their current average cost of capital is lets say 2%. At that percentage they probably can monetize 180% of gdp of debt and produce a large enough surplus(plus maybe some help from the IMF if it still exists) to be able to retire the remaining debt without being able to roll it. Now if you think a 180% increase in the broad money supply(that hasn't even been relevered yet through their banking system which it will eventually) isn't going to produce hyper inflation I think your living out of reality. It doesn't matter if you have all of the resources of the world you increase you print 180% of gdp of debt you'll have rampant inflation.

Now what you should discover out of that explanation is that I just explained to you Greece as well. You can't a little bit inflate your way out of a sovereign debt crisis and you can't a little bit default on your debt to get out of a sovereign debt crisis. Just think about what the implied yield on 10 year Greek bonds was when they announced the first "small" haircut. Markets may be a little bit less harsh to monetizing an equivalent amount of debt, but there is going to be a reaction. And that reaction is going to increase yields which will end up propagating further monetizations because the sovereign will not be able to keep on paying the yields that the market will demand.


So I think of course in Japan you are going to either have monetization and an attempt to inflate their way out *or* they are going to default. But in each case at least 80% of the debt will need to be covered. Either an 80%+ haircut in a hard restructuring or monetize at least 80% of the debt(not 80% of GDP, 80% of the debt which means at least 170% of GDP of debt). Mark my words there is no way that they could get away with monetizing 25% of their debt and that lasting long. No way! Its either almost all monetized or almost all defaulted there or potentially a combination of the two that adds up to almost all of the debt there is nothing that comes back less.
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