Dear Tenno Heika,
Japan is an amazing country. Having lived there for a few years I learned a little about people and their beliefs, the way they do things. Japanese are a smart and enterprising bunch of people. Japan has built a perfectly stable economy within an incredibly stable society that is healthy in all possible ways and could be used as a textbook example of how to do things right. It pains me to watch this great country being destroyed now. The last two years are playing out as a really bad disaster movie or a nightmare that is impossible to wake up from. I feel my heart tearing apart every time I read the news about more economic atrocities from Shinzo Abe and his minions.
Why do I say Japanese economy is perfect?
Japan has achieved through hard labor what many people in so many countries dream about: the economic stability coupled with development and progress. There are many ways to define the “good living” but we would be wise to look at how well people do that live in the country now. Let’s look at some figures and compare with the subjective perception of the situation in the country in recent years.
The country’s GDP (Gross Domestic Product) indicator has been growing steadily, outpacing such benchmark countries as U.S. and Germany. This means that the economy is doing as well or better than the rest of the world, at least in terms of what the economists say matters. Of course, that is not the whole story but a good first indication. You will notice later that Japan also has no inflation, so the growth of the economy is very real here. The Internet bubble and the financial crisis did take their toll but the economy keeps rebounding to growth and that is what matters.
Coming to Japan with visits it is easy to see construction sites everywhere, Tokyo or countryside. That is a good indicator of the healthy state of the economy, the construction booms when the economy is expanding. In Japan, the construction never stopped.
The balance of trade is quite interesting. Japan always had surplus in foreign trade but the recent events at Fukushima caused Japan to lose quite a bit of nuclear power and forced the country to buy a lot more of oil and gas abroad. Hopefully, that is a temporary condition and Japan will put all of its nuclear power stations back into running, so the trade balance will be back in black. Some say that the positive trade balance is not really all that good, the country accumulates foreign currency then. That’s nonsense. If a country accumulates too much foreign currency, it can simply buy gold or invest into business abroad, that’s not important. When the country sustains a deficit of trade over long periods of time – that’s a good indicator to wonder how they can afford it. Anyway, in case of Japan there isn’t really anything to worry about.
And looking around we do notice that we use a lot of Japanese made things, from cars to pencils. So it is no wonder that they have a positive trade balance.
The unemployment is low and has been low for a long time. We can see some raises to the unemployment rate but they can be easily attributed to particular global events: the burst of the dot-com bubble around the turn of the century and the financial crisis of 2008-2009. At those times the unemployment rate went to above 5% but it always comes back as it should in the healthy economy. The Japanese unemployment rate tends to go down to around 3-3.5% over time and that is a perfectly good natural unemployment rate (economists consider 4% a natural unemployment rate necessary for a healthy economy). So there is no problem with unemployment in Japan, not according to the data.
When we look at the real life situation, the picture is supported by observation. We do not see people standing around the stations asking for alms like in other places in the world. The few that don’t have proper jobs are well taken care of, apparently. So the subjective observations confirm the data and we can really say that everything is fine in this respect.
Now, for the fun. The thing that people most care about – the prices level evolution, represented by Consumer Price Index (CPI), calculated over a wide range of goods. The CPI has remained stable for more than a decade now. The prices do not increase or decrease. Is this not a dream situation for manufacturing? You just know what all the prices are and will be for the foreseeable future. This by itself has a hugely positive impact on the economy, providing a stable outlook for any business.
And visiting Japan, one may indeed notice that the prices largely remain the same. Oh, sure, a couple of things get more expensive, a couple of things become cheaper but overall you begin to depend on the stable prices. You don’t need to ask, even after a couple of years, how much the things you usually buy cost. It is simply amazing, it does not happen anywhere else in the world as far as I know.
Inflation rate is the big news maker in the economics publications. Inflation rate tends to zero in Japan. It has spikes around the big crisis times: the dot-com bubble and financial crisis again, but overall the inflation in Japan is non-existent provided there are no global events that shake the country somewhat. Now, I know what they told you on the TV news: the inflation is healthy, the inflation is needed, the deflation is bad. Guess what? All of that is simply wrong. You are conditioned with the rest of the world to think that inflation is good. In reality, whether the inflation is good or bad simply depends on what side you are. When we talk about a healthy economy like Japan, zero inflation is perfect. Again, it is a sign of complete predictability and expert management of the money supply that we will see just below.
For the visitor, the absence of inflation is rather manifested in the absence of change in prices as discussed above in the CPI. A visitor does not really experience inflation directly like a local business would.
The wages are also very stable, which is not bad with the stable prices. The holiday payments have tendency for getting smaller over time, decreasing the total yearly wages though. What’s interesting is that the New Year bonus used to be nearly twice as big as the summer bonus but they are becoming nearly equal now. Anyway, it seems that wages overall are declining slightly, but I am not sure whether this is telling us something or not. The base salary keeps stable, so perhaps the companies are getting clever over time with bonuses to keep money for themselves and pay less to the employees, which could be a good indication for raising taxes on company profits.
Now for the money supply, the M2, the amount of money in the economy. The interesting thing is that the money supply was increasing steadily reflecting the larger value of the economy. The money supply is voluntarily increased by the central bank of the country, of course. Seeing that the GDP has been growing steadily and the M2 was kept steadily going while the inflation is kept at zero, I would say the management of Japan’s central bank is doing its job. They expand the money volume to keep in pace with the economy but they do not cause either inflation or deflation. Good balance.
And since there is no inflation, the economy is really worth that much money. If the supply of money was larger than the economy was worth, the inflation would burn the excess. So the Japanese economy, again, is really growing steadily and is perfectly healthy and stable.
Then what seems to be the problem?
The problem is actually extremely simple. There are actually two problems. The first problem is called “interest rate”, it is not worth our time and is completely uninteresting except that it is the one that really causes all the atrocities. The second is called “government debt” and it is a real problem, although in this case it used as a cover-up for something entirely different.
First, the interest rate in Japan is basically zero. This is good if you are a manufacturer or a farmer. You can get money cheap, invest and return without going for a life-time slavery for interest payments. This is really bad if you are a bank. No, let’s rephrase it. It is really bad if you are a bank that only does financing and nothing else than financing. The problem is – the financial sector does not get any easy profits here.
Why did I say it is not worth our attention? Why the zero interest rate is not a problem for Japan? The banks in Japan usually do not exist by themselves. The banks are an integral part of a manufacturing and trading conglomerate with a supporting function. Banks do not earn money by themselves, they service the trade of the mother company. So, in Japan, the traditional bank does not depend on the inflation and interest rates to generate its profits, so the banks do not die out when the interest rates are zero.
That is, the Japanese banks do not die. Western financial companies depend on the interest rates and inflation to generate income. The Western banks are largely speculative institutions and they cannot survive in the Japanese economy. So this is the real reason behind what is happening now in Japan: the Western (American) banks are trying to destabilize the economy so that there is a high inflation and interest rate to play with, so that there is financial profit and speculation possibility. That is the whole point.
And the government debt is used to cover up that operation. Not that it is not a problem but the methods used to “recover” from a large amount of government debt are speculative and will weaken the economy instead of making it stronger. Now, the government debt is the only problem that anyone can really find in the Japanese economy.
So, the government debt amounts to more than twice the GDP of the country. On absolute terms this is bad. For any other country, it would be a disaster. For Japan, it is not really such a big problem after all. You see, the Japanese government debt is held almost entirely (no less than 95%) by Japanese, locally.
Japanese government debt is actually an investment by local people into the infrastructure of their own country. Japanese people are willing to support their own country by holding that investment. This is really an ideal situation for the country, there is no need to go to banks or other countries for help, Japan can count on its people for support. Again, this is not dangerous, it may only be dangerous if the population panicked and suddenly started to ask its money back. Even then, it would only be a long-term problem, which it is today anyway.
Now, the “Abenomics” is based on the idea that by increasing the inflation the government debt could be slowly consumed. There is much rhetoric about the stimulation of the economy but as we saw the Japanese economy does not require stimulation. It is all about government debt, the rest is just decoration. The problem is that debt is held by local people. Consuming that by inflation is cheating Japanese people out of their investment and making them poor. The end result will be that people will lose their trust in the government and will not be so willing to invest into the infrastructure of their country anymore. That means that the Japanese government will have to turn to foreign lenders for its debt.
This is important: the government will not be able to borrow internally and will have to borrow outside the country.
At the moment, Japan is a net provider of money in the world, its net international investment position is around 56% of GDP. What would happen if the local investors lost interest in holding government debt? The government debt would have to be held abroad, by other countries and banks in other countries. The conditions, provided the loss of confidence locally, are not going to be as favorable, that’s for sure. Moreover, foreign investment into the country would bring with it the instability and unpredictability, placing the country at the whim of its foreign overlords. I am exaggerating to make the point. At the moment, Japan is self-sufficient in terms of finance, its debt is held by itself and it is a net investor. Changing this favorable situation to its opposite is, at the very least, reckless.
Of course, if such a turnaround happened, it would be very favorable for the foreign banks. Even more so would be the inflation and a jump in interest rates that would follow. The banks would be able to finally make a profit purely on financial operations in Japan but at what cost to the economy? Currently, if we simplify, the only profitable investments are into production. If the situation changes, the money will go into financial operations that are, at the basis, speculative in nature. That would cause harm to the industry. At the same time, the inflation would eat into the wealth of people who would not be able to support the economy anymore.
The end result: financial and production crisis, exodus of the industry into other countries, impoverishment of Japan.
What’s the alternative?
As we saw, there is only one real problem in Japan: the government debt. It is not an urgent problem as long as the population is sufficiently wealthy to keep supporting the economy but it better be taken care of. All the rest of so-called “problems” are pure lunacy and panic mongering.
The government debt should be decreased without hurting the economy, that’s the task here. As we understand now, using inflation to consume the government debt is a really bad idea. So the debt will have to be paid out the traditional way, with money or ownership. Japan either finds a way to collect money from where it would not hurt the economy and pays back the debts or converts the debt into real ownership of the country’s infrastructure. Both are not without own problems but, done carefully, will lead the country into many years of prosperity.
Just to have a few ideas, some things could be taxed easily in the Japanese model. For example, the system does not support pure financial gain anyway. It would be logical to tax the financial gain out of existence, providing an additional disincentive to speculation. Another thing would be a much steeper personal income tax model that would tax the highest earners much more than now. Yes, they will complain, but now you get their money in the shape of borrowing and you could get the same money in the shape of tax. From the point of view of the country, the second is better. Or have a look at the corporate profits. The corporate profits are soaring, it would be a good time to use those to pay back some debt.
The important thing here is to not tax the people at large, who provide the basis of stability for the country and the government. From this point of view, that increase of sales tax was a really bad idea, you have to go back on that, it is hurting more than it helps. The blanket taxes are good in a recession but Japan is not in a recession, Japan is strongly growing. It is best to use some differentiating taxes in this environment and I am sure Japan can be rather inventive to get the money from where it would not hurt.
The danger that the government may be concerned with while discussing such measures is that it may cause deflation, increasing effectively the value of the government debt. I am sure, however, that the same people that kept the M2 in check with the growth of the economy can make sure there is enough money to prevent high levels of deflation. On the other hand, making people richer would extend their confidence and their lending power, keeping the government in control.
Japan is a tough country with a sturdy economy and can take a lot of beating. However, there is a limit to everything. Shinzo Abe and his minions will be pushing the limits until the economy gives up and goes belly up. So if this act goes on the government should be now preparing for the balancing act that U.S. and Europe have performed so well the last few decades. Instead of having stability, the country will be pushed into the inflation benefiting outsiders, devaluing the currency and impoverishing the country and its inhabitants. Balancing at a brink of economic crisis, it will be hard on people and on the small business.
And it hurts to watch the agony of Japan.