It is extremely hard to argue against absolute, in-your-face, common-sense logic, except for those rare occasions when there is some wildly counter-intuitive meta reason that justifies flinging logic and common sense to the winds. On that note, consider Japan. Japan’s outstanding debt is almost 200% of its GDP and two obvious maxims would seem to apply with some force, the first being: “When you are in a hole, stop digging,” and the second: “Families and countries can’t borrow their way out of debt.”
However, Japan is not just a troubled case. It is a uniquely troubled case. It has been trying for two decades to generate inflation, and is now reduced to thinking that lowering the rate of deflation is a kind of success.
Against that background, consider the fact that the Bank of Japan, after sustained prodding by the Japanese government, finally agreed to double the volume of three-month loans offered to Japanese commercial banks to ¥20 trillion, at a rate of just 0.1%. That is “helicopter” distribution by any standards, pumping money into the economy by giving it away as close to free as makes no difference.
Does this largesse mean that the Japanese public expects prices to rise? Of course it doesn’t, and with good reason. In February, Japan’s core consumer price index (stripped of energy costs and food costs) fell 1.2% year on year. The reason? Weak household spending gave retailers no choice but to cut prices or stare at inventories that wouldn’t shift.
Why was household spending weak? After two decades of nothing much happening no one is feeling too bouncy or eager to splash out, even though Japan’s export motor was roaring away until global demand fell off a cliff in late 2008. There is also the fact that an inevitable corollary of deflation is that the public gets to know that putting off spending means whatever high ticket items a family wants, such as a new 42-inch plasma TV or a new kitchen, can only get cheaper the longer the family holds off buying. In that perverse sense, deflation provides a great incentive for postponing spending, which in turn fuels further deflation.
Now we have a record budget, record in the sense that Japan intends to spend US$1 trillion (€720 billion) in the new fiscal year, starting April 2010, with 44.3 trillion yen (US$490 billion) having to be raised in new bond issuance just to support its public finance spending. This is in the face of a warning by ratings agencies that they want to see more fiscal prudence from Japan if it wants to avoid a ratings cut. If a ratings revision was to happen, funding Japan’s debt will get even more expensive and a few steps further down that road would see the country jogging side by side with Greece (though without Greece’s eurozone dilemma and weak economy).The aim of the budget, according to the Japanese Prime Minister Taro Aso, “is to protect the living standards of our citizens. The world is facing a once-in-a-hundred-years recession. We need extraordinary measures to deal with an extraordinary situation.” So keeping on digging is good, then, since the situation is “extraordinary.” That must be the “meta logic” we were speaking of. Oh dear… Good luck, is all one can say… As a final thought, why can’t Japan generate inflation? If Zimbabwe can, anyone can. All you have to do is roll those presses for long enough. The problem is, the Japanese government can’t get anyone, least of all its citizens, to believe it will roll the presses for long enough.
Further reading on the Japanese economy
- Understanding Reputation Risk and Its Importance, by Jenny Rayner
- Mixflation, by Giles Keating
- Japan—More moss or actual green shoots? by Anthony Harrington [blog post]
Tags: deflation , fiscal stimulus , Japan , sovereign debt