Sovereign Man's Japanese Insight: Why Deflation Can Be Good

Tyler Durden's picture

From Tim Staermose of The Sovereign Man

Insight from Japan: Why Deflation can be GOOD

Tim Staermose here. Simon asked me to fill in today as he's presently en route to New York City.

I'm sure at this point, he's probably trying to remember all the countries that he's been to since his last trip to the US six months ago-- it's required that you list all of these on the immigration form prior to entry, and for Simon, this is no small task.

Simon, Matt, and I were all together recently in Tulum, Mexico after concluding the Sovereign Man Offshore Workshop in Panama. It was great to meet so many of you at the event, and it was a trip of many firsts for me.

It was my first time to Panama -- lovely country, but I didn't see much outside of the hotel (we were working long hours at the event). It was also my first time to Mexico (and I think Simon hit the nail on the head in yesterday's missive). On the way back to Manila, where I live, I've stopped in Japan for about a week, also my first trip here.

I stayed with some Australian diplomat friends of mine, and at one point last week, we were hosting some senior Japanese bureaucrats over for drinks. I got to ask the question I've been dying to ask for ages, "What's so bad about DEFLATION?"

As I put it to my newfound Japanese friends, I'm a net saver who has no debts apart from the revolving balance on my credit cards, which I pay off each month... so I quite enjoy falling prices because the purchasing power of my savings is always growing.

Why wouldn't the average Japanese person, who is in the exact same boat, enjoy falling prices, too?
Well, as it turns out, they do! 

Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you'd think if you blindly accepted what the Western media tell you.

Sure, Japan has huge problems.  The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges.

But, as far as I can see, what's usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government.  And that's only because the "real" value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.

If you focus not on nominal GDP (which in places such as China is growing like a runaway freight train), but instead pay attention to real GDP per capita, then Japan, it turns out, is not in nearly as bad a shape as people make out. 

Indeed, thanks to its long bout with deflation, one of the things that pleasantly surprised me on my (first) visit to Japan, is that it's not nearly as expensive as I'd been led to believe. 

A cup of decent Italian-style espresso coffee in a nice cafe, for example, typically came to Y300, or about $3.60.  In Australia nowadays the same thing will cost you $4.50.

My ride from downtown to Haneda airport on the Tokyo monorail when I flew out was only Y470 ($5.70).  Even Tokyo's notoriously expensive taxis were only about $12 for a 5-10 minute ride.  And for the impeccable white-gloved service you get, I'd argue that was well more than worth it.
Lunch at a great sushi and sashimi restaurant for me and my hosts (3 adults in all) came to less than $20 a head.  And raw fish is actually some of the most expensive food you can eat in Japan.  Every single sushi restaurant in Tokyo buys its fish fresh from the fish markets each day. 

Another lunch we had was under $15 a head for an excellent buffet with a selection of pretty much every Japanese food I could think of.  A bottle of good quality imported Italian wine I bought was the equivalent of $16.

All in all, this got me thinking that perhaps the Japanese yen is not as "insanely overvalued" as everyone says it is.  On a "purchasing power parity" basis, my -- admittedly unscientific -- evaluation of the yen is that it's probably at, or even slightly below, fair value. 

It has become a cliche to say that Japan is an oddly different place, not easy for westerners to understand. And when it comes to the Japanese economy and currency, based on what I see, I'd really have to agree.
Japanese midcap stocks are trading at extraordinary lows, often less than net asset value. But since the currency and economy are just too difficult to understand, I'm inclined to keep my portfolio away from the country until I have a much better opportunity to study it.

There are other, more easily understood places in the world where we can safely make money, and I don't believe that Japan is the sort of place where you jump in simply based on cheap stock fundamentals. In Japan, business culture, politics, and local traditions have a much greater impact on markets than in many other countries. Of course, the big storm cloud hanging over the future of the country is what happens with the Japanese government's ballooning debt burden.  With a shrinking population and declining revenue base, the only way out may well be to print money... lots of it. 

My conclusion... by all means go and visit Japan.

Enjoy the different culture.  There are some fascinating experiences that await you.  It's clean, safe, modern, and all the goods and services are of super high-quality. 

For the right person, Japan makes a great place to plant a "playground" flag, a place where you go just to relax and enjoy.  If you have a "first-tier" passport, you will typically get a 90-day visa upon entry. 

For other flags:  residency, citizenship, business, or banking, forget about it.  It's either impossible, too hard, or too uncertain for now.

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Azannoth's picture

Deflation is what really is hurting the banksters and the government so It can't be bad, it helps the savers and producers and even the consumers(if the save or produce) and it punishes the unproductive bloodsucking loan sharks

Cyrano de Bivouac's picture

Well I think deflation here in America would be fairer to people who own our debt or have saved dollars. They could come here and buy or invest in things here on the cheap. It seems more ethical for that to happen than to inflate our currency and leave our creditors holding the bag. Has propping up our real estate prices worked? It looks like house prices are still in free fall.

MachoMan's picture

Bullshit.  It's ethical to let foreigners come in and buy our assets even though their ability to do so was done without our consent?  I agree that at some point political apathy turns to ratification, but if the apathy is also a product of the same process that allows foreign purchases, then I'm not sure that's much of an argument either.

In the end, we're going to repudiate the debt and, with it, their ability to do so... [aside from local conflicts and...  desires to have similarly situated owners of the land]

chumbawamba's picture

There's a simple solution to foreigners coming in a buying up our property: ask for real money in exchange.

If they try to throw a bunch of FRN at you, accuse them of trying to dupe you with counterfeit money (which it is, as counterfeit money has no underlying value).  If they get indignant, tell them to get the fuck off your porch and go find some other patsy on whom to unload their worthless paper.

I am Chumbawamba.

MachoMan's picture

I think the discussion contemplates a lack of discretion on the part of the homeowner...  meaning, it will not be his "choice" to sell...  whether it be defaulted MBS...  or "convertible" treasuries...  I just can't fathom the yokels taking new neighbors kindly.  It's ok if the houses sit dormant, but throw a chinese couple in every one and...  well, I think you would see animosity at the very least...

ivana's picture

Exactly... deflation is good for us and therefore demonized by banksters.

gwar5's picture

.....deflation is harder to tax.

High value currency is good for exports, not bad, says a source --- it confers a competitive advantage through purchase of resources and raw materials at lower relative cost which can offset cheap labor elsewhere.

Sounds good to me, why aren't we doing that? Another reason for a PM standard. I'm beginning to think it really is all tungsten.

Monetizing Silver: Instant Prosperity

Zero Govt's picture

Deflation is great for liquid consumers and businesses. For debtor consumers, businesses and Govts it is a nightmare!

What we've got coming in Credit Crunch II is not deflation, but hyper-deflation contrary to every 'expert' in the Western world. Credit Crunch I caused wholesale panic amongst big debtors and their 'solution' has been to bake-in an even bigger meltdown when Credit Crunch II arrives (circa 2012-2014).

Even Japan which has suffered 20 years of deflation won't know what's hit them!! And those 'white gloves' in taxis you talk about another sign of endless Japanese Govt micro-meddling will be blown away.. in fact when they are then you'll have 'sign' the Japanese Govt has got the message to fuk off out of society


Sean7k's picture

Deflation and inflation are for people that have currency. Without unusual inflows of gold and silver- their value remains close to constant. You only need to worry to the degree you hold assets in currency denominations. Even land retains it's value. It is the fools that paid for a home above it's cost of production that are losing their shirts.

It helps to look at the world in a different way.

Zero Govt's picture

yes it's 'admirable' how BIG the GOP's ponzi system has got isn't it?

..and on the left the Democrats ponzis are growing by the month too with US property, healthcare, social security, education, environment etc etc.

This is why the budget ceiling needs to be raised, both right and left can't stop spending and in absolute contempt of everything politicians, Govt and democracy should stand for have agreed under the table they won't touch each others ponzi schemes. 

So the budgets expand and the spending goes on and on and on ...and on

Sean7k's picture

The US has been spending over a trillion a year since Iraq. Between black budgets, off balance sheet, intelligence and war expenditures(which aren't included in the budget), we are spending like drunken sailors.

Zero Govt's picture

drunken sailors have their limits... between DC and the Fed i can't see they have a limit !!!

trav7777's picture

there hasn't been any real deflation in Japan

Infinite QE's picture

Exactly. The deflation argument is part of the ruse of fiat designed to suck in the unaware. 

equity_momo's picture

Because they have a successful export market which has prevented the Yen from collapsing into an abyss. Theyre actually looking quite clever being able to manage the implosion so well for 20 years now.  The US wont have that long unless the World suddenly grows an appetite to import fat , lazy retards. Oh , they also had the luxury of oil not being triple digits for the better part of their malaise.

Oh regional Indian's picture

Equity, actually an overlooked fact is that the Yen has been Japan's biggest export. Between the carry trade and their Overseas Loans (always with caveat to further Japanese business interests in the country), the Yen is THE sea of liquidity. And they've got used to high prices, medium wages and general stagnation.

Brilliant place, history, everything, but this current generation (who grew up on Ketai Culture courtesy DoCoMo) is so lost, in every way, it's scary. A kind of cross-over generation from the stereo-typed straight-lace to total punk.

Lost culture. Gone all hollywood.

Okinawa is where Japan will take it back from. many rumblings there.

Again, all this money stuff is a side-show.

And by the way, Japan is a 33rd parallel country.


equity_momo's picture

Good point on the carry trade. But hasn't/wont the dollar overtaken the yens role in that regards? 

Oh regional Indian's picture

I wonder about that momo.

Japan has a long lead in printing (or adding zeroes).

Race to the bottom, hand in hand perhaps? For Bux and yux.


spudboy's picture


Precisely, Japanese CPI from 1990-2010 averages a little less than a 1% increase yearly. There are no real examples of true deflation in a nation with a fiat currency.

Stuck on Zero's picture

Obama points to Hugo Chavez of Venzuela and says he's a tin pot dictator.  Hugo has 57% popularity rating.  Obama has 18%.  Our government says we're the richest nation on earth.  We have a ~20% poverty rate.  China has a 7% poverty rate.  Congress claims we have the greatest health system on earth.  The United Nations ranks us about 47th in health care (just about even with Nigeria).  The President spends trillions defending people from terrorists in the middle east.  We lose more people to crime here in out big cities.

Why do we always get the rosy picture and everyone else gets the pie?

ricksventures's picture

:) cute comments


Hugo and Venezuela, who does the statistics ??? Most dictators have over 50%, Putin has over 70% and big Kim in N. Korea has 110% (served with daily portion of fine dry grass to the a little radiated)

Also Venezuelans are about 50-60% illiterates so, the big red leader with lots of oil is perfect, otherwise it would have been zimbabwe style with 40 average life expectancy or korea and fine dry grass for dinner

20% poverty in USA, well, you got the illegals, you got illiterates, you got lazies and you got plenty of druggies, what should they do database programming??? whats is the unemployment rate among database programmers ??? -5% ???

Health Care is superb in USA, just ask a doctor from Europe, but its not free like the "superb" health care of cuba, weirdly somehow all world dictators go for healthcare in floridato a jewish doc....wonder why not cuba or nigeria ???

MOst beings we loose to crime in USA are not people, but gangsta or druggies


However things are getting worst, as as as just read zero hedge


ricksventures's picture

TRUE, name 10 greatest things of the last 10 years, where the idea didnt come from USA


name 10 greatest inventions of the last 10 years from Russia, Venezuela, S. Arabia (powered by oil) or even Japan, Korea or China or even Germany ( i can think of some) or Italy or Nigeria or the land of Obamas Indonesia or Kenya

chumbawamba's picture

Let's re-visit this in ten years, whence I will ask you what great invention has come out of the US during what will then be the last ten years, and what today is the next ten years.

The dice are rolling.

I am Chumbawamba.

ZackAttack's picture

Naw, deflation doesn't help the banks.

The  only question you have to ask in order to know what policy will be adopted is "What will help the banks most?"

MachoMan's picture

Depends on their situations...  presuming a solvent debtor, paying creditors back tomorrow with more valuable money than they lent today is certainly helpful.  Likewise, repaying creditors with monopoly money after they lent out valuable dollars of yesteryear is not helpful to creditors.

In the present case with TBTF, they're fucked either way because their debtors are insolvent and their collateral is worthless and cannot be flogged into having an increased value through cost push inflation (although it may slow the devaluation as compared to organic price discovery).

Mercury's picture

This meshes with my view of the U.S. and what I percieve to be a big ZH theme:   If all levels of society need to/must delverage then deflation is going to be part of that package. Deflation isn't without pain, but there are a lot of benefits too.

Of course deflation is bad for the government (cry me a river). That's why they're printing like there's no tomorrow.

IQ 145's picture

 "deleveraging" and deflation don't even belong in the same sentence. deflation is a monetary event; as it inflation; all modern states follow the same course; the currency implodes; look at Russia for instance, or almost any other modern state over a two hundred year timeline; yes everone deleveraged. They deleveraged to zero. They lost everything; as near as damn all. No deflation occurred. Deflation will not occurr in the dollar economny; do not deceive yourself. Inflation exists, it is all around you; it will continue and accellerate.

ivars's picture

But at first the USA has to go through another 2 year recession.

packman's picture

Japanese "deflation" - the biggest myth going.

1998 CPI: 104.1 (peak)

2011 CPI: 99.4

They're "deflation" is at a massive 0.3% annual rate.

What they have is no-flation, not deflation.


Bartanist's picture

Interesting ... but when compared to a place such as the US or UK it would seem that no-flation would look very good.

Silo's picture

Same stuff is talked about with Iceland, every type of toxic waste dump can work when there's someone else to drag you up, when the top of the pyramid comes crashing down there is nothing good about any solution.

bugs_'s picture

Maybe I could get some Sake for the Deflationist's Lounge.  I'd better hurry since rice keeps going up and there will probably be shortages.

IQ 145's picture

 Yes, you should get the Sake right away; because inflation will drive its price up !

ricksventures's picture

japan sounds awesome, i really want to go BUT the debt keeps growing according to the article, more toyotas are being produced in China, lots of elderly who wants benefits and health whats the future like in 10, 20 years in japan???

Hitler was right about Japan, they do have something special about them....


Flakmeister's picture

Spent a week in the Japanese hinterlands (Tsukuba) in 04... Absolutely awesome trip. Strongly recommend a trip while air fare is cheap. Can't comment on Tokyo though..

10kby2k's picture

Sounds pretty stable.  Americans EXPECT return on their its a law of nature.  Spolied.

partimer1's picture

real deflation is good for the most working people, since their money is worth a little more, but really bad for the leveraged rich people.  persistent deflation like Japan will make a lot rich people and bankers poor people.  That cannot happen in this country, since the Fed Reserve will try everything it can to save the banks.

trendybull459's picture

Deflation is friend of consumer and enemy of government,as reveniews falling the goverment stay with no trauses,extually they stay even now,so,imagine the scare of deflation by governments:housing collapse,all Derivetives market collapse,prostitutes losing jobs and coming to be best housewifes and every one leaving good life,at least prices low and no one has money,instead current no money and high prices,fight enercia,fight ununity,go and vote on our blog Poll,it cost you two clicks and 10sec to donate freedom out

Bill Gross is wise man,but you are who posting here is doomed,because i counted over 50posts and asked to vote for FED existence in my blog:

But it was just 3 brave people to respond,which meaning that all of you is sartisfied with current environment and you probably forgot that today Jasmin reolutions based on internet first by FED elite to screw nations,I calling for thoose who wish FED abolished to vote or to leave comments at least,the thing which is world lags today is trust between us!!!

Go and vote,World should not affaid of monster eating into our wealth on everyday basic

MachoMan's picture

I hear a lot of talk about deflation, but why is it that wages have to decrease less than assets and other necessities?  I do not understand how a decrease in the money supply necessarily makes anything more affordable for the masses.  There are a whole lot of exchanges that need to take place between those two ends...  I realize we're speaking in generalities, but I'm not sure generalities have anything to do with our present situation....  [the actual rate of deflation aside given it necessarily leads to a bond default, and thus hyperinflation].

ml8ml8's picture

We'll see what happens to their population of savers who are, as a class, over-invested in JGB's (direclty or indirectly through their banks) when they have to take a 30% haircut (at least) on that debt, and when Japan's entire banking system and all of their insurance companies implode when they have to do the same, thus wiping out their balance sheets.  Maybe as a nation, Japanese citizens (who own, directly or indirectly, half of the JGB's outstanding) will do the patriotic thing and waive interest payments on their debt so that the government can make the interest payments on the other half to the gaijin.

Unfortunately, when X-Day arrives for Japan, I fear it's going to take down the rest of the world's financial system.  In terms of being overleveraged at the government level, Japan is at least as bad as the PIIGS and far more integrated to the worldwide financial system than those relatively small concerns.  X-Day is not too far off.  As Japan's population dwindles and retirees begin to consume their savings, the pension and insurance companies will be forced to sell JGBs.  The death spiral has already begun.

Monday1929's picture

Ah, the predicted "Deflation is good" articles are arriving. Deflation is great if you have a job and no debt. You can hire convict bankers to mow your lawn. Good for aspiring Dictators, too. Though they seem to prosper in all kinds of 'flations.

BDig's picture

Deflation I suppose can be good, same as inflation as long as it's in moderation.  But I don't prefer deflation by any means.  Reason: less reason to invest.  People would just hoard their money.  So what's bad with that?  Well as the years go on, the old families with money would just get more and more powerful and pretty soon you have dictators and monarchs.  

Think of saving nickles and feeling good about it, but knowing that your rival came from a family where they were saving hundred dollar bills with the same effort.  You have no hope of ever competing with them.  Deflation rewards complacency and inflation rewards effort and risk taking.  Stagflation just sucks shit all around.

Also, if deflation were the norm, you wouldn't be getting an annual 5% raise or whatever.  You would be fighting to keep your pay the same but fully expecting a pay cut every year.

Deflation?  No thanks.

edit:  An attempt to improve readability.

Acting Man's picture

You're mind is stuck in an inflationary paradigm.  Simply because you could get a real return on your savings by hoarding it, doesn't mean investing would diminish.  In a truly deflationary environment, companies would be lowering prices because of innovation and productivity gains.  Their margins would either stay the same or increase, raising any potential dividends they could pay.  That would easily offset the urge to stash cash under your mattress for many people.

The previous 40yrs of global inflation and consolidation of global wealth and rising income inequality spits in the face of your monarch comment.  I think we've also had plenty of dictators in that same period also.  Look no further than the last quarter of the 19th century to see how deflation spurs the lower and middle class to really build wealth.

Inflation only rewards those counterfeiting the currency, sounds pretty lazy to me.  Deflation favors those willing to go out and build wealth: entrepreneurs.  I don't think many of them are lazy.

If deflation were the norm, you wouldn't need a 5% raise to maintain your current quality of life.  Again, stuck in an inflationary paradigm of thinking.  Companies would be able to keep you at your current wage/salary and you'd gain every year.

The only losers in a deflationary economy are those overleveraged and those whose income depends on price levels propped up by easy credit.  This is why the banks, housing sector and car companies were hurt so badly during the credit crisis.

Naturally occurring deflation is an avenue to prosperity for everyone but the oligarchs.  A good quick read on this is Hulsman's "Deflation and Liberty".

Oh regional Indian's picture

Very articulately stated Acting man. Thanks.

So, like the good hungarian gold doctor's thesis, Inflation (dropping interest rates) rewards bad money, while deflation (stable to rising interest rates) rewards good money.


Flakmeister's picture

Yes, very well stated, indeed.