Japan’s NO EXIT Strategy

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

One of my sources in Japan was told about a yearend Bonenkai party where an official from the Ministry of Finance, the most powerful ministry at the core of Japan Inc., had let slip some things, perhaps after one too many drinks. He confirmed the view propagated by the Liberal Democratic Party, the victor in Sunday’s election, that the Bank of Japan wasn’t doing its job, that it was just giving away money to the banks which then bought Japanese government bonds instead of channeling it into the real economy.

“That’s why the Ministry of Finance is trying to gain control over the Bank of Japan,” he said. “The Ministry of Finance has pride in its ability and is much more qualified to run things than the Bank of Japan.”

Turf war. For him and his ilk, independence of the central bank is a non-sequitur. And elected politicians, when they try to bring the powerful bureaucracy under democratic control, are a nuisance. Prime Minister Yoshihiko Noda and his Liberal Democratic Party had attempted to do that. Now they’re out.

So a new government is being formed by the party that ran the show for fifty years after World War II and is responsible for building the very institutions and structures that got Japan to where it is today. With a new prime minister, Shinzo Abe—who’d already been through the annually revolving prime-ministerial door in 2006/2007. This “new” government is going to fix whatever ails Japan by spending even more money and by wrestling control over the printing press away from the Bank of Japan.

Alas, Japan engaged in “quantitative easing” on a massive scale long before the term had been invented. It has followed the most profligate Keynesian stimulus policies for two decades. Well over half of its current budget is paid for with borrowed money. The country is drowning in liquidity. Interest rates have been at zero or near zero for over a decade. And by the end of this fiscal year, gross national debt will hit 240% of GDP, the highest in the world [for how the MoF plans to deal with that debt, read.... Japanese Ministry of Finance To Bondholders: You’re Screwed!].

But the economy, unlike Greece’s, is not in shambles, though it’s not exactly humming either. Unemployment is 4.2%, the low for the year, and down from the all-time high of 5.6% set in 2009. Youth unemployment, while causing all sorts of handwringing, has been improving. One measure: 61% of the high school students to graduate in March (end of school year) have already accepted job offers, up from 58.6% last year. In the US, we don’t even track that.

The overwhelming problem Japan has is of fiscal nature: debt and deficits can no longer be brought under control. Interest rates have to remain at near zero because the state can no longer afford to pay anything beyond that. Public and private pension funds are unable to earn a yield on much of their holdings but must pay out ballooning benefits to ever more retirees while the number of workers who are paying into these funds is shrinking.

Young people have grown up with this scenario, see it every day, know there is no longer a good exit from the debacle. It’s too late. The pile of debt is too big. Promises about job security and retirement are illusory. They work longer hours for less pay than their predecessors, don’t have enough money to move out from home, and consume practically everything they make [ The Pauperization Of Japan].

Their plight has kept Japan competitive—”thanks” to the labor market reforms by Junichiro Koizumi, Prime Minister from 2001 to 2006. More such reforms are on the way. Consumption tax increases have already been passed. If the new government has its way, there will be inflation—final straw for the young, whose wages won’t keep up with it. These are some of the consequences of a deficit-funded joyride by Japan Inc., the current generation of retirees and near-retirees, and other interest groups.

But they’re leaving their mark on young people in unexpected ways. Gender inequality, for example. A legendary issue in Japan. In 1992, when the government first surveyed its citizens on it, 60% agreed with the statement: “Husbands should work outside, while wives stay at home.” The survey was repeated sporadically; each time, the percentage dropped. By 2009, only 41.3% agreed with it—modern times after all. The next survey results were released today: those who thought wives should stay at home jumped 10.3 percentage points to 51.6%. The highest since 1997. A surprising reversal.

Surprising because of its origin. It wasn’t the older generation, but the young: 55.7% of the men in their 20s thought so, up from 34.3%; and a flabbergasting 43.7% of the women in their 20s agreed with it, up from 27.8%. These are not rounding errors or statistical aberrations but enormous shifts in attitudes.

“I suspect young people today are deeply concerned about their future,” explained Prof. Kakuko Miyata of Meiji Gakuin University, an expert on social psychology. He fingered the economic malaise young people are stuck in and added that “they may wish for the home to be a source of emotional support.” Well, instead of starting businesses to getting things going.

As for me, my let’s say uneven relationship with Japan, or more precisely with Tokyo, started in France with a Japanese girl. A “funny as hell nonfiction book about wanderlust and traveling abroad,” as a reader tweeted. Read the first few chapters of... BIG LIKE: CASCADE INTO AN ODYSSEY at Amazon.

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wtlf555's picture

This is interesting in that I now see that the natural process towards hyperinflation is governments taking over their independent central banks. I also now see that independent central banks protect against hyperinflation at the cost of zero growth and resources transferred from the public to private banking. There are two types of monetary expansion that are almost always lumped together - even on this site - even though they are very different with different outcomes. The first is expansion of monetary base (MB) which DOES NOT affect consumer inflation (other than period speculative commidities bubbles) but does affect investment asset inflation and the second is expansion of money supply (M0) which DOES affect consumer inflation and can lead to hyperinflation.

Expansion of the monetary base (MB) occurs when the government persues an expansionary monetary policy but has an independent central bank in place. In this case the government has set up a system where supply of money (M0) is dictated by the demand for money from the population. On the other hand, the supply for the monetary base (MB) is set by the central bank with a big push from the government to expand. However under this system the monetary base can expand as much as the central banks want  but the money supply (M0) will only expand through demand from the public. And in this setup with a zero interest policy that locks in zero economic growth there will be no increased demand for money (M0) from the public.

While this system works well in controlling the money supply (M0) from government saturation it fails in that the increased monetary base (MB) syphons financial resources from the public to the banking system. This is why we see an increased income disparity and a large increase in the GINI coefficient. This system virtually guarantees the "pushing on a string" analogy which inriches the banks and the wealthy. Under this system there will be NO hyperinflation since hyperinflation is an excess supply of money (M0) which will not occur with an independent central bank and private banking system that is gorging on the profits of a stratospheric monetary base.

This system of an independent central bank during an expansionary policy can end in one of two ways. The income disparity can become so bad that revolution takes place - or the government can take over the central bank so that they can print (M0). 

andyupnorth's picture

I'd bet that many more young Japanese will be leaving the country, exasperating the demographic imbalance.

Crisismode's picture

Leave and go where?


In which location on this planet are the greener pastures self-evident?



suteibu's picture

New Zealand for some of my friends.

Matt's picture

For the Japanese, Chile I think. Similar climate. I think they had a Japanese President not too long ago, lots of Japanese business there.

koncaswatch's picture

That was Peru where a Japanese man became president; then left power under dubious "circumstances".


Edit; BTW Chile with its long N-S geography across many laditudes offers an almost "select a climate" environment for those who wish to migrate there.

Matt's picture

You are correct: 

Alberto Fujimori is the guy I was thinking of.

As far as climate, I was mostly thinking of capital cities, since most people leaving Japan would likely be urban people looking for a major city. Santiago looks comparable, although Lima seems to have a nice climate as well.

q99x2's picture

Sounds like everything is on track.

Short Memories's picture

This article has a little bug.

"Prime Minister Yoshihiko Noda and his Liberal Democratic Party had attempted to do that"

Noda isn't in the LDP, he was DPJ. The LDP just got back into power

The women these days here seem to think that marrying a public servant is the best way to go... boy, are they in for a nasty surprise

London54321's picture

Has anyone noticed that one man's liability is another man's bank balance?



besnook's picture

at some point, someone will have to give up on the ponzi scheme and just print fiat without the bond connection a la lincoln's greenbacks and hitler's deutschmarks. japan is in the unique position to do so since it has little counterparty risk because it owes itself the money. maybe that is why the finance ministry wants to take over the banks. the minister wants to declare a jubilee for japan, inc.. creating inflation and devaluing the yen would be a piece of manju.

MajorWoody's picture

Good point, but would the rest of the world then accept those new yen as readily as the current ones?

Now according to Rickards, Japan is the 3rd leg propping up US Treasuries.

Maybe Japan is expecting some major help from the US in your scenario above.

besnook's picture

i think this is a case of the first one to opt out of the system has the least to lose in a scenario that will take down the entire system. there was a discussion on another thread that japan has already announced it's intention to reduce it's exposure to the west(the usa specifically) and increase it's emphasis on the pacific asian countries(china). if japan decided to eschew boj and literally print money the yen would devalue by half or more almost immediately. the dollar would soar in value. in order to keep up, the fed(and euro) would print like a madman(more like a psychotic man since they have already jumped on the crazy train) to keep up. in the meantime, japan's trade with china(and everyone else) would ramp up as everything from japan will have suddenly become real cheap. if, by then, all trade with china is done in yen/yuan then the yuan becomes the foundation of the yen as japan's dollar reserves(and china's) become much more valuable in the short term allowing for the transition to the yuan with minimal disruption. as things settle down the dollar and the usa will pay dearly. think about it for a second. what was the foundation for the boom years in the 90s? the massive devaluation of the dollar in 1987. the usa even managed to escape the expected inflation such a devaluation might have caused because of the bursting japan bubble and the general world wide deflationary pressure while growth was sustained by the tech boom, notwithstanding the bush recession. could japan do the samr thing? devaluing the yen by half would pop the banking/debt bubble worldwide forcing countries to take drastic steps to save their systems. the resulting deflationary pressure, big dollar stash and closer ties to the yuan coupled with a debt jubilee by the boj for itself(while keeping pension obligations intact) might make japan the winner inthe end just because they started it and everyone else has to react to it.

Ned Zeppelin's picture

Massive FX-swaps yen for USD to come will bring the problem to our shores. 

This whole global CB experiment will end poorly.


MajorWoody's picture

I learned a lot about the shift in social attitudes which will set patterns for the future in Japan.

About how amazingly long the can can be kicked.

I won't say "until it can't" because I hate that cliche, ala Mel Brooks.

The young of Japan will drop out of salaryman paradigm and into hopefully something more fulfilling.

Seer's picture

Demographics suggest that there's going to end up being a whole lot of elder-care work...  Not sure how the govt is going to retain the younger people: incentives will only come at the expense of the elderly; and if they're ransacked then it'll be a forced transference from the old to the young (with the govt taking its slice).

If you care about people then I suppose that this could be considered "more fulfilling."

kchrisc's picture

Who'll pay them?

The gov "borrowed" all of the people's savings and then pissed it away.

So when the old retire they will need to sell their bonds to pay their bills. The gov will then need to borrow more yen to pay the redemtion.

Game over!

The Japanese better be working on their Chinese.

Element's picture

Ever changed an old-dudes diaper?

It aint no bowl of petunias.

Seer's picture

I was saying that with a bit of sarcasm... it's the only thing* out there that'll be available so it pretty much leaves it as the only "fulfilling" job. 

* Some hyperbole, but not a lot (there will be some top jobs working directly for TPTB, but only for a handful of people).

Element's picture

That's ok, I was using a lot of sarcasm. ;)

Seer's picture

Japan has no future (if measuring based on today's unsustainable world) because it has NO resources.

It's more than easy to identify the state of a given country, just look at its demographics, import/export trends and energy imports.

Seer's picture

That is correct.  Take a look at the other two factors that I note as being key: I checked into it a while back for Singapore and it's pretty clear that my metrics stay true to form.

JamesBond's picture

stand back from that spot on the wall you're staring at and you will notice it's the Mona Lisa....



DoChenRollingBearing's picture

In my visit to Japan back in May (to Osaka), I got the feeling that the Japanese have kind of given up for a great future.  Their kids no longer study like they used to.

Fukushima might have been the psychological straw, but, as Wolf writes, they have LOTS of other problems too.

Vlad Tepid's picture

And if Osaka (the hard-playing capital of Japan) is depressed, one can rest assured it is worse in the rest of the country.  It is.

There was a writer on the Japan Times today who was wondering why all Japanese youth seemed to lack "dreams" these days.  She said something akin to "when I was in high school in 1981 we were in a recession but we didn't know it and we came out fine."  Some people are just clueless, but depressed Japanese youths don't seem to be among them.

Joe moneybags's picture

What did I learn from this article?  Japan is a country, with an economy, that is doing so-so.  And, I can buy some book written by the article's author on Amazon.

suteibu's picture

Yes, he's a whore for that stupid book.  What makes his analysis suspect is that he referred to Japan's 4.2% unemployment data as some sort of reliable indicator that Japan is not so bad off.  Unemployment and underemployment together is currently about 40% in Japan.

Meanwhile, almost 16% of Japan's children live in poverty as measured by the government despite its various and wasteful welfare programs.  Japan's debt is always the headline.  What remains untold is the slow-collapse of the society because of the corrupt, spendthrift government.

SAT 800's picture

good for you; real numbers create a real picture; false numbers are like childrens finger paintings; interesting, but not very useful.

suteibu's picture

I don't mind backing up figures with sources.  Unfortunately, when the source is the government, even the "real" numbers might not be real.

Vlad Tepid's picture

I'm not disbelieving, I'm just curious where your numbers came from.

suteibu's picture

"Of the total 49.04 million labor force recorded in the January-March period, traditional full-time positions numbered 31.64 million, dropping by 530,000. Nontraditional positions, on the other hand, jumped by 1.03 million to 17.39 million. Such jobs accounted for 35.5% of the total workforce, up 1.8 percentage points on the year. – Nikkei.com" (2011/5)

Add that optimistic 4.2% unemployment rate to this and there you go.  Now, to be sure, there are some who only want less than full time but the trend is toward cutting formerly full time jobs into part time/no benefit jobs meaning people are taking part time jobs for sustenance, pushing out those who tradititonally want part time work for additional or supplemental income.  Also, this figure completely disregards the Tohoku area hit by the earthquake/tsunami which means the official figures are skewed even lower (more optimistic) than the reality of the situation.

"The direst circumstance for young people in Japan can be encapsulated in one word: poverty.

At present, approximately one in every 6.5 children in this country, or 15.7 percent, is living in relative poverty — a state defined as when the disposable income of a household is below half the median." - Japan Times (2012/5)


Panafrican Funktron Robot's picture

"At present, approximately one in every 6.5 children in this country, or 15.7 percent, is living in relative poverty — a state defined as when the disposable income of a household is below half the median."

Shit, by that definition, the US is probably double that.  

Seer's picture

"What remains untold is the slow-collapse of the society because of the corrupt, spendthrift government."

Well, I'm certain that this cannot help.  BUT, it's the System that's to blame.  Japan over-extended its reach for growth when it has no physical resources, all the while spending more and more on resource imports (energy being key).

MurderNeverWasLove's picture

This Kyle Bass posted today: https://www.youtube.com/watch?v=JUc8-GUC1hY

Boy, sure wish I could see his slides, though.

SAT 800's picture

I love that dude; he reminds me of a younger me. What a wonderful position he's in; he gets to interview all sorts of insiders; and then, believing only the reality and never the bs; he rats them out in public. It's amazing anyone is even willing to to talk to him anymore. What's the difference with Kyle Bass? He's interested in human psychology and how it drives markets, and he always, always, wants to go direct to basics. right back to basics. to the fundamental underlying facts that we all know are true. what do the official economists believe? there are no bubbles. their theory says there are no bubbles, so there are no bubbles. how do you pay for all this shit? issue more bonds? Oh, great; terrific, well, it's been nice interviewing you. Ha. Ha. He got to talk to Barney Frank ! Can you imagine the self-control it took to keep from telling him he was a completely ignorant fool? It's hilarious stuff; rational analysis and high intelligence meets professional economists; whoops !

Oldrepublic's picture

"Japan is about to 'detonate' a 'debt bomb' and will be forced to massively devalue its currency. Japan's $14 trillion bond market is heading for a crash." -- Kyle Bass, hedge fund manager.


University of Virginia interview.

SAT 800's picture

Kyle; "so you're going to layer another bond, linked thru guaranteed parity, to the JGB; because you don't want to "disturb" the "delicate", (read-fed-up), JGB market"---Finance Minister; well, I didn't think of that."  You cant't make this stuff up; buy more popcorn; we're going to have front row seats.

otto skorzeny's picture

thanks for the link. he is a great speaker and should be the next SecTreas

SAT 800's picture

He should be the next governor of Texas; after they secceed. The Treasury and it's lap dog the Fed. are history.

CH1's picture

should be the next SecTreas

Government is barbarism. Working there is for the immoral or the amoral. I don't think Kyle qualifies.