Forget Cyprus, Japan Is The Real Crisis

Asia Confidential's picture

Forget Cyprus. A much bigger story in the coming weeks and months will be in Japan, where one of the greatest economic experiments in the modern era is about to begin. A country where government debt even dwarfs those of Europe's crisis-ridden nations, Japan will attempt to inflate its way out of a 23-year deflationary spiral.

The overwhelming consensus among the world's economists is that quantitative easing (QE) has saved the day in the U.S. and that Japan needs to follow suit, on a larger scale. I beg to differ and suggest this policy will almost certainly lead to a hyperinflationary disaster in Japan. If that's right, it will have serious ramifications for other countries, dragged down by an acceleration of the so-called currency wars. More broadly though, it is likely to destroy the myth pushed by today's economists that QE is a cure-all for downtrodden economies. It isn't and Japan will become the template to prove it.

Monster stimulus on the way

The new Bank of Japan (BoJ) Governor, Haruhiko Kuroda, started work on Thursday and his first day on the job disappointed investors. At a press conference, Kuroda pledged to do whatever it takes to defeat deflation and reiterated the government's target of 2% inflation. But he provided little in the way of specifics and investors promptly bought the yen and sold stocks.

More concrete measurers will almost certainly come by the central bank meeting on April 3-4. There are good odds that they may come even earlier via an emergency meeting of the bank.

It's widely expected that the BoJ will expand its 101 trillion yen (US$1.06 trillion) asset buying program by more than 10 million yen. Also, it will start buying Japanese government bonds with remaining maturities of up to five years by scrapping the upper limit of three years by the end of April.

The idea behind the strategy is that you create money out of thin air, use that money to buy government bonds off private institutions and others, thereby increasing money supply and possibly inflation. Also, the institutions will start lending the money out, thereby kick-starting spending and the economy. That's the theory anyhow.

What was fascinating to watch was the verbal sparring between the outgoing and incoming BoJ governors. In Japan, where group consensus rules, this was almost an outright brawl.

Outgoing Governor Masaaki Shirakawa has never been a believer in the inflationist policies of the new government and he didn't mince his words in his final days in office:

"Even if prices rise 2% and wages do the same, that won't mean an improvement in people's living standards ... what we want to achieve is an increase in real economic growth...

... Past figures in Japan as well as in Europe and the U.S. show that the link between monetary base and prices has been broken."

The latter refers to the fact that printed money in the U.S. and Europe hasn't flowed through to economies as banks have sat on the money rather than lent it out.

And if Shirakawa wasn't clear with the above, he was with the following:

"If there was one single measure that would have resolved the problem, just like clearing a fog, then we wouldn't have been in this state for the past 15 years."

The new BoJ chief, Haruhiko Kuroda, wasted little time trampling on his predecessor's legacy. Though couched in economic jargon, his statements were clear enough: Shirakawa was part of a failed era of central banking and something new needed to be done:

"It's very important for the BoJ to make itself responsible for the 2% [inflation] target by a certain period ... We should not make excuses that it wasn't our responsibility if we fail to achieve it."


"In the long term, the correlation between money supply and inflation is high."

In other words, if we print enough money, inflation will come. And we'll do whatever it takes to get the job done.

Is it the right path?

The sparring between the two central bankers isn't just an arcane discussion. It's part of a much larger debate about the effectiveness of stimulus policies. And it matters because Japan is the world's third-largest economy and it's about to pursue these policies on a grander scale.

What's amazing is the extent to which those advocating stimulus in the slow-growth developed world now dominate public debate. Consider a recent article by Financial Times columnist Martin Wolf, entitled "The sad record of fiscal austerity". In it, Wolf takes Europe to task for enforcing spending cuts while their economies were in dismal shape:

"By adopting [outright monetary transactions], the [European Central Bank] could have prevented the panic which drove the [credit] spreads that justified the austerity. It did not do so. Tens of millions of people are suffering unnecessary hardship. It is tragic."

He goes on to recommend a mix of stimulus, increased public spend and structural reforms to help Europe's plight. And he finishes with this:

"In the long run, the fiscal deficit must close. In the short run, the UK has the chance to pursue growth. It should take it. So should the US."

The arguments of Wolf and others of his ilk can be crudely summarised by three facts, which most of them would regard as beyond dispute.

Fact 1: The U.S. recovery proves stimulus works and the recovery will happen faster if there's more aggressive QE.

Fact 2: Europe remains in the doldrums because it's pursued spending cuts which have failed to repair economies.

Fact 3: Japan has never tried aggressive stimulus to overcome its long-term deflation problem and it needs to follow in U.S. footsteps immediately.

Given these are "facts" beyond dispute, let me dispute them.

Fact 1: It is far too early to tell whether U.S. stimulus policies have worked. They have propped up the economy in the short-term, but whether that's sustainable in the long run is open to question. Even in the short-term though, the recovery has been slow and unimpressive. Consider: 2012 GDP growth of 2.2% vs a post World War Two average of 3.2%, a current unemployment rate at 11.3% if you include that have dropped out of the workforce since 2008, real household incomes are still 10% below levels in 2000 and the velocity of money (M2) is the lowest in more than 50 years (indicating printed money hasn't circulating into the real economy).

 Money velocity - Mar13

Fact 2: Europe hasn't pursued austerity. Anyone who says it has is lying. But it makes for a nice political argument in favour of stimulus. European total debt has kept climbing, now at 390%, as the private sector hasn't paid down any debt, while governments have increased their debt portions. No cutbacks here!

Euro debt - Mar13 

And for the curious, unlike QE, there is some historical evidence that austerity can actually work. In my neighbourhood of Asia, the financial crisis of 1997-1998 brought tremendous pain to many Asian countries, but through austerity and sweeping economic reforms, they recovered relatively quickly and in much better shape.

Fact 3: Those that claim that Japan has never pursued aggressive stimulus are talking rubbish. But again, it's nice propaganda for Keynesian advocates. From 2001-2006, Japan embraced large-scale stimulus, with its monetary base increasing by a mammoth 36% year-on-year at its peak. During the period, the monetary base rose 82% in total. But economic growth was never revived, the currency rose rather than fell and inflation continued to decline. QE in Japan was dropped because it was seen as failing.

So the question must be asked: will the conventional wisdom advocating enormous stimulus be Japan's saviour or its noose?

Why Japan will fail

The subtitle indicates where I stand on the matter. Given its over-indebtedness, Japan has few good options left. But the policies being pursued by Shinzo Abe will fast-forward a major debt and currency crisis. It's a matter of when, not if.

Government debt to GDP in Japan is now 245%, far higher than any other country. Total debt to GDP is 500%. Government expenditure to government revenue is a staggering 2000%. Meanwhile interest costs on government debt equal 25% of government revenue.

There's no way that Japan will ever repay this debt. It has two main options: either go through extraordinary pain by cutting back on government expenditure or print substantial money to inflate some of the debt away.

Japan is choosing the second option, as are most governments around the world. It would rather print money than cut spending and doom the economy to a substantial contraction. The choice to print money though will result in an even more painful and drawn-out outcome.

It's inevitable that the yen will fall further from here, potentially much further. I've previously said that the yen at 200 or 300 on the dollar would not surprise. This could prove optimistic.

It also seems inevitable that Japanese interest rates will rise and bonds will sell off. Yields have to rise to just 2% for interest costs on government debt to take up 80% of government revenue. The jig will be up well before that though.

Those that argue this won't happen as 91% of Japanese government bonds are held by domestic investors are missing some key points. Foreign ownership of bonds is rising as domestic investors need more money to fund their retirements (Japan's rapidly ageing population). Foreigners will demand higher yields for the risks that they're taking on. And even domestic investors aren't going to sit by earning 0.6% on a 10-year bond as hyperinflation takes hold and the currency tanks.

Currency wars to begin in earnest

Talk of currency wars has been on the backburner for a few months. Expect that talk to heat up and become a reality as Japan ramps up stimulus in the next two weeks.

The likes of South Korea and Taiwan are already suffering from the sharp fall of the yen. They, and many others such as Germany and emerging countries, aren't going to sit by and watch their exporters get priced out of the market by the Japanese. They'll retaliate with currency depreciations of their own and the currency wars will be on in earnest. But the question is whether these countries will be able to keep up with a hyper-inflating Japan. I highly doubt it.

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Lordflin's picture

Money printing has always worked in the past... What could possibly go wrong?

Socialized Losses's picture

Nice Article

WhiteNight123129's picture

The debate is not between print money and cut spending, it is between print money and write-off bad debt.


The currency school says it is the expansion of the BoE notes as the Colonel Torrens says, and then John Fullarton and Thomas Tooke answer: "it is not the printing in no form or fashion, it is the 'using', of the newly printed money".


If the newly printed money is not used, no inflation, period.


Also on the link between monetary base and inflation.

Spending / quantity = price.

Spending = Spending using credit + Spending using money

If the credit contracts fast enough or the money printed is not used or a combination of the two, the printing does not do anything to reflate teh economy.

If the credit increases as fast as teh base money then, the ratio base money/credit does not change.

So if total credit expands at 6% and base money at 6% no deleveraging, debt hangover.



tom's picture

Meh. I think Japan will keep mediocre muddling. Just like it did in 2001-2006. I don't understand why you think this time it will lead to hyperinflation, when as you describe, this has already been tried in 2001-2006 and it didn't generate even a little bit of inflation then. Japan's public debts seem insanely high but nearly all of it is domestically owned and most of it is owned by arms of the government. So, likewise most of the interest paid is just moving from one pocket of the government to another, and nearly all of it is staying within the country. The IMF tries to account for this with its "net debt" figures, but even those fail to discount the portion held by the central bank.

Once you've discounted all that out, you're left with a still high but not insanely high public debt that is mainly held by private banks, pension funds, mutual funds, money funds, and local government entities. On net what's happening is those entities are paying themselves a small amount of interest on their savings by lending ever-increasing funds to the government so it can pay the interest. In theory, as long as they are willing to continue increasing the amount of funds they lend to the government, they can keep collecting the low interest, which is coming out of the incrementally more money they are lending to the system. It's a sort of extremely slow-moving Ponzi scheme.

Is there any threat of it breaking down? Don't ask whether the debt can be repaid, that's not the issue. Ask whether it can be rolled over. And yes, it can, for longer than you or I will care to watch. Japan does not have an American-style independent-minded financial sector that will become bond vigilantes. Moreover, if the private sector and local administrations reduce the amounts they're lending to the government, the government through its many branches including the central bank can always buy more.

So we come to the potential for inflation. The biggest is for import inflation if the JCB starts aggressively buying FX or other foreign assets. The previous JCB management tried to stand aside from the appreciation pressure generated by US QE. The new JCB management will not, it will devalue alongside the dollar. As in fact most of the world has been doing.

But that's not going to generate steady inflation. Japan will just be one of many CBs doing QE around the world. It can do a bit of catch up but eventually things will even out and the FX rates will roughly stabilize as globally currencies devalue. But inflation never appears where planners wish it would. Inflation is raging in the emerging markets as global QE drives flows to them. Japanese QE will not boost global demand for Japanese labor.

Socialized Losses's picture


I hear your arguments about JGB, but the "tone" sounds very similar the the refrain we heard about Japanese stocks all through the 80's. "The Japanese stock market never goes down".  Whoops until it did.

Sure it may be years away, but it also may be months away.

tom's picture

Well, I don't mean to say that Japan will never change, but it doesn't have to change anytime soon. Japanese stocks in the '80s were a more or less ordinary Ponzi. JGBs are a glacially slow Ponzi. It doesn't take a lot of additional buying each year to keep the snowball rolling.

People who called the currency move are feeling good about themselves and maybe looking for more action soon. I don't think they're going to get much. You've already got Abe today saying the JCB doesn't need to buy FX. Maybe it's time to bet on a stronger yen again.

Herdee's picture

I was thinking that maybe Merkel has rethought this situation along with its NATO partners.Let's add some incentives into the deal and that gas play looks attractive for both Turkey and Israel too.

Pike Bishop's picture

The Japanese think that Hiroshima and Nagasaki fucked them up.

Wait till the BoJ gets done with them.

Crabshacker's picture

Shit...I'm gonna need a faster bicycle to keep up MAN..

Yen Cross's picture

    March 31st is the end of the Japanese fiscal year. Kuroda is just letting all the exporters repatriate profits from overseas and then the yen takes a dump. If Europe falls apart next week then the ¥ will slam the the $ into the dirt, and the $ will slam risk currencies into the dirt.

Getting Old Sucks's picture

Japan is HISTORY!  Not because of economics but because Japan WILL become a NUCLEAR WASTELAND!  I keep reading about their economics but is everyone clueless as to what has happened there?  There's no way out!  It's done! Finished!  So why all the bullshit?  If you don't comprehend what's happened there and what the future is there, then I'd say you should join the Dancing With The Stars crowd.

toys for tits's picture

I wouldn't forget any of these countries. What we're seeing is like watching the 2004 tsunami hit while a class 5 huricane is striking simultaneously.

This shit will spread everywhere at the same time.

nicoacademia's picture

well. Japan has suffered while the world progressed. time to level the playing field bitches. 

especially those smelly koreans.


lolmao500's picture

Forget Japan, Italy is the real crisis.

nicoacademia's picture

No. Berlusconi is the real crisis. 

RockyRacoon's picture

The real crisis is that nobody knows what the real crisis is.   How can one prepare for that?

I see the crisis as dependence upon and belief in the fiat currency era.  The first country to get rid of it and back their currency with a substantial amount of gold, and make it well-known, will get the first seat in the game of musical chairs.   One can prepare for that.

Pimp Juice's picture

The Japanese and Germans will be fine after the crash because they are productive and savers. Club Med and US, not so much. Sayonara round eye.......

TBT or not TBT's picture

The Japanese are aging and will spend their savings. Some of that is in Japanese government bonds. Not bullish for Japan. Same deal in Germany which has low birth rates.

Antifaschistische's picture

Yes, Japanese are great savers...but what they've saved will make a difference.   Too bad they didn't all believe in collecting gold.   If they didn't in the past.  They soon will, and the clock is ticking.  Asians, which I respect, often move in mass hysterical fashion.  Japanese citizens alone could send a tsunami through the gold/silver market once they throw the bandwagon switch.  My personal belief, is that desperate foreigners will drive the PMs through the roof.  When the monetary crisis hits the shores of America, numbskull Americans will be priced out and will not have anywhere to turn for wealth preservation.  At that point, we will see completely psycho price action in bizarro places as money runs for the crevices to avoid being washed out to sea....and the sad thing is, in spite of all the absurd advertisements on TV and the radio to buy gold and silver from the mass conmen, Americans are still 99% sheeppishly ignorant of the storm on the horizon and do nothing at all to prepare. 

Eric L. Prentis's picture

U.S. GDP growth in 2012 was +1.6%, not +2.2%.

Since WWII, a sub 2% GDP growth for a year, as an economic expansion slows, always predicts a recession. 

Quantitative easing has failed in the U.S.


neutrinoman's picture

Indeed. The recovery started in 2009 at +2.6%, slowed to +2.2% in 2010, slowed to +1.8% in 2011, and slowed yet again to +1.6% in 2012. Because official statistics understate inflation, even these numbers are probably exaggerations, as are the NFP numbers (distorted by seasonal adjustments and other flaws).

QE was never designed in the first place to produce economic growth or lower unemployment. Its sole purpose originally was propping up the banks/stabilizing credit markets. It had a legitimate role in 2008-9 for those reasons. But then it was continued for shifting motives less and less connected with the 2007-9 crisis.

Since late 2010, the main purpose of US QE has been keeping interest rates low to subsidize large government deficits. But benefitting Wall Street speculators and pumping up the housing market again are important secondary motives. The most important side effects of QE are punishing savers and discouraging productive lending (as opposed to speculation or gimmicks like share buybacks and M&A).

All the public talk about promoting growth, lowering unemployment, and fighting deflation (an absurdly exaggerated threat, unless one means asset deflation) is just a smokescreen. Unemployment, measured realistically, hasn't improved much. And growth started slowing in 2010 and is still decelerating.

pagan's picture

QE has worked just fine. Not for main street but certainly for wall street.  

The US banking system was in tatters before QE. Now it's pretty stable compared to others.

Iam_Silverman's picture

"The US banking system was in tatters before QE. Now it's pretty stable compared to others."

By using my favorite metric (bonus size), they are doing much, much better than "pretty stable".

meizu's picture

The shale boom has mitigated the damaging effects of QE, Japan will have no such luck.

budda's picture

The opposite, Fukashima.

Conax's picture

As long as silver doesn't budge, it all good. 


falak pema's picture

if the Japs blitz and Ben kablitzes, Merkel will look like Joan of Arc as the virgin warrior who never gets rid of her austerity belt.

Some types of chastity get you very chastised for being a fat princess despised.

booboo's picture

Yea well if rampant food inflation (yes, when wages are dropping or staying flat it's fucking rampant) is part of this "propping up of the economy" then it's breaking the backs of wage earners. I don't know but does SNAP come with COLA's?


rawsienna's picture

point 1 -  name a country that has successfully exited from QE.  The heroin feels great but as time goes on its effect gets smaller and smaller. Until we see what happens when/if the FED exits, then we do not have an answer.  

point 2 -  Austerity can work if it is complemented with a large currency devaluation. It can not work in Europe's fixed exchange rate system. 

point 3 -  Japan  -  Not much to say there.  High risk adjusted real rates have been good to savers.  They need negative real rates but that hurts a society that is aging. 

point 4   --  For those long gold, will only work from these levels not when inflation starts, but rather when it becomes evident that the central banks have no will/desire to stop it.  That is next years story.  

final point  - QE in US is a giant wealth transfer to the government and to the 5% of the population that owns more financial assets "excess savings" than they need for retirement at the expense of everybody else. 

falak pema's picture

we're heading into Mad Men territory...who is Don Draper in this house of the setting sun?

yabs's picture

when the Yen starts to glow in the dark won't it be worth more?

yabs's picture


I have one word for anyone who thinks hyperinflation and high credit expansion/inflation is the same



hyperinflation is not necessarily accompanied by high credit expansion via loans

it can also be through loss of confidence

Zimbabwe printed money to pay off an IMF loan, it did not have a huge credit bubble

q99x2's picture

"Fact 1: The U.S. recovery proves stimulus works and the recovery will happen faster if there's more aggressive QE."

You've got to be kidding me.

RockyRacoon's picture

Hey, half-assed, RTFA.

"Given these are "facts" beyond dispute, let me dispute them."

Joe moneybags's picture

Read the whole article before commenting, q99x2.

kaiserhoff's picture

If Soviet Central Planning worked, we would know that by now.

This will crush manufacturing, farming, and all productive enterprise.

The scum of the earth will float along on it quite well.

disabledvet's picture

actually the Central Bank could simply buy all the debt and "liquidate it" if they wanted too. i do agree you still have a problem with raising NEW revenues as a consequence...but right now i think their back is against the wall and they have to do "the anything option." according to the Emperor "this is the worst crisis Japan has faced since World War II." and indeed "that's saying something."

dadichris's picture

so, lose money policy caused the credit bubble and disaster, but the way to recovery it is an even looser policy?  apparently humans are just that gullible...

bobbydelgreco's picture

    i have 2 words for hyperinflationary idiots .... liquidity trap

ISEEIT's picture

I suspect that Cyprus will largely blow over. An experiment if you will. The important money got out in the week or two before this game began. Do they really need to let Japan play that much longer? Maybe. If so then a bet that the Yen trades at far lower value to the USD is plausible.

They have (Japan) been falling for this crap much longer than we after all. Might just be the sadist in these freaks? Not normal for you or I , but imagine (not hard to do) that these 'people' actually enjoy the concept of destroying by war and other sickening means entire societies?

The key to comprehending this line of thought lies in studying history at the macro scale and accepting current events filtered through the lens of an outside observer, rather than solely as a participant.

My guess is that Japan needs to go. The Japanese people are injured, their culture has been diminished and mocked. As with anything real and good, the globalist will systematically destroy whatever they discover to be an obstacle to their sickening agenda.

First they came for...

Binko's picture

Wrong. If the "important money" got out of Cyprus early then the banks will be even further weakened. Cyprus is the first domino in the chain reaction that will end the Euro experiment.

There are three paths that the Cyprus crisis can follow, all of them bad.

1) Cypriot elites kowtow to their Eurozone masters and seize bank accounts to fund a bailout. If there is one thing that will drive even a somnolent populace into rebellious frenzy it's somebody grabbing their savings. Riots, government overthrow, death threats to legislators and back to square one with this option.

2) Eurocrats relent and bailout Cyprus banks with some token face-saving special tax attached. Message sent to other failing economies that bailouts are free if you play hardball. Bailouts accelerate and Northern discontent grows.

3) Cyprus banks fail utterly. Cyprus economy crushed. Cyprus leaves Euro and resurrects local currency. New friend, Russia, helps out and receives rights to naval base. That would be domino one and the chain reaction starts....

ISEEIT's picture

4.5 billion is not chump change in context of the total being marked for siezure. Just consider the reality of how incredibely corrupt these sicko's are. Corruption is merely a manifestation of deception and deception rules these creatures 24/7. Corruption/deceit is the most visible and authentic attribute of these monsters. They are not yet prepared to pull the plug/crash the party. Your prognosis of open doom is premature.

toys for tits's picture


And I would only add that no matter what is chosen, the damage to Europe has already been done by the Troika, which is they are willing to seize demand deposits and send banks on extended holidays.

These lessons will not be wasted on the rest of Europe, which will cause withdrawals, thus further weakening already weak banks.


CH1's picture

If there is one thing that will drive even a somnolent populace into rebellious frenzy it's somebody grabbing their savings.

Hunger is #1, but your point remains a good one.

And, I kind of expect your #3 to happen. If the Russians come out of this without the naval base they've always wanted, they are idiots.

Misean's picture

Kamikazi Kurrency...

EARLPEARL's picture

well if he is right buy jgbd and ycs and leverage it by 20 and you will be the richest man on earth in a few years

sitenine's picture

WTF? - "Fact 1: The U.S. recovery proves stimulus works and the recovery will happen faster if there's more aggressive QE."

Is that you, Krugman?