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Japan's Chain Of Events: Stagnation -> Monetization -> Devaluation -> Stabilization -> Retaliation -> Hyperinflation

Tyler Durden's picture


As the world's equity markets prepare to rally on the back of yet more central bank printing as Japan's Shinzo Abe takes the helm with a 2% inflation target, to be announced momentarily, and a central bank entirely in his pocket, The Telegraph's Ambrose Evans-Pritchard suggests a rather concerning analog for the last time a Japanese minister attempted to salvage his deflation/depression strewn nation: the 1930s 'brilliant rescue' by Korekiyo Takahashi, who removed Japan from the Gold Standard, ran huge 'Keynesian' budget deficits intentionally, and compelled the Bank of Japan to monetize his debt until the economy was back on its feet managed to devalue the JPY by 60% (40% on a trade-weighted basis).

Initially this led to exports rising dramatically and brief optical stability, but the repercussion is the unintended consequence (retaliation) that the world missed then and is missing now. Though the economy appeared to stabilize, the responses of other major exporting nations, implicitly losing in the game of world trade, caused Japan's policies to backfire, slowed growth and left a nation needing to chase its currency still lower - eventually leading to hyperinflation in Japan... and Takahashi's assassination.

And with no Martians to export to, why should we expect any difference this time? and how much easier (and quicker) are trade flows altered in the current world?

Via The Telegraph:

Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary, and exchange stimulus.

What happened last time the a Japanese minister tried to desperately devalue his nation to growth?

This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by Ben Bernanke as the man who "brilliantly rescued" his country from the Great Depression. Takahasi was the first of his era to tear up rule book completely. He took Japan off gold in December 1931. He ran "Keynesian" budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office. He compelled the Bank of Japan to monetize debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity. He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan's textile, machinery, and chemical exports swept Asia, ultimately causing the British Empire and India to retaliate with Imperial Preference and all that was to follow -- and there lies the rub, you might say. Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs. Policy degenerated. Japan later lurched into hyperinflation. 

but the initial stability and growth could have unintended consequences as:

Needless to say, printing money has its perils too. The risk is that Japan could escape gentle but stable deflation -- the Devil it knows -- only to see a panic flight from bonds that overwhelms the Bank of Japan. As Governor Masaaki Shirakawa told the Diet through gritted teeth, "long-term yields could rise, and that would be a problem for public finances."

Japan's unilateral move may also be perceived badly by the rest of the G-20...

Mr Abe's frustration is understandable. Japan is cursed with a safen-haven currency that strengthens in times of trouble when least wanted, the cross that  creditor states must bear. Japan did uphold the G20 deal in March 2009 to refrain from "competitive devaluations", when others did not. But should Japan now buy foreign bonds on a mass scale to suppress the yen, there will be trouble. Tokyo will be blamed as the aggressor in the outbreak of currency wars. Others will retaliate.

And just as we have warned (and Kyle Bass has painstakingly described):

"Banks hold JGBs worth 900pc of their Tier 1 capital. Their portfolios would be decimated if long rates punched above 2pc. Japan might then face a banking disaster as well. These are the hard choices that Mr Abe has to make. "

And as Evans-Pritchard concludes correctly:

Huge issues are at play here. The world's trade system is fragile. The wasting disease behind the Long Slump is a record high savings rate of 24pc of global GDP, and too little demand to go around. Everybody wants a weaker a currency. They can't all have it.


Japan's great experiment cuts both ways for the rest of us: the reflation blitz helps lift the global economy out of the doldrums: but yen manipulation snatches market share, incites protectionism, and takes us into the brave new world of "actively managed exchange rates", as Sir Mervyn King put it last month.

To summarize:

  • Stagnation
  • Monetization
  • Devaluation
  • Stabilization
  • Retaliation
  • Hyperinflation

Almost like a U2 song. And this is what already happened in Japan. Luckily, this time will be different.

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Mon, 01/21/2013 - 17:34 | 3173779 Pladizow
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Whos gonna hold 10yr JGB @ 0.7% with 2% inflation?

Hiroshima part 2 here we come!

Mon, 01/21/2013 - 17:41 | 3173792 LawsofPhysics
LawsofPhysics's picture

The Fed (in exchange for all the underlying physical assets and resources, including the soylent green or human resources).  What?  Not dophrin and whale?  Kill chicken and cow!

Mon, 01/21/2013 - 17:45 | 3173800 TruthInSunshine
TruthInSunshine's picture

Japan is continuing, but with a renewed sense of urgency and thusly-ness, its long-standing, one point, Krugman-endorsed plan for pulling itself out of its enormous debt:


1)  Dig deeper.

Mon, 01/21/2013 - 17:48 | 3173810 LawsofPhysics
LawsofPhysics's picture

The world has really become on big disgusting game of monopoly hasn't it?  Bankers conjuring up quadrillions to exchange for real labor and resources.

Mon, 01/21/2013 - 18:00 | 3173837 economics9698
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"Japan's Chain Of Events: Stagnation -> Monetization -> Devaluation -> Stabilization -> Retaliation -> Hyperinflation"

lol, classic Tyler.


"Whos gonna hold 10yr JGB @ 0.7% with 2% inflation?"

Yes, we have a winner!

Mon, 01/21/2013 - 19:19 | 3174043 Manthong
Manthong's picture

"the 1930s 'brilliant rescue' "

Well, they did get a kick-ass Navy out of the deal..

for a while, at least.

They might need that for China this time around.

Mon, 01/21/2013 - 23:54 | 3174629 lewy14
lewy14's picture

"Whos gonna hold 10yr JGB @ 0.7% with 2% inflation?"

All of Japanese institutional finance. That's who.

This time is never different, but this place is. Japan, that is. It's different.

They are singularly averse to - and culturally immune to - "defection".

If the system requires them to purchase bonds with negative yield, that is what they will do. Reading in Western behavior would be a mistake.

What Japan aims to do is kill their currency without killing their bond market. They may very well succeed in this aim.

Tue, 01/22/2013 - 01:04 | 3174788 old naughty
old naughty's picture

What Japan aims to do is to kill their senior citizens...

so no retirement benefits payout as they're all suniked in to the 10yr JGBs.

Mon, 01/21/2013 - 18:03 | 3173846 Snakeeyes
Snakeeyes's picture

Look at japan's empoyment to population ratio. The USA is getting there where the drag is so great that monetary policy is ineffective. China, on the other hand, ...


Mon, 01/21/2013 - 18:52 | 3173981 Motorhead
Motorhead's picture

1930's?  Hmmm, I don't think that was the only experiment carried out by the Japanese during that time.

(BTW, how do you say "Lebensraum" in Japanese?)

Mon, 01/21/2013 - 21:59 | 3174368 BigInJapan
BigInJapan's picture


Mon, 01/21/2013 - 17:56 | 3173833 Id fight Gandhi
Id fight Gandhi's picture

All the tea in china... Oh wait.

Mon, 01/21/2013 - 18:40 | 3173947 Tango in the Blight
Tango in the Blight's picture

Fukushima = Hiroshima

Mon, 01/21/2013 - 20:13 | 3174144 Goldilocks
Goldilocks's picture

...negotiation, by other means

Mon, 01/21/2013 - 19:15 | 3174038 ShrNfr
ShrNfr's picture

Not so different than holding a Unka Sam 10er at 1.8% with 2.4% inflation is it? They still find suckers.

Mon, 01/21/2013 - 22:39 | 3174455 Matt
Matt's picture

2.4%?! More like 10 percent using the original 1980s methodology: http://www.shadowstats.com/alternate_data/inflation-charts

Tue, 01/22/2013 - 07:40 | 3175013 DavidC
DavidC's picture

I think they're called Central Banks.


Mon, 01/21/2013 - 21:17 | 3174282 Buck Johnson
Buck Johnson's picture

I guarantee you it's coming. 

Mon, 01/21/2013 - 17:46 | 3173783 Ghordius
Ghordius's picture

AEP? I faintly remember some words on the EUR from him...

Ambrose Evans-Pritchard's 2010 predictions for example

I particularly like how he ends the tale of world financial destruction in all countries except the UK and the US with 

By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

Mon, 01/21/2013 - 18:40 | 3173949 Orly
Orly's picture

Had things been attended to in a more honest and ethical fashion, he was probably right.

Now, due to insidious interventions, that's been put off by seventeen years or so.


Mon, 01/21/2013 - 18:59 | 3173997 TruthInSunshine
TruthInSunshine's picture

Right now, it's fair to say that Germany would be at economic/financial war with London & New York, though it'd be more of cold & very stealth war, but this isn't transpiring because the global elite are preventing it from happening through use of their installed puppets within the German Government and Bundesbank.

WWI and WWII weren't just some random, spontaneous events that happened without direct causal inputs and catalysts from the world monetary/financial structure.

Mon, 01/21/2013 - 21:31 | 3174297 This just in
This just in's picture

Those are some big ass boils.  We're gonna need a bigger gauze pad.

Mon, 01/21/2013 - 21:33 | 3174301 This just in
This just in's picture

Wait a minute, we'll just use use stacks of twentys...

Mon, 01/21/2013 - 17:41 | 3173790 francis_sawyer
francis_sawyer's picture

Whip Defration Now!

Mon, 01/21/2013 - 18:25 | 3173909 IamtheREALmario
IamtheREALmario's picture

Isn't it time to hit the reset (err, weset) button on the entia grobal ecwronomy?

Mon, 01/21/2013 - 19:11 | 3174021 Goldilocks
Goldilocks's picture

Devo - Whip It (Video)
http://www.youtube.com/watch?v=IIEVqFB4WUo (2:47)

Mon, 01/21/2013 - 17:42 | 3173795 Pairadimes
Pairadimes's picture

Is it possible yet to calculate the total amount of world CB stimulus that results in a money velocity of zero?

Mon, 01/21/2013 - 17:43 | 3173797 fonzannoon
fonzannoon's picture

85 Bil a month and the Bernak still is a piker compared to Japan. Pathetic. I remember when the USA used to be #1.  Now we can't even wreck our currency the best.

Mon, 01/21/2013 - 17:49 | 3173816 PUD
PUD's picture

At the risk of repeating myself yet again...another reason for a one world currency. The idea of competitive currencies is insane. The idea of competitive nationalistic economies is insane as well. The planet has shrunk in case you haven't noticed. We do not sail ships full of spice and furs anymore. It is a global economy no matter how much you fear "commies" and to pit one part of it against the other either in resource wars or currency wars is nothing short of madness.

The only hope of salvation for this planet is co-operation. That means co-operating interests, shared resources, shared technologies, shared ideologies etc

You can no longer pit one interest against another and expect anything less than mutually assured destruction

Mon, 01/21/2013 - 17:52 | 3173827 Tyler Durden
Tyler Durden's picture

You do realize how trade works? Luckily, in a world in which central banks can print all the wealth they need, there is no need for trade.

Mon, 01/21/2013 - 17:58 | 3173838 TruthInSunshine
TruthInSunshine's picture

Or employment, productivity or demand.

This printing thing is the real panacea that finally gets us to the utopia land. Why didn't they think of this before?

Mon, 01/21/2013 - 18:13 | 3173873 rehypothecator
rehypothecator's picture

"What do we need employment for?" indeed:




Mon, 01/21/2013 - 18:31 | 3173924 IamtheREALmario
IamtheREALmario's picture

Yea, I am thinking that a fresh suppy of whips will be a suitable substitute for trade and currency. Oh, wait, all of the whip manufacturers went out of business during the last recession.

To rid the world of pesky parasiites all we need to do is eliminate all monopoy control of fiat currency creation. 

Mon, 01/21/2013 - 18:00 | 3173842 PUD
PUD's picture

I know how trade works. i know that it is conducted with currency and with disparate currencies there is the ever present temptation to one up your neighboring trade parter via depreciation. 

I am not speaking of the mechanism of money creation, I've addressed that in other comments. 

A one world currency would be pegged to a basket of real world goods and services. The currency would always have the same real world value any place on the planet. It would not be created via debt as money is now it would be spent into existence as the demands of business and population required 

My main point is...the entire paradigm has to change. The nature of money, the debt based nature of money, the procurement and distribution of global resources etc

Most of the people commenting on financial matters function entirely from within the existing dogma and expect some radical change...i'm saying that the system itself and our relationship to it must change

Mon, 01/21/2013 - 18:03 | 3173847 LawsofPhysics
LawsofPhysics's picture

The entire paradigm will change when the supply lines break.  History is very clear on this.  Get your tribe in order as all eCONomies are really local, another point history is also very clear on.

Mon, 01/21/2013 - 18:08 | 3173860 PUD
PUD's picture

sadly you are most probably correct. it does not have to happen but given human nature, tribalism and history, you're probably right

Mon, 01/21/2013 - 18:25 | 3173906 1000924014093
1000924014093's picture

Bears repeating.

Mon, 01/21/2013 - 18:07 | 3173861 PUD
PUD's picture

sadly you are most probably correct. it does not have to happen but given human nature, tribalism and history, you're probably right

Mon, 01/21/2013 - 18:25 | 3173907 1000924014093
1000924014093's picture

There you go.

Mon, 01/21/2013 - 19:59 | 3174121 LynRobison
LynRobison's picture

And I am thinking that you probably won't be a member of my tribe. 

Mon, 01/21/2013 - 21:40 | 3174323 This just in
This just in's picture

I think my tribal tatoo wil be Benny Boy poking out of a sphincter, waving and saying, "A-the- a-the- a-the- a-the A  Th-that's all Folks!"

Mon, 01/21/2013 - 18:20 | 3173892 Sean7k
Sean7k's picture

And who controls and distributes said currency? Same world value, perhaps. Opportunities for currency inflation- total. This would be the ultimate legal tender law, resulting in the ultimate totalitarianism. 

It is the elimination of all legal tender laws, the complete freedom for people to value commodities as they wish that would guarantee the most efficient trade. Value discipline is only found in freedom- not control.

Mon, 01/21/2013 - 18:27 | 3173914 Ghordius
Ghordius's picture

PUD, a fiat currency requires and is built on TRUST
It's aggregated market value is GOODWILL in the issuer and it's allies

where is this "entity basking in global goodwill" that could issue it?

For sure not an IMF or an UN or whatever

btw, we already have a global reserve currency, it's the USD

Mon, 01/21/2013 - 18:30 | 3173926 Bicycle Repairman
Bicycle Repairman's picture

"A one world currency would be pegged to a basket of real world goods and services."

Sez youse!!

Mon, 01/21/2013 - 18:37 | 3173935 IamtheREALmario
IamtheREALmario's picture

So then eliminate monopoly control of currency creation and as a result the market will decide that the most sound currency will be used for almost everything. My guess is that the most sound currency will be the one that ia backed either by hard assets or the strongest military.

In that progressive utopian world, the US should not imprison people for creating alternative currencies. They should encourage it and see it as an incetive to make their currency valuable. Competition is not as David Rockefeller claims, a sin, but rather salvation in a capitalist society.

Mon, 01/21/2013 - 19:57 | 3174115 Cosimo de Medici
Cosimo de Medici's picture

When you held hands and sat around the campfire, what song did you sing?  I think I know.

Mon, 01/21/2013 - 20:54 | 3174242 SunRise
SunRise's picture

How is one currency an advantage over multiple market-chosen currencies, i.e if I'm comfortable with currency 'A', then I simply choose to use it over say currency 'C'.  One currency - who gets to choose and what happens when it fails to preserve my purchasing power? 

Mon, 01/21/2013 - 23:49 | 3174618 Ctrl_P
Ctrl_P's picture

How about pegging your digital/fiat/worldo/bitcoin to just one asset? One that has worked for about 10,000 years or so.



Mon, 01/21/2013 - 18:00 | 3173843 LawsofPhysics
LawsofPhysics's picture

Indeed, and many of us know that there is real value in our labor.  Fuck these paper promises.

Mon, 01/21/2013 - 21:00 | 3174249 Al Gorerhythm
Al Gorerhythm's picture

Stagnation -> Monetization -> Devaluation -> Stabilization -> Retaliation -> Hyperinflation............WAR.


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