Guest Post: Japan Vs. Newton (And Certain To Lose)

Tyler Durden's picture

Submitted by Chris Martenson of Peak Prosperity,

Conventional thinking and reporting has it that Japan is conducting a larger version of the same monetary experiment they’ve been running for about 15 years.  The implication here is that we can safely analyze what Japan is up to through the same monetary lens, as always, but with a slightly wider aperture.

By now, we are all familiar with the details.  Japan has initiated a program of monetary expansion that goes by the shorthand of 2-2-2.  In two years, the Bank of Japan (BoJ) will fully double the monetary base as it seeks a minimum of 2% inflation.

In the aftermath of this announcement, the yen weakened by a whopping 8% against the dollar, the Nikkei stock average vaulted up by roughly 10%, and the $10 trillion Japanese government bond market had to be frozen twice because of intense volatility. 

In truth, what Japan is running is as much a massive social experiment as it is a monetary experiment.  It has such enormous implications to everyone, but especially the Japanese people, that we should all be paying very close attention.

Creating Inflation

The basic formula for creating inflation involves more money and credit chasing too few goods.  Whether this is more goods (just not enough to match the growth in money and credit), the same amount of goods, or even fewer goods is not important.  What matters is that there is more money and credit than goods. 

On this front, so far, so good.  Japan is going to fully double (!) the monetary base in just two years.  In any tidy, mathematical world where economics is governed by linear, rational processes, this doubling of the monetary base would result in inflation.

Unfortunately, the real world is not very tidy. 

The monetary base is really an abstraction that refers to the amount of money that the banking system has available to pyramid into a greater number of loans.  As I am sure you have figured out by now, simply having more money in the system will not automatically result in more money chasing goods. 

In fact, without a good reason to borrow and then spend that money, those new funds may well just sit in the banking system chasing nothing related to real goods and services in the real economy.  Instead, that money will simply chase financial assets such as stocks and bonds.

The BoJ knows this, and yet their plan revolves around the idea that they can create inflation by simply doubling the monetary base.  Does this mean they are confident that there is pent-up consumer demand that was stymied by a lack of cheap funds from the banking system? 

The very short answer is ‘no.’  The BoJ knows perfectly well that more base money will do nothing to stimulate additional inflation via consumer demand, and they know this because Japan has had rock-bottom borrowing costs for a very long time.

The Real Target – Trust

So if the BoJ already knows that more base money will not lead to the buying of more goods and services, then what is their plan for stoking inflation?

The answer is both simple and somewhat upsetting: They are targeting people’s trust in the yen.  The idea is simple to understand, as inflation requires that people prefer to hold ‘things’ instead of money.  That is, the preference for money is diminished and the preference for real things, perhaps anything other than money, is elevated. 

If enough people decide that holding money is a losing proposition, they will favor consumption instead.  The way to get people to favor things instead of money is to debase their confidence in money.  So people’s trust in money has to be targeted, and this is, indeed, the BoJ’s target.

The sad part of this story is that the BoJ is seeking a 2% (minimum) inflation target under the theory that higher inflation will be good for the economy and therefore Japanese businesses and therefore Japan.

The problem is that there are multiple reasons that prices might rise.  Some of them are beneficial to these inflationary aims, and some of them are destructive.  For example, if prices rise because people lose confidence in the yen, and prices rise because imports cost more, then this simply hurts consumers at the benefit of exporters.

In short, there is no net societal gain.  The accounting identity in play here is that one entity’s loss is another entity’s gain.  If consumers and importers have to pay more for imported goods simply because the yen has fallen in value, then all we have to work out is who gains.  Exporters gain, by and large, as do other sectors.  

That’s just the way these things work – it is not possible to engineer a gain where everybody benefits because one sector’s deficit automatically becomes another sector’s gain.  It is simply Newtonian physics.  For every force, there is an equal and opposing force – only the forces are economic and involve gains and losses.

The form of inflation that Japan hopes to stoke involves the kind where money currently stored in Japanese bank accounts comes roaring out into the Japanese economy.  The BoJ is willing to harness the import/export losses as a useful means of convincing the local businesses and populace that the yen is just not a safe store of value.

So the basic plan that the BoJ has put into motion is to ruin local faith in the yen.  It is actively targeting trust, a necessary component of any fiat-based currency, under the twin theories that it knows what it is doing and will know when to stop.

The problems are that I am pretty sure they will succeed beyond their wildest hopes and that nobody at the BoJ has any experience in massive social engineering experiments. 


The BoJ is not just running the largest monetary experiment in their history, but also the largest social engineering experiment.

Trust is an essential component in every economy and for every currency.  The BoJ has just upped the ante by explicitly and specifically targeting trust in the yen. Perhaps they know what they are doing, and we certainly hope so, but I happen to think it is playing with fire.

There really aren’t any guidebooks for it to follow, and even if there were, it is doubtful that the economists in charge would have been required to study them during their academic training and political careers.

If the notion of your pilots flying blind bothers you, then you are probably not very happy or confident with the BoJ’s actions here.  Were I a Japanese citizen, I would immediately convert my yen holdings to something, anything, else.  Swiss francs, gold, dollars – anything (!) would be preferable to me here.

Once your central bank declares war on its own currency, this is just the prudent thing to do.

For everyone else, Japan is now the largest economic Petri dish on the planet and is well worth studying for what happens next.


The early results, with a manic pulse in the Nikkei coincident with arrhythmic gyrations in the Japanese government bond market, suggest that something has been shaken loose in Japan.

Trust, perhaps?

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butchee's picture

How long does it take a 13 sigma event to become a 2 sigma event?

Clint Liquor's picture

The BOJ has defied the Laws of Physics and built a 'perpetual motion machine'. Now we get to see if it works.

butchee's picture

Fuck the first and second laws of thermodynamics......and, of course, Ben Bernanke.

Zer0head's picture

birdflu in chinois:  a bio attack by dear leader jr? or a new fusion offering by @WolfgangBuzz

markmotive's picture

Japanese policy will go down in the history books as one of the biggest economic blunders of our time. What are the knock-on effects? I don't know yet. Ask me in 10 years when whatever crisis is melting down the world financial system.

Things that make you go hmmm...A date that will live in yenfamy:

Unique Snowflake's picture


It's so fucking obviously anti common sense that the ONLY conclusion anyone with a brain can come to is that it's gigantic FRAUD. The 1% know that the 99% are too stupid or busy trying to survive that they wont notice their wealth being stolen until it is. Then they are so arrogant they believe they can bullshit their way out of it. Chances are they will to. Joe public is one dumbass gullible motherfucker who just loves sucking the dick of his beloved leaders.

Vampyroteuthis infernalis's picture

Japan, land of the sinking sun.

philipat's picture

At least when it all goes tits up, that insufferable prick Krugman will demonstrably be proven wrong.

aint no fortunate son's picture

a tight, symmetrical pennant has formed on the USDJPY - if technical analysis was still valid (it actually is in some markets, sometimes FX, but not equities certainly) the betting would be that the voodoo witch doctors see a breakout through 100 on the pair

Bohm Squad's picture

Tokyo traders have been at their desks for a few hours now...interesting trade though...could set stop/loss at 98.40 (risk 60 pips) and see if total destruction is, indeed, in the cards.

Vint Slugs's picture

Here's another technical view of the yen.  These guys have been right on the money - so far.


Spawn of Cagliostro's picture

The new New Normal....from King Bloomberg's network...

Bank of Japan (8301) Governor Haruhiko Kuroda’s unprecedented stimulus has made his nation’s bonds the world’s most-volatile sovereign debt after Greece’s.



Ignatius's picture

Japan vs Newton, why not? 

Certainly they find encouragement from NIST's 'success':

Croesus's picture



Bend Over, Here It Comes Again!

Pareto's picture

Can't resist: BOHICA Bitchezzzz!

More_sellers_than_buyers's picture

Wait, what? Printing money is bad? Someone should tell someone at the fed before some moron here gets that idea!

DeadFred's picture

Flying blind and not really knowing what the other players in the game are going to do, one can only guess at the desperation that drove them to this strategy.

Smuckers's picture

Shame, they make some pretty good cartoon porn and silicon dolls. 

DaveA's picture

Those silicone dolls just got a lot more affordable to anyone who's not paying with yen.

StychoKiller's picture

+1 for knowing the difference between silicon and silicone.


Hohum's picture

Why should Japanese worry about inflation if the BOJ's actions just goose asset prices?  The Japanese equivalent of the CPI won't go anywhere.  


On the other hand, the weakening yen means higher import (read: oil) prices.  Maybe Japan should go "post industrial." 

Mine Is Bigger's picture

May I ask what CPI stands for in your world?  In my world, it's consumer price index.

Hohum's picture

That's it.  Japan isn't going to inflate, at least as measured by consumer prices.  If it's lucky, there will be the closed loop of rising asset prices and bond buying.  If not, recession, deflation, and misery.

Mototard at Large's picture

CPI    Currency Printing to Infinity?

ImReady's picture

CPI = Cocks Preparing Insertion 

andrewp111's picture

Inflating the oil price is a good way to get your nuclear industry restarted, isn't it?

kaiserhoff's picture

Thoughtful piece.

The only sure result of this tap dancing is a dramatic increase in the price of imports.

Given Japan's energy and radiation problems, Abe either has the wrong answer, or a very strange question.

q99x2's picture

I don't know but a long time ago I heard something about a bunch of japanese on one of the islants. They had grown lots of hair after the bombing of Nagasaki and Hiroshima. I wonder if that's what people are reporting when they see Sasquatch now.

Let's get real. The money is going to come roaring out into Bitcoin and other currencies.

Big Ben's picture

If doubling your monetary base in two years creates 2% inflation, then will tripling your monetary base in three years create 3% inflation and quadrupling your monetary base in four years create 4% inflation? But wait! Doubling your monetary base in two years and then doing it again is the same as quadrupling your monetary base in four years. So does it create 2% inflation or 4% inflation.

I think the Japanese have no idea how all this money printing will actually affect their inflation rate. Will they stop if the inflation rate goes above 2%? The problem is that once inflation gets started, it tends to feed on itself. As people see the value of their money decreasing, they become more inclined to spend it, money velocity increases, and this causes even more inflation. And then the only way to stop the process is for the central bank to really clamp down on the money supply, causing a nasty recession.

andrewp111's picture

The system is highly nonlinear and path dependent. One cannot exprapolate or predict what a monetary expansion will do based on prior history.

spine001's picture

It is correct that you can not predict what will happen in detail. But there are a few thing you can indeed predict mathematically using chaos theory: 

1. By increasing the monetary base they are increasing the gain in the system (a great explanation of gain can be found in chapter 4 book by Schiller "Irrational exhuberance" second edition, where he calls it amplification.

2. Increases in the gain of a highly nonlinear system with multiple feedback loop makes it increasingly likely that the system will at some point become unstable. 

3. The new stable state after the instability period is called attractor and can be bounded mathematically, meaning we can indeed know many of its characteristics ahead of time.

4. The theory demonstrates (and has been proven in practice) that it is impossible to predict the trajectory of the system when it transitions from attractor A to B. The reason is that the solution to the new system is infinitely sensitive to the initial conditions. One simple example is the experiment of placing an inflatable ball in a pool with a water fall. You know it will end under the water fall but it is impossible to predict the path with any accuracy. The water fall is the attractor.

As I progress in my courses on economics I realize that these guys are unaware of this and have never studied simple control theory. Like an industrial chemical plant wehre this knowledge is critical to keep the plant operating in a stable mode. They know about amplification and feedback loops but have never put it together. God help us if the physicists that are advising our leaders don't start looking into this and take control of the decisions from the economics and relegate them to just provide input into the analysis and NOT  decision making. The system is incredibly resilient but I suspect we are reaching its stability limit. Once the transition  starts there is no stopping it and don't delude yourself that you can either time it or predict its trajectory during the transition.

Until next time,


q99x2's picture

Hey Charlie Musselwhite is playing at the White House. He's the best ex-junkie harmonica player I ever met.


q99x2's picture

Hey Charlie Musselwhite is playing at the White House. He's the best ex-junkie harmonica player I ever met.


Live video on Drudge Report Celebrating their BitCoin profits.


NoDebt's picture

Surprising such a simple thing can be made so complex.  There is little reason to fear demand-pull inflation in Japan.  They're printing because that's how they're going to retire a significant portion of the huge government debt- financial repression plus printing money (a bigger version of the Fed QE model).  If interest rates spike, they're hosed and quickly.  They are betting they won't, just like they haven't in the US. 

It's a big bet.  And it'll probably work for some period of time.  It's a lot of inertia to overcome before the worm finally turns on them.

1eyedman's picture

at what point do they just move the decimal point, and truly 'retire' some govt debt.?

sitenine's picture

Boom! Cue up some Kyle Bass, please.

khakuda's picture

It doesn't necessarily mean people will consume.  They may just buy financial assets, as they have done in the US for 4 years now and create asset bubbles.  When the bubbles pop, we get more deflationary economic seize ups.  Instead of paying people interest that they could spend now, they chose to boost 401k values, which can't be spent until one is 65 without penalty.

Central bankers are like the kids who got A's in school, but had no common sense.  You know the ones.

Da55id's picture

small nit...can't be spent until one is 59 1/, I'm 60 :-)

kchrisc's picture

What I like is that the wizards of OZ in Tokyo are saying printing creates inflation and that that is their goal while the wizards in DC say that printing doesn't create inflation but economic activity does

They´re both playing basketball with a ticking time-bomb and we, the average Joes, are the ones going to get dunked.

I´m dulling the blade on my guillotine as we speak.           hujel


dolph9's picture

The Japanese are a neutered people who are trying to get their mojo back.  In this particular game, though, they're not going to beat the Bernank.

What they need to do is stop buying U.S. Treasury bonds and tell the U.S. military that they all need to go home, and that if they don't go home they will force them to.


But they'll never do that because ever since Hiroshima they lost the will to be predators.

mendigo's picture

Why is Japans trying to devalue its currency such a big deal - its what the rest of the "developed" world is doing? So far they're just jawboning and maybe there is some manipulation going on.

Still its interesting that all they can come up with is more of the same - now why would someone try to solve an economic problem by making credit so cheap. Its a playbook with only one play. I suspect the reason is that while its mostly ineffective it allows the government to control the economy with disasterous results for most but very nice for some.

zen0's picture

Don't underestimate the Japanese. They see what other people are doing and they do it with more quality and simplicity. It is how they roll. Authenticity is not a consideration. The pre-eminence of form itself is paramount.

ISEEIT's picture

I genuinely and sincerely admire the Japanese people and culture.

Still toast.

Central planning.

Gets ya everytime.

ISEEIT's picture

As Professor Paul Krugman shall explain upon the failure of this SCPA (save central plannings ass) operation. The cause of failure will "obviously" be that they just didn't go big enough.

Lesson to the world and RIP Japan.

fijisailor's picture

"So people’s trust in money has to be targeted, and this is, indeed, the BoJ’s target."  So this is the BOJs intention but not the FEDs?

Notarocketscientist's picture

Any japanese person with half a brain would not spend it.... they would convert it to other currencies... or to Gold

Bohm Squad's picture

At 8:57 EST, this came across my platform's newsfeed:  Abe says to change deflation mindset through bold easing.


Timely article...maybe he read it.

stateside's picture

This shows that the sheep in the US have an equally ignorant group of people in Japan.  Hurry up and sell that gold.



Room 101's picture

Ignorant, perhaps. Desperate, more likely.