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Is Japan Zimbabwe?
Submitted by Axel Merk, Merk Investments
Is Japan Zimbabwe? How preposterous: Japan is an advanced economy that cannot possibly suffer the same fate as Zimbabwe. Right? Or could Japan get hyperinflation? Below I explain why Japan, and with it investors’ portfolios, might be at risk.
The other day, when I was on a panel discussing unsustainable deficits in the U.S., Eurozone and Japan, the risk of inflation and Zimbabwe style hyperinflation came up. When asked about the difference about Japan and Zimbabwe, I quipped that there isn’t any. My co-panelists were all over me, arguing Japan is different. Notably that Japan could not possibly go broke because, unlike Zimbabwe, it’s an advanced economy. The argument being that Japan produces goods the world wants.
To be clear: Zimbabwe and Japan are not the same. But are they really that different? Zimbabwe not only had a much weaker economy, but also much weaker institutions. But the old adage that something unsustainable won’t last forever may still hold.
The difference between Zimbabwe and Japan – and Europe and the U.S. for that matter – is that advanced economies have more control over their destiny. However, all these regions have made commitments they cannot keep by continuing business as usual. A weak country may simply implode. A strong country has choices. The preferred choice these days appears to be to kick the proverbial can down the road.
Currently, to get the country out of its malaise, Japan is trying the three arrows of Abenomics, a combination of government spending, monetary easing and structural reform. Except, of course, when the first two arrows are deployed, there’s little incentive left for the third. Structural reform is a codename for the tough choices that need to be made to get an economy to be more competitive, including flexible labor markets and less regulation.
Because the Bank of Japan gobbles up dramatic amounts of debt, the cost of financing government spending stays low. It’s been said that a country that issues debt in its own currency cannot go broke. Theoretically that may be correct: the central bank can always monetize the debt, i.e. buy up any new debt being issued. But in practice, there has to be a valve. In my assessment, that valve is the currency. Hence my prediction is that the yen will reach “infinity” versus the dollar (a ‘higher’ yen represents a weaker currency), i.e. be worthless at some point.
The path an advanced economy with unsustainable finances takes is in many ways a cultural and political question. Unsustainable government finances tend to be accompanied with unsatisfied citizens that have seen their standard of living erode, either because inflation has eaten away their purchasing power or because the government has taken away benefits. Such an environment is fertile ground for populist politicians to be elected. In the U.S., this may be the rise of the Occupy Wall Street or Tea Party movements. In Japan, a populist prime minister is in power.
What officials have in common is that they rarely blame themselves, but seek to shift blame on the wealthy, a minority group or foreigners. It’s no co-incidence that Abe wants to abandon Japan’s pacifist constitution; if Japan were able to balance its books, I allege that odds of such a discussion would be much lower. Similarly, by the way, Ukraine would not be in its current mess if it were able to balance its books. Japan unlike Ukraine, though, has well functioning government institutions.
Raising taxes is another way to try to get deficits under control. And indeed, Japan has tried, by increasing its value added tax (VAT); except that the government has shied away from another increase because of the negative impact the recent rate hike had on consumption. Broad based consumption (or energy) taxes are the only types of taxes that even have a chance of coming close to raising the orders of magnitudes needed to stuff huge fiscal holes. It’s not surprising that Scandinavian countries all have very high consumption taxes to finance their welfare states.
The most obvious choice, of course, for a government with unsustainable finances would be to cut expenditures. But it’s only Germany that appears to have embraced austerity.
Inflation is a slow motion form of default. The “advantage” of inflation, as long as it doesn’t turn into hyperinflation, is that it is less prone to the so-called “contagion.” In a default the risk is that many solvent players are drawn into insolvency as a house of cards implodes.
The reason why a government default tends to start out as a slow motion locomotive before it falls off a cliff is because stakeholders want to buy time. In the Eurozone debt crisis, for example, risk-averse investors were caught off guard when they realized their peripheral Eurozone debt was not risk free. By now, everyone should know these securities are not risk free which reduces the risk of contagion, as these assets have mostly moved away from financial institutions to those that can bear the risk. No one is going to cry if a hedge fund loses money; similarly, if the International Monetary Fund (IMF) loses money, the losses are ‘socialized’.
Back to Japan: Japan can continue on its current course as long as the market lets it. It’s impossible to predict if and when the market might lose confidence. The Eurozone debt crisis has shown that sentiment can switch rather suddenly, even for countries with fairly prudent long-term debt management, such as Portugal or Spain. It may be naïve at best to think that there will be plenty of warning should market sentiment shift.
What we do know is that central bank actions have masked risks. Risky assets don’t appear risky anymore. But of course they are still risky. So when volatility surges – for whatever reason, investors might flee with a vengeance. A default, by the way, is not the end of the world. While the socio-economic impact on a country may be severe and a default may cause institutions to fail, especially those that own debt of the defaulting country, the reset button of default doesn’t affect everything. Government institutions may survive and so may many manufacturers. Japan induced hyperinflation to hit the reset button after World War II. Who says this can’t happen again?
Japan continues to have choices how it wants to deal with its deficits. The current ‘muddle through’ environment may actually be one of the better stages. If Abenomics succeeded and real economic growth ensued, government debt would likely fall. Except that Japan might not be able to finance itself should the average cost of borrowing move much higher. Fear not, the Bank of Japan could always step in to lower the cost of borrowing yet again. In my view, that’ s a possible scenario of when the yen is going to cave in.
There’s another difference between Japan and Zimbabwe: a default in Zimbabwe doesn’t cause ripple effects in financial markets. But a Japanese default may be orders of magnitude larger than the trouble that emanated from the collapse in Cyprus. Hedging the currency risk out of the Nikkei may not do the trick. Indeed, there’s no simple way to prepare for an outcome where one doesn’t know for sure what path Japan is going to take. Some buy the Nikkei, currency hedged. Others short Japanese government bonds. Yet others short the yen. Many more do none of the above as the timing is ‘too difficult.’ Each one of these choices – including doing nothing - comes with their own set of risks; please note that this sampling of choices is not investment advice.
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Hyperinfration!
The land of the rising Yen
the difference between japan and zim? it is a shrinking list, but the two that jump off that page are japan is crowded with japanese people and japan is dusted in radioisotopes.
http://www.planbeconomics.com/2014/11/marc-faber-japan-is-engaged-in-pon...
Three is NO difference between Japan and Zimbabwe except insofar as their creditors keep believing other creditors will keep believeing them. Its an insane loop, one only explainable by game theory. Which only makes it that much more unpredicable.
this is absurd. Japan is not Zimbabwe.
Zimbabwe is somewhat fiscally responsible.
Does a bear shit in the woods?...
is the pope jesuit?
Does a bear shit in the woods? NO! Photographic evidence.
http://www.ippaonline.org/wp-content/uploads/2013/01/06_poy_sas.jpg
Pretty much. I wonder who got on the Tele with Kuroda last night, and told him to back off on the Nikkei/usd trade?
We're all Japan now.......
i dunno if we all zimbabwe yet but fergusson is already zimbaboon...........
If Krugman had a son, he would look Japanese.
Krugman is turning Japanese
...I really think so.
No. The reason? Square watermellons.
In Japan, perfect aesthetically shaped fruit are a status symbol, given as a gift. They're inedible and non-permanent. (Approx ~$90-120 per unit).
In Zimbabwe, gifts are also a cultural norm, but the expectation is based on the economic prosperity of the giver, and the gift will have utility and economic worth (and if you're dealing arms, worth a lot more than $40,000).
That's the difference: gift culture still locked to utility vrs extremely over specialized culture where the gift is more important the more useless / rare it is. (Anyone who has done business in Japan will know this).
If you think this is a tangent, well, this has a direct effect on where government pressures are focused on. The irony is, however much it seems silly when an old man trips and then fires all his staff (Times), when said old man goes to the great pressure cooker in the earth, cultural expectations and norms are far easier for US, EU and Chinese interests to fold into.
In Japan, I'm betting the last thing still growing when economics hit are those square watermellons.
The last thing given up is the cultural - and Japan's cultural gifts are designed to be useless. Aesthetics > Utility; take that how you want.
p.s.
To the serial junker - have some balls and step up or wander away. No-one cares about your downvote, this isn't Reddit. Blood Moon, how's about a tangle?
"perfect aesthetically shaped fruit are a status symbol, given as a gift. They're inedible and non-permanent." Have you ever bought a woman flowers?
HA!
Finally, someone got the joke. Giving cut flowers in Japan is a major no-no, which is why you give fruits (among other things).
There's hope here yet.
First thought? Please dont insult Japan....omg..
Is Japan Zimbabwe?
Don't know, but Japan will soon be a province of China as the Zionist banksters move on out.
I sure hope the Chinese are over that whole Manchurian and Nanking thing.
The banksters need to repay us.
Californians may want to work on their Chinese as well.
Zimbabwe's hyperinflation was based in their racism. Sanctions created by the west helped do them in.
http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
Japan is a demographic, slow motion 'meltdown', similar to the US.
http://en.wikipedia.org/wiki/Demographics_of_Japan
http://upload.wikimedia.org/wikipedia/commons/c/c6/Population_of_Japan_s...
http://upload.wikimedia.org/wikipedia/commons/9/94/Bdrates_of_Japan_sinc...
>>Japababwe
>> Zimpan
Zimbabwe was printing DEBT-Free money.....which hyper-inflated........Japan uses credit or debt-money which will not be hyper-inflating.......Big Difference
the author came close to the truth: the valve in a reactor-lite japan is oil. assuming the other economies of the world are modestly more responsible, the yen will creep ever higher (especially if the HNW outflows continue), which will pump oil ever higher (they own about 2 drops of domestic production). in the world of zero-wage inlflation (courtesy of china, et al) this will hit the economy, which will shrink government income and increase demand for services, which means more printing, softer yen, higher oil, and on and on until it flies aparts. it is a super-charged version of the same problem which america faces.
Farm production collapsed after they stole whitey's land. Nothing to sell, like Detroit.
that is part of it, but by no means all of it. hyperinflations usually have nothing to do with having nothing to sell. look at venezuela. look at weimar. look at the soviet satelites. they all have/had things to sell. hyperinflations cluster around wars, regime collapse (mainly unsustainable central schemes), and political stupidity. zim is resource rich, for crying out loud, and their hyperinflation was born of a massive regime change followed by epic political stupidty. japan, the US, and euro countries are NOT immune from a zim outcome.
I really never understood having a debt based monetary system. Is charging an interest rate to government debt suppose to curb governments from spending and printing money? Is a debt based currency more flexible than a currency based on an asset say gold? I never understood the reason for this except to satisfy politician's greed and to feed the free shit army.
Symbiotic greed.
Psychopath politicians get their vote-buying Free Shit Army funding.
Bankers get to charge interest for loaning money they dont have, and the largest of them get bailed out when it becomes obvious that they've been loaning the commodity of 'nothing' at interest.
They enable each other. Banks get legal cover for illicit interest on loans of imaginary money, and bailouts.
Government gets ever-expanding money and power. Bureaucrats and politicians get the ability to offer regulation for sale.
It is a match made in hell.
Debt-based money makes total sense. Until those debts start to be defaulted on. Which is almost guaranteed, because creating more debt becomes increasingly incentivized as time goes on.
Zimbabwe is better than Japan:
1 - In zimba sex;
2 - In zimba a few old;
3 - In zimba no decent food;
4 - In zimba everyone is poor without prejudice.
hehe.
The difference is that Zimbabwe was placed under crushing financial sanctions. otherwise there is no difference.
aud/usd is going to test the[ .8056-.8063] 50% Fibi of the " Big move" before she goes back down.
A pretty damn bold prediction. I basically trade with a crystal ball approach anymore. Yes, I consider tech, 'fundamentals', calender events, blah, blah, blah. In the end though at least for me, it's really shooting in the dark. Amazingly enough, I hit the target far more often than I miss, but to be honest I'm not altogether sure why that is. I'm either blessed with some rather amazing intuition or just plain dumb lucky.
No. The difference is that Zimbabwe confiscated the farms and destroyed the country's productive capacity. A fiat currency's value is directly tied to the issuer's productive capacity, because it is only backed by the country's whole production. No production equals a worthless currency.
Bullshit. The USA produces fuck all relative to its output of debt, yet no hyperinflation.
You must not have visited a USA's supermarket lately to talk such BS.
Food prices are starting to drop from wholesalers. It's translating in canned goods.
Contrary to the B.S. you get FED. (pun) The macro every Thursday speaks different.
The United States of Something~ness, is Contracting. (deflationary)
The problem with such claims is that you and I are in no position to decide what everyone else in the US ought to value. If the US produces lot of useless stuff that its people find useful, or better yet, that people in other nations somehow find valuable, then it's almost the same as if it is a truly productive economy. At least until the fundamentals start to fall apart.
When all else fails the bankster sociopaths take us to World War III.
Why doesn't he even mention almost $1T worth of US Treasuries Japan holds in this stupid article? Before Japan defaults, they should get rid of the worthless US Treasury bills. Why does Japan have to keep buying US debt while it no longer has trade surplus and its' own debt is skyrocketing???
Because Japan is US colony.
We Zimbabwed some folks
If they know their currency is eventually going to zero, then buying up everything they can with it today is the smart move.
Why doesn't he even mention almost $1T worth of US Treasuries Japan holds in this stupid article? Before Japan defaults, they should get rid of the worthless US Treasury bills. Why does Japan have to keep buying US debt while it no longer has trade surplus and its' own debt is skyrocketing???
Because Japan is US colony.
Japan produces a lot of goods the rest of world wants. The big problem with Japan is energy costs. The more oil and gas they must import, the more their currency depreciates. The Fukushima disaster really stuck a shiv in Japan's economy. Japan has to get nuke power back on line or else it is toast.
I often wonder why, in the days of the gold, silver & copper standard that anyone cared if the old coins were pure silver and the new ones, at the same size and weight, were increasingly less pure until they were like only 1/8th and the whole thing would suddenly collapse and then a new fiefdom would start the whole process over that only lead to the same result?
PDCN... JHO..
pretty darn close now - just hang on...
Japan is going to reduce its deficit by lowering interest rates on the bonds to -50%.
Old news. The BoJ is going to supercharge the debt/gdp ratio, and force wage increases.
Japan is completely "out of control . Japan is the "Canary in the coal mine."
I thought Tokyo had to be evacuated.
I got five bucks that says this starts in nippon-ginko land...
the "less than one spin event" is over before the markets could even open in the u.s...
nuttiest <20 hours in history... PDCN... the popcorn won't have time to get cold...
pdcn=pretty darn close now...
Japan is like Zimbabwe without black people
I really like the feel of my $1,000,000,000,000 Zimbabwe note!
This note feels really nice too.
https://herschelian.files.wordpress.com/2010/10/hell-money.jpg
Japan is polluting the Pacific Ocean bigtime... it has to stop..
we all share the Ocean for food... the EPA needs to help ..
"the EPA needs to help .."
LMFAO!!!
The EPA is far to busy trying to Sovietize the USSA for little em-poorer calniggula.
Japan is the future of the developed world. Financial repression and a total breakdown in the family unit.
olympic tokyo 2018 for the win... unfortunatlly radioactive rain 2016 will force to abandon any olympic game without a tank in the teams.
As long as you can replace reality with perception, it's sustainable.
When the cost of maintaining the illusion gets to high, then collapse.
Cost not measured in dollars, but in time and energy.
I think people are getting tired as things speed up.
Great relatively new movie on how central banks destroyed Japan and how they work all over. Lots of information not normally discussed even by ZH. https://www.youtube.com/watch?v=p5Ac7ap_MAY
Legal tender laws require that the people ACCEPT something of no actual value in exchange for real goods and services. Clearly a violation of the prohibition of a "taking" without value, under the 5th amendment. So how do they pull this off? Simple, they "packed" the court and f'd the people and still nobody knows it even happened. http://www.thetruthaboutthelaw.com/they-make-you-use-money-that-is-backe...