Japan's Keynesian Death Spiral - How Central Planners Crippled An Economy

Tyler Durden's picture

Submitted by Yonathan Amselem via The Mises Institute,

The greatest tragedy of the 2008–2009 financial meltdown was not that it happened. The collapse of asset prices was the necessary result of near zero interest rates. No, the most devastating aspect of the financial meltdown is that central planning alchemy lost no credibility. Policymakers around the world are still turning to Keynesian and socialist interventionism to address problems caused by Keynesians and socialists. The twin sledgehammers of central banking and almost unlimited state power have so distorted global markets (again) that some economies are now terminal. The latest victim of the interventionists and micromanagers is the nation of Japan. A once genuinely productive and innovative nation has, over the years, slowly succumbed to the cancerous rot of interventionism.

Japan's World War II defeat left behind a barren rocky island whose industrial capacity, infrastructure, and labor force were devastated by Allied bombs. Japan's flattened cities and smoldering factories may have painted a gloomy future but Japan had the thing that mattered most — a population largely free to organize and rebuild. The American military and remnants of central Japanese authority tried to lead the rebuilding of Japan through the political process but lines of communication and the transportation infrastructure were so damaged that many population centers away from Tokyo were left relatively free to rebuild. The resulting Japanese economic boom catapulted Japan's living standards to a level on par with most Westernized nations. This explosive growth, described as a "miracle," was no such thing. Japan's new-found prosperity was simply what happens when markets are allowed to function. Unfortunately, the central planners in banking and government couldn’t resist the statist urge of heavy-handed interventionism. If there’s anything the political elite hate, its free people making voluntary decisions without their forceful input.

Central Planning Has Turned Japanese Corporations into Welfare Queens

The central planners imposed a number of zany anti-market schemes on the Japanese economy that have never been substantively reformed to this day. Legislators shielded Japan’s massive industrial base from foreign competition through protectionist tariffs and even subsidized some overseas exports. On the domestic front, nascent Japanese companies were heavily burdened by onerous regulations and very high taxes — this made it nearly impossible for start-ups to get off the ground and challenge the corporate establishment's market share. As if this was not enough, exporters were further coddled by the Bank of Japan (BOJ). The BOJ has been fervently trying to turn the yen into toilet paper for the last thirty years. A cheap currency means artificially high profits for companies that export goods and artificially high costs for companies that import goods. After all, no government scheme could rightfully call itself a government scheme if it didn't enrich somebody at the direct expense of others. The destructive effects of these policies have massively eroded Japanese productivity in the twentieth and twenty-first centuries.

As happens in all industrialized economies with a powerful state and central bank, Japan's largest corporations became agents or semi-agents of the state. Japanese automakers, shippers, and other producers could reliably be expected to carry out carry out government labor or production policy in exchange for direct access to politicians, cheap loans, anti-competitive legislation, guaranteed profits, and bail outs. Japanese companies (particularly manufacturers) are deeply entrenched and largely immune to domestic and foreign competitors. Government protectionism turned once productive Japanese companies slow and arthritic. The few actually productive sectors of Japan have been forcefully shrunken by taxes to subsidize an outrageously bloated government and the multitude of corporate parasites huddled around its teats. The result is that Japanese companies are increasingly noncompetitive in a global marketplace shared by dynamic companies from Australia, New Zealand, Singapore, Hong Kong, and other more-market-oriented economies.

Keynesian Alchemy in Japan

Japan's Keynesian death spiral began almost three decades ago. In 1986 the value of the Japanese yen almost doubled relative to the US dollar. Consequently, Japan's mammoth export sector took a beating. Businesses with political influence found they could achieve higher returns not by innovating or cutting costs, but rather, by pressuring the political and monetary elite to flood the market with cheap credit. The BOJ and short-sighted politicians were happy to oblige. The result was a bubble unlike anything Japan had ever experienced. The land value of Tokyo surpassed the land value of the entirety of the United States. In just a few short years, the Nikkei quadrupled in size and an enormous Japanese financial sector came into existence. The overfinancialization of an economy is among the first signs of a malignant central bank sized tumor. The rise of gargantuan investment banks and multimillion dollar derivatives traders in the United States correlated almost exactly with the death of sound (ish) money in 1971 (Nixon’s administration took the United States completely off the gold standard). Japan’s monetary madness resulted in corporations and households assuming record levels of debt that were financed by zero savings in the private economy.

The inevitable bursting of the bubble in the early 1990s was truly spectacular. The Nikkei lost over 80 percent of its value, land and home prices almost completely flattened, and GDP growth crashed to an anemic 1 percent. When economists refer to Japan's "lost decade" they refer to Japan's post-bubble economy. Yet, Japan now finds itself creeping into a third decade with minuscule growth. The Nikkei and asset prices have never recovered anywhere near their previous highs. Anyone getting into the Nikkei in 1990 would, after twenty-six years, have returns of roughly -50 percent. Keynesians and other economic interventionists would do well to view Japan as the canary in the coal mine. The United States and Europe have doubled down on Keynesian alchemy this last decade but our leaders need only look at the devastation these schemes have brought to Japan — a nation that has tried to borrow, print, and tax itself into prosperity for thirty years. Japan is in the late stages of Keynesian cancer and policymakers in the rest of the developed world would do well to take notice.


As if the political elite's harebrained schemes weren't doing enough to put a nail in Japan's coffin, the nation is also suffering a demographic disaster. A country that consumes more adult diapers than baby diapers is a nation on its way to the dustbin of history. There is such a shortage of young, capable labor in Japan that the nation has even started importing "interns" from China to work in its many industries. As is happening in Europe and the United States, endless undergraduate and postgraduate "education" has sheltered young adults more and more from the real skills demanded by the labor market. Young adulthood is financed almost exclusively by debt or capital consumption of their parent's savings. The hassles of starting and raising a family have become more and more burdensome to unskilled, indebted Japanese couples (with no savings) that probably only enter the workforce for the first time in their mid-twenties.

It Is Not Too Late

Japan has a highly capable workforce, an impressive industrial base, and all the infrastructure necessary to reassert itself as a global commercial powerhouse. Japan's recovery means cutting taxes, paring down its outrageously expensive mercantile policies, allowing for easier immigration of foreign companies and their employees, and letting the market decide the true value of the yen. The Japanese people need to reject the schemers and planners who are suffocating a great nation.

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skinwalker's picture

I may be wrong, but there are three nations that represent what the US will become, depending on how things go: 

1. Japan

2. Mexico

3. Congo

JamesBond's picture

This must be a high school term paper.  There is no way a seasoned researcher/writer would be this late to the table on the Japanese economic issue.



ClydeCrashcup's picture


I may be wrong, but there are three nations that represent what the US will become, depending on how things go: 

1. Japan

2. Mexico

3. Congo


You forgot to include choice #4: All of the above.

GoldenGoosed's picture

The dichotomy economy!
Bubbling out like baby moo moos

Yen Cross's picture

   Hey--- I'm not going to brag about it, but I've suggested on multiple occasions, that that huge usd/jpy short, was ripe, just like WTI for an ass ripping.

 Last week, I said I was long usd/jpy. Crickets- chirp-chirp-chirp Until the BOMB on Thursday.

 I made fun of all the banksters calling the 100 handle/ completion level of that long term H/S pattern.

brada1013567's picture

I do remember you banging the drum on usd.jpy when it was 108ish great call

Yen Cross's picture

    So, where do you think the train " Kurodacrazy stops?

  That Guy at Phoenix Capital, had some good thoughts. [ I'm not endorsing anyone] On an earlier thread.

  Those bond markets need to be liquified, and even if Central banks own the markets, it doesn't create inflation.

 People just buy bigger mattresses.

   Demand comes from low prices and value. We have too much excess output, so inputing more capital just exacerbates the problem, and creates bad people doing bad unproductive things.


Theonewhoknows's picture
Theonewhoknows (not verified) Yen Cross Apr 24, 2016 9:15 AM

It will stop in either political or economic disaster. First, one delivers Japan into environment where not paying debt is the only goal - you can achieve this through war (1930's example of nazi germany), further doing whatever you are doing (the US example) or asking for help to reform as the political elite inside the country is unable and unwilling to change (Greek example). 

The economic solution is when politicians and central bankers have no control over what is happening - they have it in above examples, therefore, they 'political' solutions. The market solution is brutal and will solve this matter once and for all - bankruptcies and bottom-up economy reformation. Just like in Southern Europe people start trading different currencies than the official one which is worthless. They even barter. Violent reset - people without savings, having only 24hrs in a day just like before trying to make small, community-based economies actually creating value to one another. 

Any bad data just gives them excuse to have their The inflationary escape from debt - just like the FED is trying to do this.

On top of that look what's happening in the US right now - just because the central bank lost all its ammunition (ZIRP, QE and nothing is good) they still trying to paint the picture in pink for everyone - when they stop, then they will have excuse to print, lower interest rates, basically do whatever they want - look at commodities as they are negatively correlated to USD. It's a good indicator



John Kich's picture

This is Donald Trump's most shocking statement yet,

However the mainstream media isn't saying a word about it!

What are they really trying to cover up?!...


TuPhat's picture

The authors conclusion, that Japan should become more globalist and allow foreign companies and workers to take over their economy is pure nonsense. We have our own problems with schemers like that in the US. ZH, could you come up with some kind of tag for articles like this just to warn readers that you are presenting it as a sort of contrarian view point. Otherwise people could take this garbage for real.

mcmc's picture

"As if the political elite's harebrained schemes weren't doing enough to put a nail in Japan's coffin, the nation is also suffering a demographic disaster."

Is Japan's demographic decline a result or a cause of the economic decline? The birth rate started declining in the 1960's and has been below replacement rate since 1974. The bubble in the mid-80's that Mises blames oneasy credit is the only time since then that the birth rate briefly reversed its decline. But because medical advances have prolonged lifespan, it's only since 2011 that Japan's population began to decline, too.

Japan is the 4th largest exporter, and the 4th largest importer. Most of what they import is raw material, especially oil and gas, to produce the exports. But they are a net importer, and are dependent on imports for essential commodities.

Why would someone who understands capital and finance on industrial scales expect a to see a growing economy in a country dependent on imports, with a population that is declining overall and simultaneously aging out of productive employment years? 

honestann's picture

The Japanese people need to reject the schemers and planners who are suffocating a great nation.

Yes, they certainly do.  However, the Japanese have now suffered more than a generation of anti-liberty, anti-competitive, anti-free-market Keynesian brainwashing.

I'm no historian, but what I do know of history indicates to me that [what passes as] human societies never progress from bad to good [without some massive explosive warfare].

Where sane "human societies" do spring up, they seem to [?almost?] always spring up in frontiers (where population density is zero to low).  In other words, a healthy crop can expand where near nothing exists.  But once the disease of collectivism, statism or tyranny of any kind infects the "society" to any significant extent, the disease always becomes progressively worse, always drives the society insane, and always leads to economic and behavioral disaster.

Of course all the above can be summarized into the cliche advice I give, namely "get the hell outta dodge", "move somewhere [extremely] rural", and "become as self-sufficient as possible".  Worked for me.

newworldorder's picture

Unfortunately for the Japanese people, Fukushima Daiichi will dictate the fate of Japan. Everything else is a monetary sideshow.

DaveA's picture

Japan's fertility problem is fully explained in this simple chart:


One solution that must be rejected out of hand is allowing immigration. Let Europe become the Western Caliphate and the USA become Mexico Norte, but Japan will stay Japan, albeit older, poorer, and less populous.

___________'s picture
___________ (not verified) DaveA Apr 24, 2016 1:30 AM

no suprise. jewish idea of female equality is death to every nation.

you may have seen the suicide chart of white woman in usa.




genetically female is searching for a dominant leading man.

then female is unintentionally and instinctively is challenging the man, if the man shows weaksness then female eventually loses intresst in the man.

thats why so many woman like black or muslim aggressive, dumb man. its their genetics to find someone, who could give her an dominant and successful offspring.


i found this one out when i was 17. until then i thought you need to treat woman kind and gentle like my mama told me.  i found out that if i force smart psychological pressure on female and lead the woman, than they like me for some reason. and as woman are quite an emotional type, you need to present yourself imminently as a leading man.


genetically a female likes inequality. within society they search for an stronger winning type of man and stick to him.


tarabel's picture



MacArthur built a great foundation and modernization scheme for prostrate Japan. Yet it remained a semi-feudal society. This served them well when the need was to unite and rebuild. Once that was done, however, the same "victory disease" that took hold of Japan after its early run of success in WWII led them into gargantuan excesses that ill-befitted a small, resource-poor island that suddenly found itself temporarily rich.

In particular, the feudal overlords of Japan Inc. discovered the same evil lesson that destroyed their American competitors. By allowing their sterling brand name products to be manufatured by Third World peasants, they could crank their profits into the stratosphere. All that was required was for them to betray the underlings who owed them their traditional abundance of loyalty and obedience.

Now the Japanese model social contract is broken and Humpty Dumpty-san is not going to be reassembled any time soon, if ever. What Japan needs is violent social upheaval to restore its national virility-- and it is the least likely place on earth for that to happen.

A nice war with China is the only shock likely to awaken the dormant and docile posterity of the once fearsome samurai.

___________'s picture
___________ (not verified) Apr 24, 2016 1:07 AM

the elitification is too hard. to be part of society, people
are forced to give up their life and study and work like some superhumans.

since the spiral of "do more, do better" is spinning for decades in japan, peoeple started to give up.
who the fuck want to work on 2 jobs wile sleeping 4 hours a day, plus a third job on weekend and then he needs to find a woman.
man drop out, they are bombed with endless porn, prostitutes and values of family vanish. you simply cant afford to have children in such

human biology tells you as a man that you should have at least 2 children by the age of 25!
obvioulsy people become sick, as they only enter labor by the age of 25.
instead many of them simply stay at home and play their useless computer games, as they became mentally sicked under endless pressure of false success.

but i think the true sick people in japan are the elites, especially the neo-elite is no longer suitable to rule the country. they have nothing in common with japans elite back then. a bunch of plastic dick sucking fails without talent, but with a lot of ignorance.
letting in chinese muslims into japan is one of the worst things ive heared so far.
while abe and kuroda have developed a plan together with jew krugmann and UN to flood japan with pakistanis and indonesians.

the example is a different but the pattern of stupidity is the same:
white people, when they entered australia and imported bunnies for farming.
bunnies became a plaque and they tried to fix it with releasing of red foxes. now they had two plaques,
bunnies and red foxes. while the foxes killed at least 10 native species (including https://en.wikipedia.org/wiki/Desert_rat-kangaroo)

Aussie Battler's picture

No clearly Japan just needs a bit more government debt and more NIRP and it'll kick into gear, right Krugs?

g3h's picture

Need more economic data to make the argyment more convincing.

MEFOBILLS's picture

This article is complete nonsense.  Austrian monks continuously cherry pick history to fit their warped narrative.

Japan's postwar miracle was becuase Japan kept a wartime economy.  They used CREDIT GUIDANCE WINDOWS, which targeted industry.

See the move and read the books:  Princes of Yen


Japan got itself into trouble when BOJ changed policy to give guidance for PRIVATE BANK LOANS to anybody with a pulse.  These new credit loans chased after property.  This then caused a huge property bubble.  This ostensibly free market maneuver, then pushed land prices into the stratosphere, and left a debt overhang.

BOJ moved Japan from a managed economy, to one that was FREE for the bankers to make loans and take rents against property.  

I'm consistently amazed at the amount of economic illiteracy pushed by some pundits.  Werner's books and this movie have been out for quite awhile now, so there is no excuse for economic illiteracy on Japan.

Post bubble economics left Japan in a BALANCE SHEET RECESSION.  Richard Koo is an authority on this bubble mechanism.  

Read up Yonatham and quit being an ignoramus.