Lessons From Japan: Decades Of Decay, Unavoidable Collapse

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Japan has proven that decay can be stretched into decades, but it has yet to prove that gravity can be revoked by central bank monetary games.

Japan's fiscal and monetary extremes are in the news again: this time it's the Bank of Japan's extraordinarily large ownership of Japanese stocks, a policy intended to boost "investor sentiment" and prop up sagging equity valuations:

The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.

The core failure of Japan's central bank and state is they have attempted to substitute monetary games for desperately needed social, political and economic reforms. This is the Keynesian ideology and project in a single sentence:

Keynesian policy holds that expansionary monetary and fiscal policy can be substituted for structural social, political and economic reforms, enabling the status quo to retain its power and privileges without disruption.

In effect, Japan has pursued a vast monetization campaign for 26 years. The Bank of Japan creates money out of thin air and uses the free money to buy government bonds, funding the state's enormous fiscal deficits (also known as monetizing government debt). The BoJ has extended this monetization to corporate bonds and the stock market-- effectively propping up government debt, corporate debt and the stock market with newly created money.

That these were once private-sector markets has been set aside, as the only thing that matters now is keeping them propped up, regardless of the cost. As I note in my new book Why Our Status Quo Failed and Is Beyond Reform, when emergency measures become permanent policies, you know the status quo is on life support.

Longtime readers know I have a long history of studying Japan, starting with language and cultural studies in university (mid 1970s) and continuing into the 2000s with economic, financial and social analyses. We have many friends in Japan (representing all age groups), and maintain an on-the-ground situational awareness of cultural/social trends.

If you seek a data-based grasp of Japan's fiscal and financial decay, I recommend the following documents: the first is an easy-to-digest series of slides from an OECD study, the next two are detailed official Ministry of Finance reports in English, and the fourth one is an article describing the political resistance of the status quo in Japan to any real, systemic reform:

OECD Revitalizing Japan 2015 (Slideshare)

Japanese Public Finance Fact Sheet

Japan's Fiscal Condition

Japan’s powerful prime minister still can’t get the economy going

The key takeaway here is that decay can last for decades, enabling the status quo of the state and media to maintain the illusion that superficially all is well. As visitors and paid pundits never tire of exclaiming, Japan remains a wealthy nation where everything works wonderfully well--public transport, etc.--and the average lifestyle is enviable: long lives, good health, an abundance of consumer goodies, etc.

But this well-being has been maintained at a high cost. Social cohesion is fraying (beneath the surface, of course), birthrates continue to decline (and what does that say about a culture, that young women no longer want children?) and the signs of economic stagnation are visible to anyone who peeks beneath the hood.

The Keynesian fantasy that Japan has embraced holds that every problem can be solved by printing more money. The Keynesian faithful (a.k.a. the Keynesian Cargo Cult of Paul Krugman et al.) hold that there is no problem that can't be solved by printing more money and issuing more credit.

Not only are some problems immune to printing/borrowing more money, the reliance on printing/borrowing vast sums of money year after year creates a new set of intractable problems. Just to give one example of many: over 80% of Japan's farmers are over 60 years of age and are poised to retire in the next decade. Printing money hasn't printed new young eager farmers, nor has it changed the perverse incentives and political imbalances that are exacerbating the problem.

Decades of borrowing money in a futile attempt to avoid structural reforms has crippled Japan's fiscal future. Even at effectively zero rates of bond yields, Japan now spends roughly a quarter of its government budget on debt service--and servicing of existing debt now consumes 41% of all tax revenues.

Tax revenues only cover 64% of spending; 35.6% of the government's spending is borrowed.

These are staggeringly unsustainable policies, yet the status quo's refusal to accept fundamental structural changes dooms Japan to the TINA Trap: there is no alternative to endless monetary expansion and central-planning control of markets.

Meanwhile, the fiscal realities become more unsustainable every year. While tax revenues increased 14.7% from 51 trillion yen (TY) at the peak of the property and stock bubble in 1989 to 57.6 TY today, social security spending has tripled from 10 TY to 32 TY.

While tax revenues rose a modest 15% in 26 years, total government spending soared from 60 TY to 96.7 TY--an enormous 60% gain.

Even as the BoJ repressed interest rates paid on government bonds to near-zero, national debt service more than doubled, from 11.6 TY to 23.6 TY.

Cutting income taxes--another Keynesian staple--failed to accomplish anything but further weaken the fiscal outlook. The percentage of personal income taxes as a share of all tax revenue has plummeted, to no avail: all the conventional measures of economic vitality have continued their downward trend.

Every status quo and every nation has pursued the same fantasy: that playing monetary games such as quantitative easing and buying stocks and bonds to prop up over-valued markets can be substituted for painful structural reforms in the core fiscal, social and financial sectors.

Japan has proven that decay can be stretched into decades, but it has yet to prove that gravity can be revoked by central bank monetary games.

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SilverDoctors's picture

It might not be Japan that's the trigger...

The Golden Jackass Jim Willie just warned today that a global Lehmen moment is dead ahead, which will send gold to $10,000 and silver to $300
Might be one of the last chances to load up on Phyzz before the long awaited reset.  

 

Theonewhoknows's picture

Let's add that China buys the amount of gold equal to annual global production

El Oregonian's picture

JAPAN:
Land of the "SETTING SUN"...

MalteseFalcon's picture

The fact that it has taken over 25 years for Japan to implode shows the immense amount of wealth America lost when the automobile industry was sent to Japan in the 1970s.

In the 1970s Americans got to eat shit while the Japanese and the Arabs (oil hoax) ate steak.

venturen's picture

you seem to have left out the part of the union destruction of the American car companies and their cars were crap!

MalteseFalcon's picture

I also left out the part where American workers were left with tools from the 1950s to build automobiles and compete with Japan who had the latest tools. 

And I left out the incompetence of American auto company "management".

DontWorry's picture

Hes been saying the same thing for 8 years, and one of these days he'll be right

ConfederateH's picture

Talk about the boy who cried wolf, Jim Willie has warned of financial collapse and skyrocketing gold more often than the FBI creates "terrorist" false flags.

abyssinian's picture

When will this crash happen? soon or another couple hundred years of central banks maniuplation? 

firstdivision's picture

Isn't it lovely that the FRB and ECB have been following the BOJ playbook page by page?

KnuckleDragger-X's picture

Well, it looks shiny. I don't expect collapse so much, more like disintegration, and it will be swept into the dust-bin of history.......

Buckaroo Banzai's picture

This article overlooks Japan's unchallenged global leadership in producing 2-D waifus. We have to acknowledge the bright spots in the Japan story.

LawsofPhysics's picture

Japan?  LOL!  We are well past "Japan", we are entering the global Weimar phase!!!

asteroids's picture

Hmm. When the State owns the majority of business, what is that called?

Wilcox1's picture

Its probably a little late, but I'd be looking real hard at some degrowth tactics.

NoDebt's picture

Economic collapse, civil unrest and starvation are very de-growthy.  Self-solving problem.  Nothing proactive needs to be done.

Anything proactive that's done at this point would only hasten the day all that happens anyway.

DontWorry's picture

Increased debt and artifically low interest rates can only mask an unsustainable path for so long.  Longer than most may think tho.  And the end phase of an unsustainable path may not look like we expect it to, so it may be hard to realize except in hindsight. 

ImpotentRage's picture

I bet social security spending will plummet soon enough once all the old people start dying off and not getting replaced!

south40_dreams's picture

And there will be more oxygen for the rest of us when you are dead.  

mary mary's picture

We planted lots of trees in our yard.  Trees generate oxygen.  Even after we're dead.

CrimsonAvenger's picture

Damn, CHS said "cargo cult" again - everybody drink!

mary mary's picture

Who cares?  Japan has always been a feudal system.  Whether the top 4 families own the stock outright, or the government they control owns the stock, makes little difference.  What does make a difference is Fukushima.  If they find out they can't eat the fish, they will go to Southeast Asia and Southwest America and Northwest America to get fish.  Then things will get interesting.

perelmanfan's picture

More money and more debt solves every problem. If the problems remain, it's BECAUSE GOVERNMENTS WERE TOO TIMID, AND SHOULD HAVE PRINTED MORE MONEY AND GONE FAR DEEPER INTO DEBT! Where's my Nobel?

youngman's picture

The only good thing about the Japanese is that they will do whatever yo tell them to do....very homogenous...very Nationalistic...not to many foreigners allowed in....and they live a long time..but just eat fish and rice...they are a good test tube to learn from..

financialrealist's picture

the entire system is being propped up by the central bank cabal while world governments prepare and position themselves.  when the global chess board is finally set, and all expendable resources exhausted, they will find the trigger. Though we don't know what event will serve as the trigger, what the trigger will be is something one can point to as the reason the house of cards finally collapsed, deflecting fault and blame. This undoubtedly will lead to WAR. its the only plausible outcome that solves the cancerous problems riddling the world. 

the only real way to manage what ensues is to make yourself self-reliant and hope you don't get caught in the crossfire. Read your history, this is not new, just now it is on a global scale.     

venturen's picture

Print MOAR...I AM KRUGMAN!

earleflorida's picture

http://www.ibiblio.org/hyperwar/PTO/Dip/Perry/

"A Brief Summary of the Perry Expedition to Japan 1853"  (163 years so long ago a quiet unassuming `Hermit Kingdom' as were the Korean's?)

Japan had been forced to open up its markets, or better said, transitonary ports-o-calls.

Indeed, the South Pacific was in the spotlight for the worlds great powers, ie. France, England, Spain...etel.

America was growing both internally and externally and was willing then to show-off it's new found might esp. Navy [marines and bluejackets]

note: Per usual, Japan acquienced. But, it didn't take long for the Japanese to master the art of war, via a strong navy and disciplined army.

1953-1904/05 Japan defeats the Russian Navy in the   http://en.wikipedia.org/wiki/Russo-Japanese_War 

Yes, the beginnings for the Bolshevik uprising...[?]

And, of course the Chinese were in turmoil[?]/transition after the collaspse of the Qing Dynasty [1644-1912] and the 'Republic Period [1912-49]' brought about an agricultural economy unto a mighty industrial nation but 67 (~the same amount of tyme it took for the Bolshevik anomaly to disintegrate) years yonder!!!

So WTF does this have to do with Japan's Economy? Japan is a dead 'Ducking' today. If they, Japan don't apoligize to China over the 'Nanking Massacre'... long ago... they will wither away as the west.     http://en.wikipedia.org/wiki/Chinese_Civil_War   (A regional war with Japan with a protracted civil war temporarily put on hold to defeat the Japs, and then resumed) WOW! 

Ps. America knew that China would be here in the 50s!!!

Japan should realize that it is of the oriental culture and stop being of the west culture. America only wants Japan and ROC (Taiwan) as strategic military outpost feeling that they still have authority over the world's 'Four Seas"-- Nought!!!

jmo

have we as americans learnt our lesson of today..[?] regarding the pro's and con's of isolationalism with a 'Fair-Trade Constitution' as in no-moar open-ended treaties!