The story of Japan's 20-year slump
By
Bill Bonner Feb 05, 2010
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Last August, it was reported that deflation in Japan had reached a new record. Prices were dropping at the fastest pace in 38 years. By November, it was duration, rather than depth, that got the press's attention. Prices had been going down for ten months in a row. Then, last week, an update: "Japan deflation hits a record pace" http://news.bbc.co.uk/1/hi/8487059.stm, reported the BBC. Prices in Japan were falling faster than they had since they began keeping track in 1970. The tide has gone out so far; beachcombers can't remember when there was so much beach to comb.
While the value of the yen rises, the government uses every trick in the book – and some as yet unpublished – to knock it down. If you are in a position to borrow money from the central bank, the bankers will give it to you at practically zero interest. And if your neighbourhood wants a bridge or a community centre, that too will be forthcoming from the Japanese government. No government has ever been so generous. At least, not without going broke. For every yen the government squeezes from taxpayers, it returns more than two in spending.
Yet, the value of the yen continues to rise. Investors seem to think the trend is eternal. Or perhaps they don't think at all. They lend money to the world's most spendthrift major government for ten years in exchange for a yield of only 1.310%. Everything comes to an end, of course. But how? On today's back page, we head for high ground.
The drama of this story is an old and familiar one. Deeply flawed heroes at the world's central banks and treasury departments think they can do a better job of running the economy than the markets themselves. It is they who set the price for short-term money, for example, not willing borrowers and lenders. It is they who trip on every step. In France, the savings rate, as percentage of revenue, has risen for the last 16 months, to 17% – the highest rate in 27 years. This comes as the Sarkozy government follows the lead of the US and Japan, with a deficit of about 8%, compared to 10% in America and even higher in Japan.
This isn't the first time this has happened in France. The previous savings rate peak came when the Mitterrand government was trying to stimulate the economy out of the early 1980s slump. The more the government tries to stimulate spending by running deficits, the more people try to protect themselves by saving.
While the drama continues throughout the world, the theatre we look at today is Japan. There, the story is further along. Which is to say, the central bankers have gotten themselves into deeper trouble. The kind of trouble into which they have gotten is the sort that will cause even more trouble to get out of. Martin Wolf of the FT and Richard Koo of Nomura Securities applaud their performance. But by trying to suppress a correction in the private sector, Japan's central bankers have stretched out a slump over two decades and Japan now faces a public-sector crisis. Their fiscal stimulus no longer stimulates; monetary inflation no longer inflates. Their every quack cure brings the patient closer to the grave.
You might think they'd give up. Instead, they increase the dosage. Fiscal stimulus hits a new record, right along with deflation. But our subject is not the plot development, it's the denouement. Already, Japan's public debt approaches 200% of GDP and 700% of tax revenues. The final act can't be that far ahead. Given the track record, we have to assume it will be the exact opposite of what central bankers expect. They are aiming for the whimper of new-born growth. What they may get is roaring hyperinflation.
The Japanese were recently among the champion savers of the world. Savings built up over decades. The typical Japanese citizen now looks forward to his retirement with a mountain of yen in his backyard. Directly or indirectly, these savings financed the government's stimulus efforts. Banks, pension plans, insurance companies – all bought government bonds as a safe way to store wealth. The government then drew upon this stored-up wealth to finance its bridges to nowhere and its other boondoggles. The result is a misunderstanding on its way to becoming a catastrophe. The retiring householder believes he still has his cake. The government, however, has eaten it.
Falling prices would seem to be proof that the money is still there. Instead, they are like a dark night to a burglar. The authorities help themselves to another piece of cake, and put more IOU-a-piece-of-cake notes onto the box. But where is the big bang? Deflation sucks out the tide. Higher savings rates typically produce lower prices, for a while. Even in Weimar Germany, there was a period in 1920 when the mark rose. The Feds put out even more IOUs – bonds, notes, bills.
Suddenly, the tide turns. People lose confidence. Then, the big wave hits. Long-term bonds, the most vulnerable to inflation, are exchanged for cash. Cash and government securities flood the market. Prices soar. Savers are wiped out. Meek debtors, relieved of their burdens, inherit the world. And central bankers return to their desks and come up with a new plan.
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