The Japan That Can Say No More

A lot has changed in Tokyo since the year 1989 when the book ‘The Japan That Can Say No‘ came out. In the late eighties, Japan’s economy, still the world’s second largest, was growing between 4% and 7% annually. Japanese corporations were on a buying spree, snapping up U.S. trophy properties like Rockefeller Center and Pebble Beach. In 1989, Akihito, the current Emperor of Japan, acceded the Chrysanthemum Throne, and the property value of the Imperial Palace in central Tokyo, measuring approximately one square mile, was assessed higher than the entire state of California. While stock and property markets soared, Japanese consumers splurged. High-end restaurants were offering sushi wrapped with gold leaf instead of seaweed, or upon request, they routinely served sake and green tea sprinkled with gold dust (I’m not making this up, I was living in Tokyo, a 15-year run, brokering US Treasury bonds). Golf course memberships, a huge status symbol in Japan, were changing hands for millions of dollars. On December 29th, the last trading day of 1989, the Nikkei stock average closed at what still remains to this day, its all-time high of 38,915…

As it turned out, there was as much hot air in that book as there was in those asset prices, and it was Japan’s markets, that instead, said ‘No’. The bubble burst, the country fell into recession, what became a long, slow, economic slog, what we all now know as Japan’s ‘Lost Decade(s)’…

Prior to 1989, there are multiple reasons that explain the past economic ‘miracle’ of Japan, but for this post, I would like to concentrate on the biggest, which was the aggressive fiscal stimulus (increased deficit spending) by the Japanese government. On the other hand, there are also multiple reasons that explain the current economic ‘lost decades’ of Japan, and that biggest, is the over-reliance on ‘monetary stimulus’ (increased ‘quantitative easing’ so-called ‘QE’) by the Japanese central bank, which they pioneered in March 2001 (‘QE’ was coined by Richard Andreas Werner, a German economist working as the chief economist of Jardine Fleming Securities Asia Ltd. in Tokyo at the time, and used this expression during presentations to institutional investors in Tokyo). To counter weak economic growth, the Japanese government has continued with more experimental ‘monetary stimulus’ and less proven fiscal stimulus (because they believed then and still believe today that it problematically adds to Japan’s ‘debt’)…

The Japanese economy, same as the economy of any monetary sovereign, only does exactly what it has been instructed to do by the fiscal policymakers in its government and the monetary policymakers in its central bank. Any economy of a monetary sovereign, using a pure, fiat currency, like Japan, goes in whatever direction the knobs have been turned by these policymakers. If policymakers in Japan want to intentionally slow the economy, then they should raise national consumption sales taxes (drain yen from consumers), introduce negative rates (drain yen from savers), expand central bank asset purchases (further distort markets), and provide an inadequate amount of fiscal spending (add an insignificant amount of public sector demand that doesn’t increase inflation). These measures, if all combined, and continued over time, will also have a powerful and exponentially compounding effect (‘paradox of thrift’), that keeps adding a poisonous uncertainty (decreased consumption), more flight to risk-free assets (stronger yen), which then hurts manufactures (lowers capital expenditures), hurts their employees (lower paychecks), and makes imports more expensive (drains even more yen from consumers). The Japanese economy has done exactly what it was told to do by its policymakers, so no one should be surprised at the country’s economic performance. People should be surprised, however, if in the distant future, economic historians did not compare the prolonged ‘monetary stimulus’ policies deployed in Japan in our lifetimes as the financial equivalent of medieval bloodletting.

It’s easy to see what the problem is. The chief economic surgeons in Japan call monetary stimulus an ‘arrow’. That’s the problem right there, they aren’t familiar with the post-gold standard, modern operating room. They see monetary stimulus as being one of the so-called ‘3 Arrows’ of Abenomics, but monetary stimulus, the lowering of interest rates, is not an ‘arrow’ (is not a scalpel). Only those other two arrows of Abenomics (more fiscal stimulus and more pro-growth reforms), are actual arrows (are actual scalpels). ‘Monetary stimulus’ isn’t a scalpel, it’s only a monetary accommodation, an economic sedative. ‘Monetary stimulus’ is just the anesthesia, that is used by the anesthesiologists (monetary policymakers) while the surgeons (fiscal policymakers) are busy employing more fiscal stimulus (repairing body parts), enacting those reforms (removing tumors), and the anesthesia should only be temporarily administered to the patient (if you know what you’re doing).  Furthermore, fiscal policymakers in Japan, as well as in the U.S., have bought into that ‘federal-gov’t-is-the-same-as-a-household’ delusion. Same as in the U.S. regarding Treasury bonds, fiscal policymakers in Japan are absolutely convinced that more federal deficit spending, which increases Japan’s so-called national ‘debt’ due to more issuance of Japanese government bonds (JGBs), would be a bigger problem than a chronically weak economy. By even thinking that JGBs are ‘debt’, by even believing that Japan itself is in ‘debt’, the real problem is that policymakers in Japan, just as in the U.S., are using outdated, gold-standard mentality, which is still taught to all of us by economists using textbooks referring to that bygone era….

JGBs are no longer ‘debt’. The Japanese national government, the issuer of yen, yen that is now a pure, fiat currency, does not have ‘debt’ because all those Japanese federal gov’t bonds, those JGBs, are denominated in yen. If those JGBs, that are issued by Japan, were denominated in U.S. dollars, or fixed to U.S. dollars at a certain foreign exchange rate, or pegged to any other foreign currency that Japan did not issue, THEN YES, THAT WOULD BE DEBT, but the Japanese yen isn’t any of these. Since 1971, when President Nixon dismantled the Bretton Woods system (fixed-exchange rate), the Japanese yen, just like the US dollar, is a pure, fiat currency meaning that it freely floats and it is not convertible to gold or anything. To be clear, JGBs are ‘obligations’ (JGBs are legal tender obligations of Japan to any holders of those securities), and JGBs are ‘liabilities’ (the outstanding JGBs and the interest payable are liabilities of Japan on a national consolidated balance sheet), but ask any accountant, not all obligations and liabilities are debts. Japan, like any other monetary sovereign that issues it’s own pure, fiat currency (not convertible to anything and freely floats), is never in ‘debt’ of anything denominated in that same currency.

The government of Japan, the issuer of yen, is not the same as a household, a user of yen. When the Japanese gov’t (issuer of yen) deficit spends, it is a different paradigm from when a Japanese citizen (user of yen) deficit spends. A user of yen must borrow yen to finance deficit spending, and when they do, that means that user of yen incurs an actual debt, whether it is in the form of a monthly credit card balance (same as a bond), an outstanding student loan (same as a bond), or a mortgage amount (same as a bond). Conversely, every single Japanese gov’t bond (JGB) in existence is issued by the gov’t of Japan, sold by its banking agent, the Bank of Japan (BOJ), and it is denominated in Japanese yen, a currency that the Japanese gov’t has sole monopoly power to issue. Rather than being ‘debt’, those JGBs are just a time deposit, a safekeeping service, for anyone with a desire to save yen. Just like a certificate of deposit (CD) at any bank, JGBs are a place to park yen, risk-free. It’s just like buying a CD at any other bank, except a CD from the BOJ is called a JGB…

Unlike a user of yen, the Japanese goverment, the issuer of yen, doesn’t need to ‘borrow’ yen. The Japanese gov’t, the issuer of yen, doesn’t need to sell JGBs to ‘finance’ deficit spending in yen. The Japanese gov’t, the monopoly ‘supplier’ of yen, is simply adding newly-created yen, to the economy, and the Japanese people, the Japanese financial institutions, or anyone else, when buying JGBs, are putting some of it back. A 250% JGB to GDP just means that the Japanese are incredibly good savers, that’s all. That is not Japan going into ‘debt’. That is yin and yang, ebb and flow, tidal gravity, like fallen rain and natural evaporation, and it’s all happening inside Japan’s very own economic ecology of yen, Japan’s post-gold standard, modern monetary masterpiece. The gov’t of Japan, their policymakers, have as much to worry about having to ‘pay back’ that ‘debt’, those JGBs, as much as they have to worry about ‘putting back’ all the rain that has ever fallen, or ‘paying back’ all the oxygen ever breathed. Japanese JGBs are as much a ‘debt’ to the country of Japan as are shares of Nissan stock ever issued and sold by Nissan being a ‘debt’ to the corporation of Nissan.

Thankfully though, Japanese government policymakers seem to have recently begun to rethink ‘monetary stimulus’. The latest fiscal stimulus announced by Japanese gov’t policymakers last month did NOT increase the asset purchase sizes of QE, nor did the BOJ push negative rates even deeper. Earlier this year, the Japanese gov’t also decided NOT to raise across-the-board sales taxes (Japan National Consumption Tax) any higher, again, to 10%, like they did, to 8%, in April 2014. All these are very good signs that regarding ‘monetary stimulus’, maybe, just maybe, Japanese gov’t policymakers are possibly thinking ‘No More’.

Imagine the monetary policymakers at the Bank of Japan, following Emperor Akihito’s lead, speaking directly to the Japanese people, leveling with them, admitting to them, that it is not your ‘deflationary mindset’ that is holding the country back, but the government’s own policies. Federal policymakers should announce that they will start acting like the issuer of yen…not like users of yen…so…unlike users of yen that need to get their budgets in balance…that instead…that they…the issuer of yen…with a wobbly economy caused by a lack of aggregate demand…by a lack of consumer purchasing power…will increase that demand, by increasing spending, that keeps increasing ‘deficits’ coming FROM the issuer (meaning larger injections of ‘surpluses’ going TO the users), and will not let up that fiscal stimulus until the issuer gets their economy in balance. So that a fair and proper worldwide economic expansion could finally begin, perhaps the rest of the world’s policymakers would also decide to step down from their ‘monetary stimulus’ throne.

Yonde kurete arigato,


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