Japan; from quagmire to Abenomics to collapse!

Part I: Toward the abyss

Japan has been in a stable, but unsustainable, equilibrium for years. Its leaders know it is unsustainable and in their immense wisdom, decided to manage the whole system in order to achieve a sustainable development. However, this will prove fraught with danger since moving an unsustainable system away from its steady-state runs the risk of unleashing a gale wave of unintended consequences. The problem of course is that the people now in charge of moving the Japanese system from its current constellation have absolutely no idea on how to get it from where it is back on sound footing. The reason is simple, as with most policy quacks they are taught by other quacks. Some of the teachers even have Ph.D.’s. in quackery to prove to lesser quacks who truly master the art of quacking; we call them economists.

Economists are a group of people that look upon the social structure called the economy with condescension and arrogance. They see it as their task to manipulate other people in order to build confidence. If confidence is high, then economic growth, prosperity and bliss will come automatically. The problem is that when people feel down they do not spend money. And when people do not spend money, economic growth turns into contraction and people feel even worse in what turns out to be a self-reinforcing cycle of less growth, less confidence and even less growth and so on in perpetuity.

This is basically how Prime Minister Abe and his newly installed lackeys at the Bank of Japan see as the situation in Japan today. In the early 1990s people lost confidence for some unexplained reason, and because the supposedly omniscient masters did not do enough manipulation back then, confidence was never regained; which essentially explains the predicament Japan is in now.
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Part II: From quagmire to Abenomics

Unsurprisingly the policy lead to a massive increase in debt levels. In order to feed the unsustainable system, consecutive Japanese governments threw money at it with the perverted consequence of depriving corporations of capital. Government debt grew inexorably while corporations got squeezed.

Source: Bank of Japan – Flow of Funds (BoJ), Cabinet Office (CaO), own calculations

The central bank reacted by lowering interest rates from a peak of 6 per cent in the winter of 1990/91 to a low of 0.5 per cent in 1995. In addition they expanded their balance sheet by lending to banks against legacy assets. The insolvent banking system and the overleveraged household sector did not crave liquidity for more than refinancing outstanding bad debt, so the increased base money ended up as excessive reserves in the BoJ deposit account.

Sounds familiar?
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Part III: Abenomics and the road to collapse

Abenomics is the label given to Prime Minster Abe`s three pronged plan to revive the Japanese economy. One of his first acts as Prime Minister was to place trusted inflationist at the helm of BoJ. The new Chairman, Mr. Kuroda, did not disappoint with his plan to double the monetary base in two years. In addition, the BoJ is doing qualitative easing through a pledge to create two per cent annual consumer price inflation in order to manipulate real interest rates into negative territory. They will “do whatever it takes” to reach the target set forth. The Treasury will ramp up spending with a “stimulus” package worth 2 per cent of GDC. Hence, the plan has been dubbed 2-2-2- for doubling monetary base to reach two per cent price inflation together with a fiscal package worth 2 per cent of GDC. A third leg of Mr. Abe`s comprehensive plan include structural reforms, but those are hard to get through the political system and has been watered down.

Source: Bank of Japan (BoJ), own calculations and projections

Source: Bank of Japan (BoJ), own calculations and projections

In short, Abenomics is just a copy of failed policies writ large. We will argue that this time it will trigger something so big that it will break Japan and move them straight into the abyss.

Why? First of all, consider spending. We know that 50 per cent of spending is growing exponentially and will do so for many years to come. The rest of the budget is more or less falling. In theory all other categories could go to zero, but there would still be a deficit. Remember, more than half of revenues are derived from bond issuance. Secondly, if the administration manages to create price inflation, spending will at a minimum follow the price inflation rate forward. Since spending is starting from a much higher base than revenue, the gap is destined to grow further.
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Thank you guys for creating such a valuable analysis

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Ihr Oeconomicus

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Archiv-Beitrag: Abenomics – Japans neue Wirtschaftspolitik