We have been traveling in Japan for past 4 weeks (another 2 weeks to go). Talking to regular folks, there seems to be divergence between what regular folks thinks need to be done compared to government.<p>The regular folks want to see Dollar-Yen parity. As Yen drops, things become more expensive and regular folks cut back more on spending. I am not sure why increasing cost of imports doesn't show up as inflation. Things would have been worse if not for drop in oil prices (major import for Japan). These folks don't believe dropping Yen is the solution as majority of investment by Japanese companies is outside Japan and weaker Yen just reduces that investment, in turn less profit flow back in the country.<p>The expectation of deflation is deeply rooted in regular folks. Everyone is waiting to spend on large items, just not right now. Land prices are falling so no one wants to buy a house now. We were interested in buying a place in Sapporo but everyone told us to wait until we really need to buy. An apartment costing $200-300K rents for $500-700/mo in Sapporo compared to similar place in Seattle renting for $1,000+/mo. One of our friend mentioned that they just sold their house in Sapporo and had to offer healthy discount to the buyer.<p>I don't have a solution to Japan's problems. But QE, weaker Yen, and raising taxes doesn't appear to be the solution. Rolling back tax increases may be a start in the right direction.<p>Regular folks seems to have better pulse on the problem than establishments.
Here's an article that's not behind a paywall: <a href="http://www.bbc.com/news/business-30077122" rel="nofollow">http://www.bbc.com/news/business-30077122</a>
Here's the thing: you actually need a strong middle class to buy your products. No amount of artificially inflating the value of the stock market through quantitative easing will give you a healthy economy. QE is like putting a fresh coat of paint on a house with a rotten interior: it makes things look pretty, but the structural integrity of the building is almost non-existent.<p>Employees working themselves to death for little pay is only aggravating the problem, rather than solving it.
Quantitative easing, Yen depreciation...<p>What they need to do is figure out a way to grow the population locally or through large-scale immigration. I'm afraid this is the fate that awaits the developed world (or countries with low population growth).<p>Japan is like a canary in the mine of post-industrialism. It'll be interesting to see what they figure out for their society and the lessons they might have for us.
Non-paywall WSJ link through Google: <a href="https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CCcQFjAD&url=http%3A%2F%2Fonline.wsj.com%2Farticles%2Fjapan-falls-into-recession-1416182404&ei=VVZpVMWmJoW6uATjj4G4Dw&usg=AFQjCNHuI4sPUXsYPK6eWe3jz6dSrgaW8Q&bvm=bv.79142246,d.c2E&cad=rja" rel="nofollow">https://www.google.co.kr/url?sa=t&rct=j&q=&esrc=s&source=web...</a>
Here's the biggest underlying problem. Contrary to what one would expect, Japanese firms are actually flush with money, but due to Abenomics, the weakness of Yen means they are investing more and more abroad, rather than putting the resources in improving its own infrastructure. We all know about Softbank's recent investments in India and South East Asia. And it's not just limited to Tech or even the private sector, even infra firms are investing in troves abroad, especially in South East Asia. In a way the Japanese growth rate doesn't take into account the rent its entities are receiving from abroad. So the short term picture might actually be rosier than the numbers of would suggest.<p>The bigger problem is actually long term weaknesses that this trend will expose.<p>Another huge problem is consumer lending. Most Japanese banks are actually pretty stringent when it comes to lending to their own people. So even if low interest rates might encourage consumer borrowing appetite, there's very little supply out there. I think the PM and the central bank needs to address these, even if loosening lending might be contrary to what Japan has done in the past.
Before Abe, Japan is in a trap:<p>1. It has 200% debt-to GDP ratio<p>2. It has near zero interest rate and negative to zero inflation<p>3. It has near zero growth rate.<p>It's important to understand how this trap works: Japan simply can't have meaningful growth. If there's real growth, that will force the interest up, otherwise there will be mass misallocation and high inflation. But given a 200% debt to GDP, the government just can't afford a higher interest rate, as the debt servicing cost will eat up most of the budget. So, assuming growth rate and interest rate is about the same (big if, i know), for just maintaining the status quo (regarding debt burden), for every x% the economy grows, the government has to raise 2x the amount to cover the interest expense. That's how scary it is.<p>That's why there's this sales tax hike and the consequent gdp dip. While other country with lower debt to gdp ratio can keep stimulating for a long time and only deal with the debt problem after recovery, Japan can't. It has to increase the government revenue relatively early, because it has a much smaller buffer to begin with.
Here is the common ground and controversy between most economists on the situation, I think it is interesting how much common ground there is:<p>The common ground:<p>* The government of Japan faces budget constraints; it cannot tax more than a certain amount and that includes seigniorage (taxing using inflation).<p>* Right now Japan doesn't seem to be immediately close to those constraints since interest rates and inflation are low.<p>* Lowering taxes, spending more and depreciating the currency will expand the economy, but rates will increase and so will inflation (among with wages).<p>* Inflation expectations can create actual inflation. It can be generalized that different people will demand higher prices in advance if they can, since they know their costs will rise. The same applies to interest rate and there is a link between them (investors demand higher yields if inflation is expected).<p>* Default and excessive inflation can be a result of too much expansionary policy (eventually, what is too much is up for debate), but they can destroy the gains and make the economy worse off.<p>The disagreement (you can see that its actually a spectrum of opinion and there are differences between the details of the policies, but for clarity I've divided them neatly into two camps):<p>* School A believes expansionary policy will make Japan default because the government will have lost control, since expectations can make interest rates and inflation jump rapidly. They site that the level of Debt to GDP is over 200% as evidence. They say the government should not lose credibility or else.<p>* School B believes that the expansionary policy is so hard to actually pull off that some expectations of inflation and higher rates are desirable. Since rates stay low and deflation is always around the corner it seems that the government can easily reverse too much expansionary policy, far before a default appears to be likely. Additionally Increased GDP will bring more revenue, decreasing the need to rely on inflation after a certain point. They joke that the "government should credibly promise to be irresponsible" to get out of the bad equilibrium that is the lost decades.<p>-----<p>A political compromise appears to have been made by mixing expansionary policy with the decision to increase the sales tax. Since this caused a recession school B feels vindicated - getting to a default and inflation path is really hard. Interest rates and inflation refuse to bulge.<p>However the lack of progress will add even more to the debt to GDP, perversely aiding school A (even thought some of them might agree that B were right in the previous period). So the end result has been 20 years of the government oscillating between those two positions, without reaching a point where either side can victory (default or significant GDP growth).
Demographics. Fukishima. China. Japan faces enormous challenges. Aging population means increased healthcare costs supported by a (temporarily) declining workforce and decreased tax revenues. Fukishima's costs are incalculable but impact broadly healthcare, manufacturing, farming and fishing. Much Japanese manufacturing has moved to China and adding to that expense is Japan's need to increase its defense spending to provide a small measure of balance in its territorial disputes with its neighbor. A wave of investment and entrepreneurship is required in Japan that I'm not sure the country is capable of fostering at this time. Bearish.
I don't understand following -
Japan had QE measure in place thus increasing money supply. But then they also increased sales tax from 5% to 8%.<p>Why take conflicting measures ? How increasing sales tax is going to make consumers and middle class spend more ?<p>Have Japan's economists not considered it ?
Japan is a country with too many people saving too much money.<p>So, one proposal: institute a small yearly wealth tax.<p>Avoids a lot of the problems with inflation-based approaches, and doesn't penalize people nearly as much for having liquid assets.
Hasn't Japans central bank started last week to buy 100% of all newly issued government bonds? I fear this will end very badly for them since the Yen doesn't have the status as a global reserve currency like the US Dollar.<p>Also, the debt to GDP ratio is insane, I am still stunned they didn't default 10 years ago.<p>Maybe a default is the only way for them to get out of the decades of stagnation at this point, even though it will be very painful in the beginning.
Paul Craig Roberts on Japan, America and QE.<p><a href="http://www.paulcraigroberts.org/2014/11/14/global-house-cards-paul-craig-roberts/" rel="nofollow">http://www.paulcraigroberts.org/2014/11/14/global-house-card...</a>