Why Japan's Money Printing Madness Matters

This is getting hard to believe. The announcement that Japan has plunged into a triple dip recession should have been lights out for Abenomics. But, no, its madman prime minister has now called a snap election to enlist more public support for his campaign to destroy what remains of Japan's economy.

And what's worse, he's not likely to be stopped by the electorate or even the leadership of Japan Inc, which presumably should know better. Here's what Japan leading brokerage had to say about the "unexpected" 1.6% drop in Q3 GDP---- compared to the consensus expectation of a 2.2% gain and after the upward revised shrinkage of 7.3% in Q2.

We think that the economy is gradually improving,” said Tomo Kinoshita, an economist at Nomura Securities. “There’s no reason to be pessimistic about the economy going forward.”

Really? How in the world can an economist perched at the epicenter of Japan Inc. think that its economy is improving when Japan's constant dollar GDP has now fallen back to pre-Abenomics levels; and, in fact, is no higher than it was in late 2007 prior to the "financial crisis"? Indeed, aside from the Q1 pull-forward of spending to beat the consumption tax increase, Japan's economy has remained stranded on the flat-line it attained after world trade recovered from its 2008-2009 plunge.

Historical Data Chart

But that's only the most recent iteration of the stagnation story. Japan has actually been treading water for a long-time---going all the way back to July 1989 when the monumental bubble created by the BOJ during the 1980s was cresting.

Japan's index of total industrial production during July of that peak bubble year printed at 96.8. So here's the real shocker: It was still printing at 96.8 in July 2014. That's right---- after 25 years of the greatest government debt and money printing spree in recorded history, Japan's industrial production has gone exactly nowhere.

Given that baleful history and the self-evident failure of the Keynesian elixir to cure Japan's economic stagnation problem, it might be asked why the entire country seemingly moves in lock-step toward bankruptcy behind the sheer foolishness of Abenomics. That's especially the case because even the short-run impacts have been self-evidently damaging to the real economy and have been utterly inconsistent with promised results.

To wit, Abenomics was supposed to send exports soaring and the trade accounts back into the black, thereby adding to GDP and household incomes. But what it has actually done has been to slash the global purchasing power of the yen by 35% since early 2013, causing Japan's bill for imported energy, industrial materials and manufactured components and consumer goods to soar.

Accordingly, Japan's trade accounts have remained mired in red ink, thereby defeating the fundamental "beggar-thy-neighbor" predicate of Abenomics. As shown in the second panel below, it's trade account for the first 9 months of 2014 spewed 11 trillion yen of red ink or double its level in the year before Abenomics (2012). Annualized in dollar terms, the once and mighty export powerhouse of Japan has experienced a $200 billion swoon in its trade balance since 2010.

ABOOK Oct 2014 Japan Trade Balance

Moreover, Japan's soaring import prices and cost of living, coupled with the utterly necessary increase in its consumption tax last April, have cause real household incomes to shrink by 6%. Thus, if Japan's aging retirement colony could consume its way out of stagnation, which it can't, Abenomics has clearly made matters worse on even that front line of the Keynesian cure.

ABOOK Oct 2014 Japan Madness HH Incomes

Notwithstanding this self-evident, negative short-run impact, however, Japan soldiers on toward disaster with Abenomics for one overpowering reason. It is effectively bankrupt and has therefore embraced an entirely fictional narrative about its plight in order to avoid confronting the awful truth about its fiscal and economic circumstances.

This convenient fiction is the "deflation" myth, and the argument is that Japan's only hope for eventually corralling its huge public debt is to first decisively break-away from that albatross. Only with positive inflation and a resurrection of its historic rate of GDP gains, it is claimed, can Japan hope to grow out from under its crushing public debt ratio of nearly 230%. Indeed, mimicking some latter day version of the Reagan supply-siders' voodoo economics, Abe's top economic advisors argue that only by adding more debt in the short-run can the long-run debt problem be contained.

“This is a once-in-a-lifetime opportunity to get ourselves out of deflation,” Etsuro Honda, an economic adviser to the prime minister, told reporters Tuesday. “From this perspective, it is dangerous to raise the consumption tax.”

Here's the problem. Japan has spent the last 35 years burying itself in debt, off-shoring its industrial economy and getting old. There is no conceivable real growth rate, therefore, that can overcome the runaway fiscal debt burden that it has accumulated since 1980. As shown below, its public leverage ratio has risen by 5X relative to its national income during that period.

Historical Data Chart

In this context, the BOJ's 2% inflation target come hell or high water is a little more understandable, even if profoundly incendiary.  At 2% inflation forever, all of Japan's $12 trillion mountain of public debt would have to be monetized or the carry cost---which already consumes 25% of its revenues-----would soar. That, in turn, would drive Japan into literal fiscal bankruptcy or transform its vast retirement colony into a poorhouse owing to savage tax increases and benefit cuts.

But, of course, there is not a shred of evidence that 2% inflation generates any more real output growth than 0.5%, but that's not the point. The pro-inflation policy of Japan is about nothing other than depreciating its towering public debt. And Kuroda's madcap 80 trillion yen per year money printing campaign is just a naked pretext for monetizing the prodigious flow of Japan's budgetary red ink.


Stated differently, the Keynesian priesthood has invented an utterly groundless deflation ogre in order justify rampant monetary expansion in the vain hope that financial bubbles will levitate the real economy. But the latter delusion has been already disproved twice this century, and has now been validated once again by the short-lived fiasco of Abenomics. That is, in just 22 months Japan's stock market has doubled, but its real GDP is back where it started and real household incomes have been pushed into the drink.

There is a reason this repudiation of Keynesian money printing is not just an anomalous problem relating to Japan's unique history and economic structure. Namely, the phony "deflation" theory underlying the financial madness of Kuroda and Abe is readily portable. It has already been embraced by European policy-makers and will be arriving in the North American precincts soon.

So it is worth documenting yet again. In the entire 25 years since Japan's financial bubble burst there has never been a semblance of meaningful consumer price deflation in Japan. Even the core CPI is well above it 1990 level:

Historical Data Chart

And on the theory that over any extended period of time, people do eat and warm themselves in winter, it is necessary to view Japan's long-term trend for the overall CPI. What is shows is not deflation, but near perfect price stability. That is, after the considerable rise in consumer prices during the 1980s, its price index has remained more or less constant ever since its financial bubble was punctured in the early 1990s.

Historical Data Chart

There is not a shred of evidence that this wholesome price stability has caused Japan's consumers to save too much or defer spending that they could otherwise afford. In fact, Japan's savings rate has cratered during this period, dropping from more than 20% of household income prior to 1980 to hardly 3% today. That's the opposite of what the deflation theory implies. What has actually deflated in Japan is its gigantic asset bubble, and that is something that even its prodigious money printing has proved incapable of reversing.


In short, they Keynesian apparatchiks have created a straw man that suits the purposes of their political masters on the fiscal front by rationalizing the monetization of endless amounts of public debt; and it empowers the state's central banking branch to engage in plenary manipulation of the entire financial system on the misbegotten theory that fiat credit and bubble wealth can cause real production, incomes and wealth to rise.

Stated differently, Keynesian fiscal policies and central banking regimes have buried the public sectors of most of the world's major economies in unsustainable debt. Now they propose to double down on more of the same because an entire generation of politicians have been house-trained in permanent fiscal profligacy and endless kicking of the fiscal can down the road.

To be sure, in putting off Japan's day of fiscal reckoning once again, this time until  2017, Prime Minister Abe is proving himself to be a certifiable madman. In short order, however, he will have plenty of company all around the planet.







David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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