Home » Money » Japan – Down the Rabbit Hole

Japan – Down the Rabbit Hole

For all we complain about low growth and dimming prospects here in the US, it’s a problem that has plagued the developed world. If anything, we’re doing quite well, thank you. Europe is still struggling to get out of the depression, with high unemployment – especially among their youth. China and other developing nations appear to have hit a wall, unable to round the corner and step up to developed nation status.

And then, there is Japan. “Basket Case” doesn’t begin to describe it.

We last checked in with them over three years ago when Shinzo Abe became Prime Minister and instituted what has been called “Abenomics”. Call it “Supply Side” if you want, as it emphasized growth in the money supply and a cheap Yen to stimulate growth in production. Call it “A license to print money by the Bank of Japan (BOJ)” if you’re a cynic.

But the problems in Japan are much more severe – they are demographic and social. Without a wholesale restructuring they are as doomed now as they have been for an entire generation. There’s a lesson here for everyone.

Prime Minister Shinzo Abe

Prime Minister Shinzo Abe

Where they stand now is that Japan is in a negative interest regime in their money markets for the last two months. Banks that park money overnight have to actually pay for the privilege, meaning they don’t do it unless they have to. There is no real “safe haven” for money, outside of government bonds – and they are climbing almost as fast as money is leaving the nation.

The effect has not stimulated the economy, but has instead produced a stream of strange side-effects.

“Every day is like being Alice in Wonderland,” said Tomohisa Fujiki, head of interest-rate strategy at BNP Paribas Securities Japan. “Interest-rates levels are having no effect on credit demand, the market function is declining. You can’t expect everything to go according to plan.” Money is so cheap that it floats around, looking for new places to essentially hide until it’s all over. Investment? Not on your life. Japan is a scary place to make a long-term stand as deflation continues to rule.

The Yen has actually risen recently, partly in response to the excessive rise in US Treasuries and the flight of money from China.

Kuroda, explaining where things are.  The charts have gone 3D.

Kuroda, explaining where things are. The charts have gone 3D.

The current head of the BOJ, Haruhiko Kuroda, is the architect of this crazy world, returning to a solid money based policy.  It’s a change from his predecessor, Masaaki Shirakawa, who became a thorn in the side of the government by insisting that structural reform was essential. PM Abe didn’t want to hear that, so the BOJ wound up under pressure to do what it does best – push out more Yen.

The result is worth understanding well by anyone who wants to end the (unusual) independence of the US Federal Reserve System.

What kind of structural reforms does Japan need? This extended quote from policy wonk and experienced bond trader Mohamed El-Erian gets to the heart of it:

The most important lesson from Japan is the need for policy makers to move simultaneously on what Prime Minister Shinzo Abe calls the “three arrows” — monetary easing, government spending and business deregulation.
The first two arrows alone, as Japan has discovered, do not suffice. Structural impediments to growth also must addressed, including counterproductive entry barriers to certain sectors, inadequate infrastructure, poorly functioning labor markets or pockets of excessive indebtedness. Otherwise, policy disappointments will be the rule rather than the exception, even as unconventional monetary policy loses not just its effectiveness but also risks becoming counterproductive.

Workers per retiree, as per IMF data. Japan is only ahead of us in some regards.

That’s all good as far as it goes, but it still separates economics from the people who make up the economy – a huge mistake. Social and economic policy are more and more one thing these days, and Japan doesn’t have an economic problem as much as a social one. The population is aging rapidly and birthrate has fallen well below replacement.

These are trends that are happening across the developed world, so this is where we all need to pay attention.

How did this happen? Japan has never experienced key social reforms, particularly where it comes to the role of women. Barataria has long argued that the entry of women into the workforce was one of the reasons why wages have been suppressed since the 1970s, given that there has been a net excess of workers for the amount of paid work to go around. As difficult as it has been for us to adjust it’s even worse for Japan – which did its best to never reform, never change, and never accept women into the workforce.

black_retireThe result is a nation very much on decline, with every retiree supported by only two workers. We’re not far behind in this trend, either, which is to say that there will necessarily be a need for more social programs to support the poor if these are nothing more than the existing Social Security and Medicaid. Japan’s pension system is not as robust as ours and it’s under far more stress. It’s killing them.

Meanwhile, the life of a Japanese woman is miserable and there is no place for a solid family life in their current arrangement. Hence the doom.

That’s not to say that El-Erian is wrong in his assessment, which is very similar to the Barataria plan for restructuring our economy here in the US. The goal has to be to avoid the problems that have plagued Japan – and we’re doing much better economically and socially to start with. But demographically?

Next year, as loyal readers know, is the turning point. As the peak Baby Boom born in 1952-1958 starts to hit 65 years old there will be job openings like crazy. A few structural reforms here and there will make all the difference as qualified workers become more scarce and wages start to creep up. There will be a need for more education and training, yes, but the opportunities will be here.

As long as workers start to make enough money to fuel a boom at the same time they have to pay for more and more retirees it will all work out – as it did not in Japan. There, things only limp along from bad to worse. The inability to reform socially as well as economically has put them down the rabbit hole with no way out.

How well are we doing? Look at Japan. It could be a lot worse.

22 thoughts on “Japan – Down the Rabbit Hole

  1. As far as I know the debt that Japan has is just to its own people. In our short stay, there seemed to be no beggars on the streets. People had modest homes and there wasn’t as great a discrepancy between the rich and the poor. The civility and politeness was so pleasant to encounter. Japan was obviously not booming but the level of prosperity was quite tolerable. Not the extremes like here.

      • The present structure of society is not sustainable. We cannot rely on perpetual growth to run our economies. We must also realize that change is a constant and we’ll have to get with it in adapting to the new challenges. If we are smart we will start planning for this transition so it’s less traumatic to the many. (war is not the answer to everything)

      • I have to answer that with a link: https://erikhare.com/2015/08/03/growth-is/
        There will always be growth, matched to population growth and productivity increases. But some of that growth should probably be taken out as less work. We may well have outgrown the 40 hour work-week – we may need to make 32 the standard.
        My solution is to let the length of the workweek be subject to market forces, too. If people can make enough to live in 32 hours they probably will. That’s a terrible punt and I know it. But I don’t know any other way to make this work.

      • You are right there will always be some growth of the physical things as the physical things wear out and need to be replaced. Cutting the number of hours in the work week is not a bad idea because many jobs in the labour force are monotonous although necessary. You put your finger on the problem – how to make it work for the multitude. No doubt we are in a state of transition and it will take some figuring out.

  2. Sigh – I can’t help but read this – and seriously – you KNOW I love your writing/posts – BUT, I glazed over and had to re-focus, several times – CUZ I COULDN’T be distracted by the quote I read, oh-so-many years ago – that, my brain filters are set to (neurology & physiology stuff – not economics, yes, I have the stuff I keep up on…too…LOL):

    “…our current form of capitalism depends upon being in just the right place, at just the right time and moving on to stay ahead of the domino fall – that is why it’s so complicated – this game – we have a system that is, in the end, unsustainable…” – –


    Sorry – but that is actually two quotes, squished into one paraphrase by me own neurology – BUT I still think it might just be true – the original info is from a document written in the 90s and an RSA lecture circa 2010 – On sustainability and capitalism – and NO one has a definitive answer that can be implemented, overnight – Nope – One is an idea of what to try when things go to Hades in a Handbasket and you are rebuilding an economy from the ground up – the other is, “This is the issue – but no one knows how yet, to best solve it…” type spiel –

    Suffice to say – I don’t wish for either scenario – and not smart enough to fix from the inside of current system – but there is a cellular response when I read some of these things –

    a heart and mind that says, ‘why does it have to be this durn hard?!?”

    Course, I could just be lazy – or dumb – BUT when it the funny thing about complex systems? Everyone ‘uses’ them – but few know how they really work NOR can they recreate when the you-know-what its the fan –

    I’m betting, just about much more chaos, and the systems will collapse – under it’s own weight – not from anyone doing it on purpose – – and we will be faced with a situation many are no longer capable of doing –

    “This is who I am – this is what I know – this is how I can serve, here, right now – – ”

    Betcha the farmers, engineers and handymen are lookin’ way better, as Careers, than they do just now – – LOL

    I do enjoy your posts and I’m trying to get ‘educated’ but – if I can’t build a car to drive, from scratch, from the old plans before Life went South? Well, I probably don’t need a car – – LOL

    It’s the vulnerability of any complex civilization – and me thinks, most of the developed world, is racing towards that cliff – – 🙂

    • Well, perhaps you don’t have to worry about the details. The short version is, “We have a lot to learn from Japan.” The long answer, here, is “We can learn some things from them, but we already did some things right.”

      Let’s keep it simple – the challenge to the whole world right now is to reform and modernize society from the ground up. We look at the economic pieces and sometimes the social pieces and see them as different. They aren’t.
      We also look at the challenges to developed nations and developing nations as different. In some ways they are the same – reform at all levels is absolutely required.
      Now, step back a moment and look at the conservative (small “c”) movements that are fighting change. They exist all over the world, and for a good reason – people everywhere are waking up in nations they don’t recognize. That experience is a little different from one place to the next, but the emotional response is very similar.
      Japan is failing for a lot of reasons. We’re not thriving for some similar reasons. China? Hard to say just where it’s going, but they aren’t exactly failing nor are they thriving in the way they’d like.
      Is any of this sustainable? Short answer: No. Not a bit. There’s just not enough paying work to go around as we all automate and experience productivity increases. No amount of monetary policy will change that, either – and that’s the tool of choice. It may help but it won’t solve the problems.
      Japan shows that failure all over the place. We can learn from that.

      • Okay – thanks for the clearer (dumbed down for non-economic me – seriously – I know what my failings are…LOL and not offended, at all – appreciate it…)

        BUT, why, today, with everything WE as a species Should KNOW – at a time in history where this is more information available to the average person (granted, in developing countries that have power/internet infrastructure in place) …

        WHY are we still f*****g around with systems/ideas that aren’t Sustainable – or, at least, more Sustainable than what we are doing, just now – Information overload? Delusion? To me, there are only 3 things that matter – and I’m crawling my way back from the edge of ‘loser’ here in US – (yes, I’m on Medicaire – cuz I just didn’t quite make enough money this year to get off it – LOL) BUT yes, if I have to invest, there are only 3 places I choose to do so:

        Knowledge to do for myself

        And so, I don’t invest – I invest in infrastructure to grow food, perennial stands of building materials to build shelter, and/or tools that allows me to do what I want, that doesn’t depend on anything other than the sun not dying – 🙂 (wind a good bet, here, too, but not convinced by data/stats for home systems – lol – – )

        I don’t get it, Erik, sorry – but I DON’t! There just seems a never ending race to be biggest/best/most successful – when really, for our species to survive, long term, I really can’t see how we can keep doing what we are doing, just now, and survive – – and I don’t get it – –

        🙂 As always – I appreciate you! But I’m willing to listen to my own blind-spots – BUT, somethings – I just CAN’T ignore the mulitple examples from human history that tell me – “um…yeah…this ain’t gonna turn out good…” – –

      • Why do we keep doing the same things? Well, aren’t things changing enough as it is? It used to be you could depend on stuff to be a certain way – and a lot of people are depending on them. To just say “Screw you guys, I’m going home” and go off into the woods in a tiny house may make sense to people with nothing to lose, but most people have something they’d be giving up. They don’t want to give that up.
        And if we throw everything out, what about stuff like Social Security and Medicare? Plus the other parts of this system that genuinely keep people alive?
        So …. we can’t just throw out everything. Or maybe you can, so go for it. But most people can’t or just won’t for a lot of reasons.

      • You are right – of course, BUT, there are so many tiny ways to make a difference, overall, everyday WITHOUT folks giving up stuff they’ve worked hard for/gained – I’m in a tiny house, cuz I wanted it – I’m into my stuff, because I see the long term benefits – but there ways to make a huge difference, if only it was easier (or seen as easier) for folks – and YES! I have my pain points – I don’t particularly care for folks who tell me they are concerned about their health, but think they can’t afford care/nourishment, cuz they are going on a trip to a Island Oasis next summer – – LOL –

        I get it – I really do – but, I guess, all I was asking, is the only way we morph into a new way of doing global economics is to watch it collapse and rebuild it, from ground up? OR do you believe the current system can be tweaked and fixed to morph into something that can work, long term? That’s my question -in the end…
        I guess, until I know better to ask better questions…. LOL But I’m only saying online and publicly the same things so many (most better off than I, and afraid they might lose their ‘haves’ – just saying – everyone in my local circle think I’m nutz for making choices based on what I can sustain on the lowest $ amount possible – and what I can figure out to do, locally, for myself – I ain’t even close to that – BUT – still think that kind of life gives a freedom of thinking about such things without attachments to what the solution might look like – – 🙂

      • BTW – I subscribe to the theory, “Energy cannot be created or destroyed, only re-purposed’ school of thought AS WELL as the quote, “Nothing is ever, 100% sustainable” – – Just want you to know – I’m aware of the odds – and know about my inconsistencies – – LOL – – – You are free to re-post and explain why perspectives like mine are THE PROBLEM! Yes, I trust you that much! 🙂

      • No, you’re not the problem! You’re asking a lot of questions and setting yourself up with a good BS detector to evaluate the responses. Yes, energy is not created or destroyed. And all this stuff that litters our lives comes from somewhere. But it all provides jobs to people.
        Having the whole economy change over in so many ways is really, really complicated. It really tests this thing called “Democracy”. Hell, it tests “Civilization”. 🙂

      • LOL – Yes – and, just so you know – I sometimes yearn to retreat to the wilds of the Yukon – but I ain’t yet skilled enough to survive with breaking my leg & dying of exposure, the first day out – – LOL – – I’m not asking for us all to go back to out-houses – BUT, I still believe – there are ways to nudge/improve the system – even while we are working within it – BUT when the system is this complex – who knows what the hell they are really doing? LOL – –

        But it’s okay = plenty of cat playing the piano posts for me to go look at on Social Media and soothe myself from the whole confusion over it – – LOL

      • So where is the place for pieces like this full of an awful lot of detail? What about things like my half-hour long discussions at a taproom? Some of this stuff you really can’t push together in less time or fewer words. Some of it I have to refine and maybe can get down to a sound-bite the length of “We’ll build a wall!”.
        You’re asking damned good questions. I count on you and other readers to help me answer this and think it all through. Thanks so much for being in on it all!

      • Sorry I didn’t make it clear – I was making fun of those who have plenty of time to watch videos of cat’s playing the piano, but are ‘too busy’ to read, visit or sit around the taproom sharing ideas – – LOL – – I LOVE that you do this AND it’s great to have someone to converse with and show me angles/perspectives I wasn’t aware of or clear on – – 🙂 The more space there is to have these kinds of dialogues, the better equipped we are, I think to come come up with ideas/solutions – 🙂

  3. Wow. Too much detail here but I see where you say we have something to learn from Japan. I don’t get how they can keep on like this, it seems to me that the Japanese Yen must be worthless by now but it isn’t. How can that be?

    • You would think, right. That is a good point – they are trying to destroy it and it just keeps holding value. It’s kind of strange. But a lot of this is “What would you rather hold, Yen or Yuan?” They win that one.

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