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The Japanese government for the last
twenty three years has employed the Keynesian tools of deficit spending and
more recently the monetarist policies of expanding money supply in an attempt
to stop the economy from sliding into recession and to develop some growth.
On paper, it has only achieved the former objective; in reality it has
emasculated the productive capability of her domestic economy.
Before the
speculative bubble of the late-1980s the Japanese economy was driven by
savings. Her strong savings flow gave Japanese industry access to a stable
low-cost source of real capital with which it was able to produce
high-quality goods for export at competitive prices. While there was, in the free
market sense, much wrong with Japan this characteristic more than compensated
for her economic sins. However, the bubble came along, fuelled by the
institutional greed of the Zaibatsu which through their banks sanctioned a
spectacular expansion of credit, and as bubbles go this one went pop
spectacularly. Since then the government has done everything it can to stop
banks folding and industrial malinvestments from
being liquidated.
The result
is an economy which has barely progressed since. Japanese investment in
manufacturing has been directed elsewhere, particularly other South-east
Asian states and China. So the result of deficit spending has been a mountain
of public sector debt with no domestic economic progress to show for it. Now
that government debt-to-GDP is at 240%, or over one quadrillion yen, Japan is
resorting to accelerated money-printing as the only and final solution.
This will
destroy her currency; and Japan also has another problem with its aging
population. Those savers of yesteryear are now drawing down on their
nest-eggs at an accelerating rate. This means the genuine capital for
Japanese industry to use for industrial investment is no longer there. The
switch from accumulating savings to savings drawdown is also beginning to be
reflected in the Japanese trade figures. They are now moving into deficit, a
reflection of the change from net private-sector saving accumulation, to net
private sector consumption.
This is
bound to lead to a growing pool of yen in weak foreign hands, and a need for
the government to import capital to cover its deficit. No longer is Japan
self-financing. This implies that interest rates will have to rise, but think
of the cost for the world’s most indebted nation.
There is
little new in my analysis, and it should certainly come as no surprise. Her
detractors have cited Japan’s deteriorating age demographics for at
least the last decade, and it has been obvious to the markets that Keynesian
and monetarist solutions have made no positive difference. After all, the Nikkei
Index is still bumping along at about a quarter of its December 1989 peak.
The economy has simply been in a prolonged slump.
The
difference today is the move towards a trade deficit, which will put
increasing amounts of yen into weak foreign hands. For this reason 2013 is
likely to be the year when the accumulation of government deficits and the
ramping-up of money supply between them finally undermine the yen.
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