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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

The Economics of Japan’s Lost Decades

Posted by WARREN MOSLER on December 18th, 2012

The Economics of Japans Lost Decades

By: Tanweer Akram, PhD

51 Responses to “The Economics of Japan’s Lost Decades”

  1. Matt Franko Says:

    Page 24: “Government deficits have prevented collapse in economic activity, and higher taxes and reforms aimed at fiscal consolidation have been counterproductive. Further, the Bank of Japan can keep Japanese government bond yields low as long as it deems necessary;
    worrying about Japanese government bond yields spiking sharply due to elevated government debt levels is not warranted given that Japan has a sovereign currency and thus no restraints on its ability to service its government debt…..”

    Not too shabby I’d say!…

    Reply

    AP Reply:

    @Matt Franko,

    Certainly better than this garbage:

    http://www.testosteronepit.com/home/2012/12/17/japans-no-exit-strategy.html

    “The overwhelming problem Japan has is of fiscal nature: debt and deficits can no longer be brought under control. Interest rates have to remain at near zero because the state can no longer afford to pay anything beyond that. Public and private pension funds are unable to earn a yield on much of their holdings but must pay out ballooning benefits to ever more retirees while the number of workers who are paying into these funds is shrinking. Young people have grown up with this scenario, see it every day, know there is no longer a good exit from the debacle. It’s too late. The pile of debt is too big. Promises about job security and retirement are illusory. They work longer hours for less pay than their predecessors, don’t have enough money to move out from home, and consume practically everything they make”

    Reply

    WARREN MOSLER Reply:

    and he reads this website
    ;)

    Reply

  2. walter Says:

    Warren,
    That goes into the right direction, especially p 24.
    I see references to Tcherneva, Hudson, Post-Keynesian conference in Kansas City.
    And that from a Dutch bank!! That must give you hope for the eurozone….

    Present developments around the BOJ role are also pretty MMT style I think, do you agree?

    Reply

    Walid M Reply:

    @walter, i suspect Warren taught him a thing or two

    Reply

    WARREN MOSLER Reply:

    it’s mutual. he does very high quality work

    Reply

    WARREN MOSLER Reply:

    some, apart from the emphasis on qe overnight

    Reply

  3. Jack34 Says:

    Oh please let me simply, no need for PhD on this one.

    It is called a Ponzi scheme with two possible choices:

    a) keep feeding newly minted debt into the bottom of the pyramid so that it keeps getting wider and higher.

    b) Stop feeding the ponzi and watch it implode, watch trillions in debt disappear and all major Japanese banks go insolvent immediately, within hours.

    Same course for America.

    Reply

    jerry Reply:

    @Jack34, true but their private sector debt is way down from the peak in 1996.. doesn’t seem to be very ponzi-esque.

    Reply

    WARREN MOSLER Reply:

    it’s not.
    ponzi is when you have to borrow to be able to spend
    a currency issuer necessarily spends first, then borrows.

    Reply

    Unforgiven Reply:

    @Jack34,

    Really, really need to check the required reading on this site. Start with 7DIF. You’re lost in a commodity-backed currency paradigm and that’s not the kind of currency we have.

    Reply

    WARREN MOSLER Reply:

    wrong, read’the 7dif’ on this website

    Reply

  4. Mr Bajs Says:

    Hi Warren, would you say a lot of countries in Asia are heading the way of Japan, with the rising property prices in Hong Kong, Singapore, Australia etc in mind? When interest rates go up, will it all come down? And will therefore interest rates probably stay low for a very very long time (way beyond 2015)..

    Reply

    WARREN MOSLER Reply:

    it’s not about interest rates, it’s about fiscal being too tight or not

    Reply

  5. Paul Palmer Says:

    With large and sustained government deficits, why has Japan not been able to “turn the corner” on economic growth?

    Reply

    jerry Reply:

    @Paul Palmer, good question, and also their unemployment seems fairly low (4.2%), but maybe there are some anomalies with the way they present that percentage?

    Reply

    WARREN MOSLER Reply:

    yes!

    Reply

    jerry Reply:

    @WARREN MOSLER, Wow I guess so huh, labor force participation rate is 58.7%.. I feel like unemployment numbers are becoming increasingly useless as an indicator, we hear the US rate fell but only because people left the workforce. What’s a good reliable number to use for unemployment?

    WARREN MOSLER Reply:

    offer a transition job to anyone willing and able to work and see who shows up?

    chewitup Reply:

    @Paul Palmer,
    Japan’s bubble was huge. The shock of their bursting bubble went beyond deleveraging and into a large propensity to save. If you read the whole article above, he explains it pretty well. Demographics, etc.

    Reply

    Ed Rombach Reply:

    @Paul Palmer,

    Maybe not all deficits of the same size produce equal outcomes. Back when Japan was paving over the countryside in public sector spending, they built one of the largest suspension bridges in the world which as I recall was only being used by about 40 people per day. That may have been a misallocation of resources which could probably have been put to better use by the private sector. As far as I know, one fiscal policy stimulus that Japan has not tried is aggressive tax cuts. Maybe putting Trillions of Yen back into the pockets of millions of Japanese taxpayers to spend, save and invest as they see fit would yield better results? Invisible hand anyone?

    Reply

    Adam (ak) Reply:

    @Ed Rombach,

    No, these people won’t consume more. Why should they bother? Can someone drive 2 cars at once? Can someone drink 10 bottles of champagne win every day? The same applies to the stockpile of whale meat – the demand is pretty low.

    Economists simply fail to comprehend that individuals have a finite desire to consume available products. Not everyone is a psychopath (Ayn Rand’s “entrepreneur”) bent on destroying natural resources at ever increasing pace, exploiting other people and multiplying the so’called “wealth”.

    Not everyone is another Emperor Nero who needed to burn Rome to experience the ultimate artistic arousal.

    Probably about 90% of the people don’t really care. Their demand would saturate or it has actually saturated already.

    The only venue to increase the rate of churn also called GDP is by inventing new products made using new technologies. Or by making sure the needs of the poorer people are also satisfied. This would make everyone happier and at the same time save the environment for the future generations.

    Reply

    jerry Reply:

    @Adam (ak), Interesting point.. most indicators look pretty good for Japan – stable prices, relatively low unemployment, high standard of living.. just not able to generate GDP growth. And how much does that matter really? It is the third biggest economy with less than 2% of the world’s population. Not bad!

    WARREN MOSLER Reply:

    yes, except the output gap/unemployment remains too high.

    Ed Rombach Reply:

    @Adam (ak),

    “No, these people won’t consume more. Why should they bother? Can someone drive 2 cars at once? Can someone drink 10 bottles of champagne win every day? The same applies to the stockpile of whale meat – the demand is pretty low.”

    Right, because it’s not just about consumption. If there is to be human progress, the ratio of capital investment, not only in maintaining existing plant machinery and equipment, but more importantly in the next generation of technology, must proceed exponentially faster than what is paid to workers for consumption. In other words the ratio of capital to labor must increase at an accelerating pace for living standards to rise in absolute terms.

    WARREN MOSLER Reply:

    if people want to work and produce but not consume private goods they can produce and sustain public goods

    Paul Palmer Reply:

    @Ed Rombach,
    How do we know what the right amount is? Or else we end up looking like Obama’s advisors who said the stimulus package would be enough to bring employment back.

    Also, Warren has said multiple times tax cuts better than government stimulus spending projects. A dollar of free market spending is better than a dollar (or yen) of government spending (most of the time).

    Reply

    Ed Rombach Reply:

    @Paul Palmer,

    Thank you for making my point, because maybe I did not make it well enough myself. I am in full agreement with Warren on this point and as you say, “A dollar of free market spending is better than a dollar (or yen) of government spending (most of the time).” My estimate for (most of the time) would be something like nine times out of ten because a free market is far more likely to allocate resources wisely than central planners. Where I think Warren and I might disagree is on the supply side effect of tax cuts. As I understand it, the MMT outlook only sees tax cuts as increasing the supply of money, which provides consumers with more aggregate demand. In this context I may be an anomaly in that I perceive both demand and supply side effects from tax cuts depending on the type of tax that is cut. The right type of tax cuts can raise incentives to work, save and invest which can increase the demand for money which can offset the increased supply of money resulting from the tax cut.

    WARREN MOSLER Reply:

    i don’t think i ever said a dollar of free market spending is better than a dollar of govt spending.
    for one thing there is no such thing as ‘free market’
    for another there is no private sector without some kind of public sector.
    for a third thing ‘better’ is an impossible word to use for this type of analysis

    ;)

    Paul Palmer Reply:

    @Paul Palmer,
    Perhaps Japan is also over-saving instead of consuming.

    To me, one of the most interesting points of MMT is that there is such a thing as “savings demand” and people cut consumption until their desire for savings is satisfied. The classical economics I took treated savings as just some percentage of income. Changes in savings demand (or savings desire) is counter-cyclical.

    So maybe the answer is, Japan’s government deficits are producing lots of 0.01% interest bonds which meet the ever-increasing savings desires of the private sector, while producing bridges to nowhere instead of increasing the standard of living.

    I know for a fact that their business culture has lots of unproductive jobs in the private sector. At increasingly failing companies as well, since they are export-oriented and are getting their collective clocks cleaned by the Chinese.

    Still, at some point I would think the deficit is big enough no matter what, and am surprised it hasn’t yet been reached in Japan. it would be good if there were some kind of quantitative analysis that could determine what this is. Then again, it’s economics, not a field known for precision.

    WARREN MOSLER Reply:

    no such thing as ‘over saving’ when the output choice is public and private goods and services

    WARREN MOSLER Reply:

    far enough for what you consider full employment

    SteveK9 Reply:

    @Paul Palmer, If the Japanese are saving a lot for retirement (they are all getting old), they may have a problem when they do in fact retire, if the ‘real’ economy cannot supply the goods and services they think this money will buy.

    Ralph Musgrave Reply:

    @Paul Palmer,
    “With large and sustained government deficits, why has Japan not been able to “turn the corner” on economic growth?” The answer is simple: Japanese households tend to hoard or save large amounts of money and national debt.

    Reply

    WARREN MOSLER Reply:

    because the deficit remains too small

    Reply

    WARREN MOSLER Reply:

    deficits still too small re savings desires and for full employment

    Reply

  6. Adam (ak) Says:

    The Japanese export-dependant economy will be allowed to “recover” – probably just for a while until is steam-rolled by the other emerging superpower. Plaza Accords clipped their wings. Now they are allowed to slowly regain their export competitiveness. This is all 100% political – it is a part of the Anti-Chinese “pivot” strategy.

    Just look at this:
    http://www.smh.com.au/environment/conservation/sea-shepherd-activist-vows-to-defy-court-over-whaling-fleet-20121219-2bncz.html

    If anyone had any doubts about the Diaouy Islands / Japanese Militarism Revival issue, the American attitude towards slaughtering whales clearly shows what’s really going on.

    Just like in 1945-50 when some leading Japanese war criminals including the Japanese Emperor were allowed to remain free / stay in power (and help uniting the Japanese society against the communist threat), the so-called “values” (and whales) are sacrificed in 2012 for short term political gains.

    http://en.wikipedia.org/wiki/Japanese_war_crimes

    Mr Obama should consider a completely different kind of “pivot”. Instead of oiling the rusty war machine why can’t the American compete peacefully with the Chinese in education, science, advanced technology, etc?

    Reply

    Matt Franko Reply:

    @Adam (ak), So you dont see an emerging shift in Japan away from the export driven towards a more internally focused economy (infrastructure, etc.)?

    Can the demographics continue to support the export model if many are retired?

    rsp,

    Reply

    Adam (ak) Reply:

    @Matt Franko,

    I believe that their production and investment are currently limited by the aggregate demand not productive capacities (or natural resources – yet).

    It is entirely possible that the progress in robotics may free up enough workforce so that the productive economy does not suffer from the demographic imbalance. People can concentrate on tasks which can never be outsourced to algorithmic systems such as caring for other people and certain types of scientific research.

    (I am not commenting on the possibility of building in the future a system mimicking the human brain, this is still technically impossible despite all the talk about artificial neural networks).

    I am not convinced that the export-driven growth model makes sense for the Japanese in the long-term future. I have to admit that I have read very little about that country, haven’t talked to people who were born there and know substantially less about Japan than about China.

    Reply

    WARREN MOSLER Reply:

    sure, just keep whipping and driving them, surpressing domestic consumption, and sending the output overseas

    Reply

    SteveK9 Reply:

    @Matt Franko, Habits are hard to break.

    Reply

    WARREN MOSLER Reply:

    works for me!

    Reply

  7. Danny Says:

    More internal stimulus to offset deflation would be available in Japan if the monetary transmission channel wasn’t dependant on the lending decisions of commercial banks. Simply modify the central bank so it deals directly with the public in conducting monetary policy.

    internationalmonetary.wordpress.com

    Reply

    WARREN MOSLER Reply:

    i’d rather cut taxes and/or increase govt spending

    Reply

    Danny Reply:

    @WARREN MOSLER, The problem is how money is distributed at its creation. The government has trouble allocating all the newly minted money efficiently. Money will enter the economy in a balanced manner if distributed evenly across the public, avoided the creation of imbalances.

    Reply

    WARREN MOSLER Reply:

    spending is how the govt. ‘creates’ dollars and yes, spending policy matters a lot! see my last third of the 7dif on this website

  8. JBH Says:

    Yes and look how well their nightmare centralist deficit spending policy has worked. A 20+ year economic slowdown and a stock market 80% off it’s highs. No thanks.

    Reply

    WARREN MOSLER Reply:

    you have some ‘mandatory readings’ to catch up on. and start with the 7dif after which you will agree their deficits are too small.

    Reply

    Danny Reply:

    @WARREN MOSLER, I looked at the document you linked. I couldnt see any reference the issue of how money is directed into the economy. How money is distributed at its creation is key. The government has trouble allocating all the newly minted money efficiently which leads to poorly allocated resources, cronyism etc…

    I think a really good solution is for money supply to be expanded in times of stimulus directly to the public so that the central bank just passes the funds on to the citizens and the citizens themselves determine how to employ the funds.

    Reply

    WARREN MOSLER Reply:

    hence my proposed payroll tax holiday

    Danny Reply:

    @Danny Yeah reducing taxes has a similar effect as increasing monetary stimulus. I see my proposal as superior though because everyone receives stimulus evenly including retirees, students the disabled and unemployed. Also if the people are directly involved in monetary policy with the central bank the system will become more democratic and participatory and remove some of the responsibility from the executive government making governing easier.

    internationalmonetary.wordpress.com

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