Turning Stones Into Bread – The Japanese Miracle

Stuffing the Futon

Our friend Ramsey Su just asked what Haruhiko Kuroda and Shinzo Abe are going to do now in light of the strong yen (aside from perhaps doing the honorable thing). Isn’t it time to just “wipe out some debt with the stroke of a pen”?

We will return to that question further below, but first a few words on the new Samurai futon. Apparently the Japanese are becoming more than a little antsy about Kuroda-san’s negative interest rate policy (and the threats of more of the same coming down the pike). Bloomberg informs us of the latest developments in this saga: “Manga Worker Stuffs Cash in Futon to Flee Japan’s Negative Rates”:

Abe Spending like a drunken Sailor

Is it because Shinzo Abe’s government has stopped spending like a drunken sailor? Not quite:

Japan for years has been renowned for having the world’s largest government debt load. No longer. That’s if you consider how the effective public borrowing burden is plunging — by one estimate as much as the equivalent of 15 percentage points of gross domestic product a year, putting it on track toward a more manageable level.

Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift.

“Japan is the country where public debt in private hands is falling the fastest anywhere,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100 percent of GDP in two to three years, from 177 percent just before Prime Minister Shinzo Abe took power in late 2012, he estimates.”

For once we actually find ourselves agreeing with Adair Turner, if only in terms of his analysis of the situation:

“I do not believe that there is any credible scenario in which Japanese government debt can be repaid in the normal sense of the word repay,” said Adair Turner, chairman of the Institute for New Economic Thinking and a former head of Britain’s financial regulator.”

He’s undoubtedly right about that. Mises knew it in 1949 already, when he noted:

“Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”

However, Adair Turner immediately lets his inner Silvio Gesell (the prototypical monetary crank) hang out again by adding:

“It would therefore be useful to make clear to the Japanese people that the public debt does not all have to be repaid, since some of it can be permanently monetized by the Bank of Japan.”

Useful for whom? We doubt it would make holders of the yen happy. They would probably find the yen suddenly beginning to eerily resemble those Reichsmarks issued by Havenstein’s central bank.

To be sure, things can chug along just fine for quite some time – but as noted above, once confidence in a currency is lost, these situations tend to go haywire in a non-linear manner. Go beyond the unknowable threshold, and what used to be money will quite suddenly become toilet paper. When confidence in a fiat money goes, it tends to do so rapidly and irretrievably.

Oh well, at least no-one will have to worry anymore about people “saving too much” in that case, or about the Japanese stuffing yen into futons. They will probably make pyres out of them instead. Perhaps the BoJ should hire this guy:

At least  Bloomberg mentions the view of a skeptic as well, who reminds us that there is actually such a thing as an “endgame”. He rightly notes that Turner’s prescription would in the end amount to a “suicide policy”:

“If the objective is to raise inflation and inflation expectations, it’s possible it could work,” Kanno said. Debt monetization could spur foreign investors to drive down the yen, as happened with Kuroda’s first easing, leading to a burst in inflation, he said. “But how would it affect the endgame — that’s my big concern,” said Kanno, who used to work at the BOJ. “It’s a suicide policy.” 

This is certainly true – but on the other hand, what other way out is there? In spite of not lacking in imagination, we can no longer really see one.  We find it quite amusing though that as long as everybody manages to pretend that everything is still normal, the yen is actually strong like an ox (as an aside to this, we remain bullish on the yen short to medium term on technical grounds – even though it is probably ultimately a lost cause):