Japan Guide, a Series

By pjain      Published June 5, 2020, 5:56 p.m. in blog Geo-Politics   

Review of WHY 30+ Years of Japan Stimulus that hasn't worked!

Japan Economic Miracle and Competitiveness peaked late 80s - GDP 9%+ Growth

Japan’s economic-financial performance peaked in 1989-1991 and periodic revivals aside, it has stagnated since, amid degeneration in public finances.

Japan Real Estate goes Astronomical Highs

1987 Crash as BoJ pricked the Bubble raising rates, inverting Yield Curve

In the late 1980s the Bank of Japan (BoJ), on the advice of leading economists, interpreted the decade as artificial, a mere “bubble,” and set out to “pop” it with punitive interest-rate hikes.

The BoJ inverted the yield curve, which is a recession signal in part because it makes credit intermediation (“borrowing short, lending long”) unprofitable.

For the past three decades, amid various crises, Japan has run dozens of alleged “stimulus” schemes (?scams)

BoJ certainly “succeeded” in its mission to combat the supposed artificiality of Japan’s economic-financial performance in the 1980s; but the economy tanked. Consumer spending went underground, deflation took hold, and GDP growth tanked and went negative with no demand.

Massive Government deficit spending to fight "deflation", Unlimited Debt/bond issuance as Debt-to-GDP over 250%

Since the crash, Japan’s policymakers have gone full Keynesian, implementing dozens of “stimulus schemes;” in effect, they’ve tried to artificially revive Japan’s economy, not by deregulating it, not by cutting tax rates or restraining growth in government but by massive public deficit spending.

While in past the fifteen years prior to 1990, growth in public spending and tax revenues closely tracked; new debt issuance was limited and even declined between 1982 and 1990. But since then, spending growth has far outpaced growth in tax revenues, due mainly to tax rate hikes and a stagnant economy.

Deficit spending and new debt issuance have been preferred.

Interest rate-cutting, a zero-interest rate policy (ZIRP)

“QE” (central bank monetization of public debts) buying back Bonds

The Bank of Japan keeps borrowing costs low with aggressive bond buying,

Direct purchases of private debt and equity securities

Yield Curve Control

Under a policy dubbed yield curve control (YCC), the BOJ guides the short-term interest rate at -0.1% and the 10-year bond yield at around 0%.

Now in 2020, the surprise increase in issuance of super-long bonds could trigger some market volatility,

The BOJ's yield curve control should prevent a spike in long-term interest rates,

Extreme currency manipulation

  • Encouraging bankers to support and do Yen Carry Trade to beggar the currency - borrowing (selling) very low interest Yen, and buying dollars to lower the currency

What has Japan been doing for 30+ years?

Japan GDP stagnated rapidly by early 1990s

  1. Japan’s real GDP decelerated from growth of 9.4% in 1988 to only 4% in 1989; by 1993 GDP was contracting.

  2. Industrial production decelerated, from 7.4% in 1988 to only 3.5% in 1989

    • THEN contracting by 13% between 1991 and 1993.
    • In 2020 Japan’s industrial production index still remains 12% below its 1991 peak.
  3. The NIKKEI equity index also crashed after the BoJ’s policy assault, by 60% from the end of 1989 to mid-1992. The index low in 2009 was 80% below the 1989 peak; today the index remains 46% below its 1989 peak.

No proof of effectiveness

None of these programs has ever been proved to improve Japan’s economic-financial performance. Indeed, its performance has eroded amid the cascade of higher spending.

  • The more Japan did, the worse it got eg the 30 years in 60s growth era vastly different from 30 years of 90s on. These are CAGR over VERY LONG PERIODS, on a simple interest rate a public debt growth of 6% * 30 is 180% but on compound interest it is 440% increase!

Table One makes clear that Japan’s public debt and public leverage increased by only 2.6% p.a. and 2.0% p.a., respectively, while real GDP grew 6.4% p.a., industrial output grew 7.2% p.a., and the NIKKEI advanced 12.2% p.a. In each case pre-1990 performance outpaced post-1990 performance.

Overreach Tax Revenues

Extreme levels of Debt-to-GDP much worse than profligate G7

Abe-"I am cool"-economics - We can Stimulate up the gazoo

2020 Stimulus 2 short months reaches 40% GDP

  • Back to Back $1.1 Trillion Stimulus DONE TWICE

  • Massive BoJ Bond Issuance. These will be funded partly by a extra budget measures and eg Japan will issue an additional 31.9 trillion yen in government bonds under the second supplementary budget for the current fiscal year ending in March 2021. That will push new bond issuance for this fiscal year to a record 90 trillion yen. Inclusive of issuance to roll over debt maturing during the year, Japan's total calendar-base annual market issuance would hit a record 212 trillion yen, further straining already tattered finances.

The packages (this year) took the size of the budget to a record 160 trillion yen, with new bond issuance making up 56.3% of annual budget revenue and raising the spectre of more bond issues later to offset falling tax income.

  1. A 117 trillion yen ($1.09 trillion) package was rolled out in May.

  2. Japan Approves SECOND $1.1 trillion Stimulus to Combat Pandemic Pain for June

  3. Composition of the new packages will include measures such as

  4. 10T yen Set aside in reserves that can be tapped for emergency spending.
  5. 33T yen in direct spending
  6. higher medical spending
  7. 190T Support to firms (45T in 1st package, 145T in 2nd package)
    • aid to firms struggling to pay rent
    • more subsidies to companies hit by slumping sales (more zombie corporate support)

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