Japan in 2013

2012-DEC-23

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.