The Prime Minister of Japan has a radical agenda. Break Japan’s death spiral. To do this he must first break the deflationist stranglehold of Japan’s government institutions and then drive inflation to tip the balance of society’s allocation of resources from the old to the young.
It looks like he is losing. It looks like he may have lost.
Japanese elected representatives have even less grip on the levers of power than in the West. The quagmire and ossification of the democratic process you see in Europe and America is far more developed in Japan. The levers of government are simply not connected to the elected representatives of the people.
In Japan agreement is not the same as an undertaking to do anything. An instruction is not disagreed with, just ignored.
Real inflation isn’t hard to create, but governments don’t like real inflation as it risks increasing the cost of servicing the unsustainable debt. Governments search for the right kind of inflation, one that does not increase interest rates, which of course doesn’t exist. Instead, they use quantitative easing to fund themselves robbing the private sector by forcing it to fund the public sector for free. It is no shock therefore that QE doesn’t help growth much.
The Bank of Japan wants just this sort of non-existent inflation. It increases money supply but in effect that money supply is mopped up by the huge public deficit of the public sector of Japan. (Pro-tip: U.S. QE buys U.S. Government bonds; QE has been approximately the same size as the U.S. deficit. The government is therefore the funder of its own deficit not the general bond market.) This money flow doesn’t lead to a particularly good allocation of productive resources and hence has a stifling hand on recovery.
This is the state Japan finds itself in, only worse. The bureaucrats of Japan do not want inflation, they want deflation. Deflation pays out the old. Not only is Japan an old nation but its population is already two years into what looks like a rapid and drastic decline. In two generations the population will be well on the way to halving. Deflation is a pretty smart strategy to manage that decline and pass the asset of 120 million Japanese to the 60 million remaining and of course the government.
This is a chart of the Nikkei, which is a nice summation of this process:
However, this is not a comfortable outcome for Shinzo Abe.
For him Japan will only be strong through growth and only growth can turn around the population collapse underway. Think about China with 1,300 million people and Japan with 60 million, you can see how a nationalistic minded Japanese politician will see that as catastrophic. If you were to think of the environmental benefits of Japan with half the population, you would see the benefits of institution deflation.
So the deflationary trend is clear and it defines the battle line of Japanese democracy versus institution strategy.
This is where the battle lies, right on the fault line of the defeat of Abenomics.
It looks perilously like Abe is on the ropes. The BOJ has spoken and it’s the same old “yes, yes, yes,” means “NO” that’s been spouted for a decade.
Sadly Abe has been rattling his sabre in the foreign policy arena and while this has bolstered his voter popularity it appears to have lost important support in the institutions that he needs to win over his agenda. That blunder looks to have hurt him badly where it counts most for Abenomics because institutionally Japan is deeply pacifist and will not support anything that smacks of militarism.
So it is looking shaky for Abenomics and with the Ukraine and Russian conflict about to demonstrate the costs of macho territorial posturing, Abe is unlikely to gain any further traction for his agenda.
This is sad because Japan could use a boom. It’s sad to see such a vibrant country fade away.
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Clem Chambers is the CEO of leading private investors Web site ADVFN.com and author of The Game in Wall Street and Letters to my Broker.
