The Bank of Japan just ended 8 years of negative interest rates.
Indeed, this is the first interest rate hike for Japan in 17 years.
According to Keynesian economics, Japan should have experienced an economic boom from all that monetary stimulus. It did not. Prices were stagnant. Wages were stagnant. GDP growth was anemic.
Japan spent more than 1.2 quadrillion yen in deficit spending trying to boost its economy, and all they have to show for it is a debt that’s over 200% of its GDP.
Yet deficit spending remains the preferred policy solution of just about every damn country in the world.
Back in the dim mists of time (i.e., the 1980s), Japan Inc. was going to take over the world. That didn’t happen either. Instead, the Japanese bubble, based in huge measure on wildly unsustainable real estate valuations (“At the peak of the bubble economy, Tokyo real estate could sell for as much as US$139,000 per square foot, which was nearly 350 times as much as equivalent space in Manhattan. By that reckoning, the Imperial Palace in Tokyo was worth as much as the entire US state of California.”) popped. There then followed three decades of economic stagnation.
Many will point out that Japan’s shrinking demographics make it an economic outlier, but a whole lot of Western nations aren’t too far behind.
You can’t deficit spend your way to prosperity, and attempts to do so end in disaster.
Tags: 1980s, Bank of Japan, Economics, interest rates, Japan, negative interest rates
This will reduce, but not end, the financial ‘carry trade’ where large international investors borrow in Japan, exchange currencies, and then invest in other countries. Mostly China and the United States.
It will tend to depress the money supply in China and the United States; and increase the value of the Japanese yen against other world currencies.
I sometimes think we’re all being dosed with crazy pills, especially when it comes to economics.
I’d never profess to being an expert, but by all the reading I did on the issue starting back during the late 1970s, plus what was covered in the classes I took? We really ought to be well into a major economic disaster, by now. Something nearly apocalyptic. I mean… 34 trillion-with-a-T dollars? D’ya remember the panic-mongering when it went over a trillion, back during Reagan’s time?
And, yet… We’re not eating cats and dogs or taking in each others laundry. It’s nuts… Everything I remember studying and reading says this shouldn’t be, but here we are.
I suspect that we’re in a state where a lot of the old laws of economics no longer apply. Or, that if they do, they’ve been masked by circumstances.
Moore’s Law, for example. All the supposed “productivity” that computers were supposed to bring… The fact that we’ve shifted from 90% of the population having to do agriculture to feed ourselves to a situation where less than 3% of the workforce is vaguely involved in the agriculture sector.
Whatever is going on, I think we’re in new territory, a transitional phase. There has to be some damn reason that the whole system hasn’t blown up under the weight of all the contradictions and bad decisions by the people in charge, but I’ll be damned if I know what those reasons are.
Regardless, there appears to be way more slack in the system than we realized.
Politicians like to hear the “spend in bad times” Keynesian philosophy. However, they tend to do the “spend in good times” too, despite the advice against.
That doesn’t make them Keynesian. It just makes them spendaholics.
Keynesian economics has a lot of flaws — let’s just say it’s never behaved as advertised in reality — but calling politicians hypocrites should always be in season.
The US$ is the world reserve currency. Which means that printing money is not borrowing against the US economy; it’s borrowing against everything on the planet valued in US$ and a portion of just about everything else. Which is why the US government tends to discourage other nations from adopting alternative payments.
Japan has a robust surplus in their current account. Their ability to produce excellent products and export them at a competitive price means that Japanese products will find a ready market.
It is difficult to bring foreign goods into Japan because of Byzantine trade restrictions. So the value of exports is almost always larger than the value of imports. This lopsided trade pattern leads to a huge pool of capital building up in Japanese banks.
Normally, this would not be a problem because these funds can be used to expand economic production. The problem lies with the politics of trade. If Japanese businesses can borrow money at cheap rates, they can charge less for their goods. This would put American labor at a disadvantage.
Japan relies heavily on the US of A for a large part of its military defense. As such, undercutting the American worker would lead to anti-Japanese trade sentiment and a demand for high tariffs. A trade war would hurt both Americans and the Japanese.
Japan leaves their interest rates ridiculously low so that Washington, D.C. can afford to borrow money and maintain a higher level of military spending than would otherwise be possible.
This is a non-optimal solution but it has worked well enough to maintain Japanese living standards and still maintain a military deterrent. If Japan’s pacifist leanings are some day addressed by amending their Constitution, their robust savings can be readily converted into arms production, an arrangement that would lessen the burden of US military spending.