“The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions.”

Dead? That doesn’t sound very healthy, does it, boys and girls?

This blog post is part of a series on the subject of inflation and deflation, specifically asking if deflation is really so bad (consumers love lower prices), and if inflation is really so desirable. These lead to other questions, such as, “has inflation worked in the past to boost a flagging economy?” and “who benefits from inflation?” and “is deflation the same as falling prices?” and “who is really frightened of deflation?”

From Bloomberg’s  JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit

What caught my eye (my emphasis):

Totan Research Co. and Spiro Sovereign Strategy also said BOJ monetary stimulus is cutting the tie between economic fundamentals and bonds, which yield 0.6 percent for 10 years, the least in the world.

… Prime Minister Shinzo Abe, counting on fiscal and monetary stimulus to end 15 years of deflation, has yet to decide on whether to go ahead with the second planned increase to 10 percent by 2015.

Has Japan really suffered from deflation for 15 years? Let’s see what the Federal Reserve charts say:


Hmm. A fairly stable line with a brief period of inflation starting at the end of 2004 and ending sharply in 2008.

“These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.” …

Why on earth would they think that? Could it be because that is what policy makers have been doing in Europe and the U.S., apparently with impunity?

 … “The BOJ’s priority is to lower Japan’s real interest rates and ensure an end to deflation, even if they have to sacrifice liquidity and trading volumes in the bond market,” Takatoshi Kato, a former top currency official at Japan’s Ministry of Finance said in an interview on Oct. 31 in Tokyo.

… “Market functions are sacrificed for the sake of ending deflation,” said Izuru Kato, the Tokyo-based president of Totan, a research unit of money-market broker Tokyo Tanshi Co. A reduction in monetary stimulus could cause a drop in bond prices, which “will make it difficult for the BOJ to normalize policy,” he said.

Why is inflation apparently so desirable? Rising prices means energy becomes more expensive as Japan has to import all its energy or at least the resources to produce its own energy (apart from a small percentage produced by water and geothermals). It also means that citizens will have to tighten their belts because wages are not rising (why should they? The stock market rises are not due primarily to increased production).

So why is inflation so desirable? Who wants it? Consumers don’t.  But the politicians do. Why? Politicians in the EU and a former governor of the ECB is also very worried about deflation, according to a Telegraph report:

Writing in The Telegraph (UK), Ambrose Evans-Pritchard reported that the data stunned the markets. He quotes remarks from a number of financial-market analysts who called this a “debt deflation trap.”

Evans-Pritchard also marshals the authority of an unnamed former governor of the ECB who is quoted criticizing the ECB for not acting to head off the deflation threat through more activist monetary policy.[“Europe moves nearer Japanese style deflation trap,” Daily Telegraph, 31 October 2013.]

A writer on the Mises.org website asks, How does a reduction in consumer price inflation become “deflation”? How does a minor improvement in the purchasing power of consumers become a problem for liquidity in the financial markets?

Good questions! And the answer?

European politicians and central bank policy-makers are concerned not about consumer price reductions but about real reductions in the money supply as such reductions would force governments to abandon permanent budget deficit monetization. That is why they maintain a monopoly over the power to create money and they like to control where money enters the economy. Politicians use these advantages in two ways.

First, they are all, with the sole exception of the Bundesbank, “inflationists” when it comes to monetary policy. Inflation (that is, an increase in the money supply) steadily reduces the purchasing power of a fiat money and, in parallel, eases the burden of debt repayments over time as nominal sums become progressively of less relative value…

for highly indebted Eurozone governments, price inflation is the perceived “get out of jail” card, permitting them to meet their debt obligations with a falling share of government expenditures.

With Japan’s debt-to-GDP predicted by the IMF to grow to 244% this year, “inflating their way out of debt” might well seem attractive to  Japanese lawmakers.

So, inflation (meaning an increase in the money supply) is desirable to the central bank and the government. What about the consumers? They vote, but apparently they don’t care, or else they are happy to vote for politicians who want to take away their purchasing power so that the government can continue deficit spending. It’s not even about saving the asses of Japanese companies that are in difficulties due to falling prices (i.e. failing competitiveness).

Yet growth of PIIGS governments’ debts as a proportion of GDP (Table 1) have now crossed above the critical 90 percent ratio advised by Rogoff and Reinhart as being the threshold above which growth rates irrevocably decline. [K. Rogoff and C. Reinhardt, “Growth in a Time of Debt,” American Economic Review (May 2010). Reported that among 20 developed countries studied, average annual GDP growth was 3–4 percent when debt was relatively moderate or low (i.e., under 60 percent of GDP), but it dipped to just 1.6 percent when debt was high (i.e., above 90 percent of GDP).]

Wha….? So economists know that a debt-to-GDP rate of over 90% is correlated with an irrevocable economic decline. How much is Japan’s debt-to-GDP rate again? 244%!?!?!?

I must be dim. I still don’t get why inflation is such a good thing? Do you?