Posts Tagged economy

Japan’s Self-Defeating Mercantilism – Why isn’t the medecine working?

In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn $27.4bn. Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?

via Guest Post: Japan’s Self-Defeating Mercantilism | Zero Hedge.

It’s a long article, well worth reading. Here I’ve selected excerpts and commented on them.

First, the title is tautologous: mercantilist policies have always been self-defeating for the nation as a whole in the long run. They are designed to bolster a particular group of people or section of the economy, at the expense of the individual and the consumer. Murray Rothbard put it this way:

In the days of Adam Smith and the classical economists, mercantilism was properly regarded as a blend of economic fallacy and state creation of special privilege….

Mercantilism, which reached its height in the Europe of the 17th and 18th centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held that exports should be encouraged by the government and imports discouraged. Economically, this seems to be a tissue of fallacy; for what is the point of exports if not to purchase imports, and what is the point of piling up monetary bullion if the bullion is not used to purchase goods?

… Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.… But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

“Mercantilism: A Lesson for Our Times?”, Murray Rothbard, writing in the Freeman, 1963. (See also the Wikipedia for Schools article on Mercantilism.)

But it’s not working! In 2013, Japan recorded a record annual trade deficit of 11.47 TRILLION yen (up from 6.94 trillion in 2012; that’s an increase of nearly 100%!). Rising costs for imports outstripped growth in exports.

Recall that Mr. Abe’s policy was to weaken the yen in order to boost exports. Trouble is, Japan is a resource-poor nation, something that all Japanese schoolchildren know. Many products manufactured in Japan require raw materials which must be imported. Thanks to Mr. Abe’s “weak yen” policy, those imports cost Japanese manufacturers and importers more. In addition, there were the unexpectedly large amounts of LNG which were required to power Japan’s industry to replace the lost wattage of the 54 nuclear power stations which were taken offline after the 2011 earthquake-tsunami-Fukushima disaster.

Brilliant, Mr. Abe!

Back to the article. Here’s the theory:

Consumers are immediately hit with an implicit “tax” as imported goods cost more, while export-oriented firms get an effective subsidy.

Yes, exporters get a boost, but against this, in Japan’s case, must be offset the rising costs of energy and of importing raw materials.

In the capital markets, the effect is to lower the value of domestic bonds in foreign currency terms, with the result that yields rise. This means that the cost to the government of financing its deficit rises, forcing a reduction in government spending. As a result of these effects, resources are shifted from the household and government sectors and into the corporate sector. The effect of this resource reallocation should be to boost productivity, which in turn initiates a virtuous circle of rising incomes and ultimately higher consumption.

Needless to say (for those living in Japan), neither has happened. Why not?

in addition to devaluing, it is also engaging in massive quantitative easing. This keeps bond yields low, enabling the government to keep financing its deficit at low cost. There is thus no incentive for the government to cut spending— and in fact the consumption tax hike will be offset by even more spending. Furthermore, low bond yields suppress the financial income of household savers.

Great. So in addition to having to pay more for imported goods,  and for electricity (both for their own household use and for that of the manufacturing industries), consumers are unable to gain any real benefits from their savings, because interest rates are so low.

Question: if savings are discouraged, how will the capital needed for future investment be accumulated?

The end result of all this is that the government bears none of the burden of the adjustment and the household sector bears all of it, through higher import costs and lower financial income. With the household sector’s spending power thus crimped, companies have no incentive to invest in domestically-focused production. Instead, all their investment will be geared toward exports—mercantilism on steroids.

With the predictable result that the consumer gets it in the shorts. Of course, exporters, to the extent that they are individuals, are also consumers.

Since all the leading economies favor policies that support production over consumption, the world is getting more goods than it can absorb. The result is ongoing price declines, which have the effect of deferring the ultimate global recovery.

The problem is not falling prices per se (see this brilliant article debunking the “deflation is evil” myth); the problem is subsidized production, because this distorts price signals and prevents resources from being re-allocated in a timely fashion.

What this means is that Japan’s ultra-mercantilism is self defeating. In a global environment of weak demand and disinflation any volume increase in its exports will have to be paid for through price reductions…

Japan’s most likely path is that the yen keeps falling, the BoJ keeps printing money, and the dollar value of exports stagnates as devaluation and price cuts offset any volume increases. And so, paradoxically, the current account will continue to deteriorate into permanent deficit, despite ultra-mercantilism. At this point the game will have changed in Japan and Abenomics will have manifestly failed to deliver on its stated objectives.

The sad part is that this outcome is all so predictable. We don’t actually have to try the experiment to know that it is highly likely to fail, meaning it won’t result in increased productivity, economic growth, consumption or savings.

How will Japan’s voters react when they see that Abenomics has failed? Is there anyone offering any alternative to mercantilist policies?

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More bad news for Japan’s economy

Japan Services PMI™Markit reports Japan Composite data show sharpest decline in business activity since September 2011 Key points: Moderate declines in activity across both manufacturing and services Total new orders fall for first time in six months Service sector optimism the second-highest in 37 months

via Mish’s Global Economic Trend Analysis.

But, not to worry. Japan has a secret weapon – a central bank – just like the U.S., the U.K., China and Europe. All they have to do is print more money. In fact, it’s a puzzle why they haven’t done this before, isn’t it, boys and girls. Or have the central bank buy the government debt directly.

The news from the rest of the world isn’t too good, either, but those places all have a central bank, so no worries, mate! And China is bouncing back! The worst is probably over, already.

Easy. What’s all the fuss about?

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Japan a bug that will not escape the windshield

Enjoying the good weather? Feelin’ groovy? Getting ready for summer? Like MarketingJapan, checking out great new places to eat? As Mike has clearly fumbled the ball on this one, I’ll have to pick it up (well somebody’s gotta!)

Summer may be cancelled. Japan is a bug in search of a windshield!!! Are you prepared? Are you preparing? Buying assets that will be of value in a recession? Got stocks of food and water? Got your cash under the mattress? No? Because you can always get your cash out from an ATM???

I quote from Mish’s Global Economic Trend Analysis.  And don’t think Mike is always out to yakitori: check out his hard-hitting piece on the Tokyo concert to end nuke power.

If Japan’s current-account was negative, Japan would depend on foreign capital to make up the deficit. Will foreigners fund Japan at 0% interest rates?

I think not.

Bug In Search of Window

Japan has debt-to-GDP ratio of 220% and rising. As of July 9, the Yield on 10-year Japanese Bonds is .80%.

A mere rise of 2 percentage points would consume all Japanese revenues just to pay interest on the national debt.

Moreover, Japan’s demographics are such that pension plans are now for the first time last year net sellers of bonds, not net buyers. For details, please see World’s Largest Pension Fund Needs to Sell Japanese Bonds; Japan’s Demographic Time Bomb Officially Goes Off

As John Mauldin commented in his book Endgame: The End of the Debt SuperCycle and How It Changes Everything, “Japan is like a bug in search of a window.” If you have not yet picked up a copy, please do so. It’s a good read.

Once Japan’s current account balance goes negative in a sustained way and I believe that will indeed happen, the bug will have found the window.

via Mish’s Global Economic Trend Analysis.

(I’ve changed Mish’s link to Mauldin’s book to direct you to the Amazon Japan product page; if you buy it from here, you’ll be buying me a drink. Cheers!)

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For A Million BTU: Monday 4 June 2012 |

Update: Check out this graph from Seth Godin’s blog: it compares fatalities in the nuclear and coal industries. (Thanks to Mike Rogers for the link).

A week ago, I posted about Japanese shut-down nuclear reactors and how this had resulted in a big jump in purchases of natural gas and coal.

I had believed that the costs of importing coal and natural gas were higher than the costs of running the nuclear power plants, and that this was an unsustainable policy in the long run.

However, today, I was alerted to the falling prices of LNG and coal:

For A Million BTU: Monday 4 June 2012 |


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U.S. Tax Burden: 40 Million Government Workers. Is Japan better off?

How many people work for governments in the United States?  Let’s look at the numbers.

via Tax Burden: 40 Million Government Workers. Answer: 40 million, according to a study by Prof. Paul Light of New York University.

A little top-heavy maybe?

top-heavy big-breasted woman


How many people work for governments in Japan? Last month, Saving Japan author Peter Dyloco compared the two countries Japan and the U.S. in terms of their populations and the percentage that is employed by the government. His estimate for the US was 1.7 million.

Perhaps the figure for Japan is also much higher than the 1 million Saving Japan quotes.

Some states are discovering they cannot afford to pay all the workers that they hire. According to Mish, “In a much needed development U.S. Local Governments Cut Payrolls to Lowest Level Since 2006″

Will local governments in Japan have to fire their workers? Few people seem to be considering this possibility. It seems to be another of those “impossible” scenarios that actually happened last year. The Japanese phrase is “soutei-gai” 想定外 unimaginable, completely unpredictable.

But it’s happening in the U.S., in a country that, according to pundits, has an economy that is recovering.



And so is Japan’s:

Recovering from a hangover


More Executives Say Japanese Economy Is Improving.

According to a quarterly survey compiled by The Nikkei on Saturday, 58.6% of respondents said the domestic economy is growing, a significant increase from the 38.6% seen in the previous survey from December.

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Next contestant Nikkei from Japan, special subject the bleeding obvious

How much sooner would this have happened if Tepco was a genuine private company?

Tepco has not gone bankrupt simply because it is being bailed out by the government. Financial aid from the government-backed Nuclear Damage Liability Facilitation Fund is expected to reach 3.4 trillion yen. The figure is already far higher than the 350 billion yen or so that Japan Airlines Co. received from the government and the roughly 2 trillion yen that went to Resona Holdings Inc. 8308.

In Tepco’s case, government aid will continue to grow unless the firm can plug the hole in the bucket.

Given this grim reality, what needs to be done is evident. Power rates need to go up so that Tepco can pay compensation for the nuclear accident and provide a stable supply of power. And some of its idled nuclear reactors need to be brought back online after their safety has been confirmed to curb the increase in power rates.

via 2012/03/30 05:38 – OPINION: There Are Solutions To Tepco’s Financial Woes.

The reason for my title, if you haven’t spotted it already, can be explained in this video. It’s a cultural reference to a line from the British comedy series, “Fawlty Towers” (and here for Japanese readers).



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Time run out for Japan? “The yen’s looming day of reckoning”

English-speaking observers of Japan’s economy have been sounding warnings since last year (and many before that), but within the world of Wa, there seems to be little sense of panic.  Has time run out for Japan?

So says MarketWatch, and thanks to MarketingJapan’s Mike Rogers for the links: read Mike’s articles Yen Devaluation Now Imminent? Being Called by Major Financials! Get out of debt – Get your financial house in order now!
“A massive 40% devaluation of the Japanese yen is imminent and inevitable…”

Mike’s articles contain excerpts from a MarketWatch article entitled “The Yen’s looming day of reckoning” and from a ZeroHedge article by Tyler Durden of March 26th, entitled, “Four Years of Japanese Central Planning Failure Charted”.  Both articles are worth reading in their entirety for the insights they give into how Japan’s economy works (or doesn’t, depending on your point of view).

Even though you may live and work in Japan, you may still get some insights  and surprises, probably unpleasant ones. So buckle up, hold onto your seat, and read on. Read the rest of this entry »

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ECB’s and BoJ’s balance sheet as portion of GDP

ECB BoJ balance sheets as % of GDP

ECB BoJ balance sheets as % of GDP

The above graphic is from an RT interview with “Tragedy of the Euro” author and economics professor, Philip Bagus (Bagus’ interview begins @ 16:15).

Bastiat Circle blog has the transcript and the video.

What happens in Europe, of course, impinges on Japan because

  • Europe is one of Japan’s major trading partners,
  • the BoJ’s balance sheet is approximately equal to the ECB’s, and
  • the BoJ’s and Japan’s Finance Ministry policies may well follow the path of Europe’s.

via Eurozone Wealth Transfers and Sovereign Default

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Big Japan trade deficits? So? We don’t need no stinking nuclear plants!

Asian trade deficits seem to be talk of the markets at the moment, with China and Japan both reporting notable trade deficits in recent days. Chris Martenson wrote a piece published in the Analysis section of this website yesterday, noting that Japan is now recording record trade deficits as a result largely of a surge in energy import costs.

Before the Fukushima nuclear disaster, the country relied on nuclear power for 30% of electricity production. But by the end of this month, that figure will stand at 0%. Resource-poor Japan is having to spend enormous amounts on importing oil and natural gas.

The fact that China and Japan are now both running trade deficits has troubling implications as far as heavily-indebted western countries are concerned. After all, if large Asian countries are no longer running large trade surpluses, then there will be less demand from them for western bonds, which will compound the already tricky financial situation that Europe and the US face.

However, mercantilism remains the dominant trading preference as far as both of these countries are concerned, so we shouldn’t expect the authorities there to sit back and watch these deficits increase. CNN reports that officials at the People’s Bank of China are already hinting at halting the yuan’s appreciation, while Japanese efforts to weaken the yen in recent years have been persistent – though unsuccessful on a relative basis

So in one form or another, China and Japan will both look to weaken – or at the very least in China’s case, suppress – their currencies. Whether or not they succeed on a relative basis is tricky to predict, given that they’re squaring off against the heavyweight money printers of Europe and America. But one thing is pretty much certain: the yen and the yuan will weaken against gold, and gold will continue to benefit from these competitive devaluations.

via Asian trade deficits: prelude to more money printing?

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Japan Posts Record Trade Deficit in January, 4th Consecutive Deficit Month

In today’s post, Mish gives (yet another) warning about Japan’s unsustainable economic road, and makes a good suggestion (my emphasis)

At some point, I suggest now, Japan needs to stop blaming the earthquake and tsunami for its collapse in exports. Furthermore, Japan is going to have difficulty financing its debt unless its turns the situation around quickly.

That may not be likely as Japan logs record trade deficit in January

Imports rose 9.8 percent from a year ago and energy prices are one of the reasons. Japan needs alternate energy sources following the shutdown of its nuclear reactors.

While rising imports may still be blamed on the tsunami, the collapse in exports has a different reason. Europe is in a major slowdown and more US consumers are happy with GM and Ford autos.

via Mish’s Global Economic Trend Analysis: Japan Posts Record Trade Deficit in January, 4th Consecutive Deficit Month.

On the matter of alternate energy, Prof. Lenz has done a great job recently of translating from Japanese into English Japan’s new feed-in tariff law, which is closely connected with consumer usage of alternative energy supplies (especially, but not limited to, solar):

Prof. Lenz seems to be a believer in using the power of government to force businesses or consumers into certain paths of economic behaviour:

In my opinion, building codes world wide should make solar panels as part of the roof obligatory. Just as there are building codes designed to reduce the risk of fire (which of course come with a cost), there should be building codes designed to help avoiding killing everyone on the planet by Venus Syndrome.

Mish is not at all sure using government power to force a “green agenda” is a good idea.

Solar Energy Madness in Europe

In an effort to spur solar energy in France, Germany, Spain and other European countries, bureaucratic dunces decided to pay as much as 10 times market rates for those supplying energy to the power grid.

In response, farmers in France have started building “barns” that serve no other purpose than a place to put solar panels. Supermarkets put solar panels on their roofs and unused sections of parking lots.

It has been a boom to solar panel makers (China), but it is costing costing the French power company Electricite de France SA more than a billion euros ($1.3 billion) a year to meet government mandated pledges to accept solar energy from those supplying the grid.

At the end of 2010, EDF received 3,000 applications a day to connect panels to the grid. In 2008, the number of applications was 7,100 for the entire year.

The results should have been easy to predict in advance, but you can never explain anything to economic illiterates interfering in the free markets hoping to make things better. They never do. (from Sunday Funnies 2011-01-23 Student Loans; Solar Energy Madness in Europe)

Obviously this is silly: the historical record will clearly show that politicians only have humanity’s best, long-term, interests at heart. What other motives could they possibly have for pushing green energy?

It is, admittedly, disappointing to read that the Earth Summit is doomed to fail:

said Syukuro Manabe, a climate modeller at the US National Oceanic and Atmospheric Administration, “the political system is not motivated to worry about the future“.

And here is another idiot who clearly doesn’t  know what he is talking about: politicians as thieves, in a system that discourages them from treating resources as scarce? Nuts!

Mish is just a successful investment advisor and fund manager. What the hell he know about economics?

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