Not Even With Free Money May This Land Be Healed

Where macroeconomic policy making meets psychology, unhappily: Kathleen Chu's and Katsuko Kuwako's look at Japan's brain bursting housing and land markets. (Link)

Hint to world: after a housing bubble bursts, destroying the equity and/or the virtual savings of everyday folk, be not surprised if weird, interest-rate and market-clearing-mechanism-defying resistance should move in...and never leave. Even in the most densely populated environs on the planet.

Hoarding is what Chu & Kuwako describe...but the hoarding of a vacuum, the lost value of land and buildings owners never had a chance to hold in their hands.

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Image: Conjunction of Venus, Jupiter and the Moon above the Kanda River on 30 November 2008.
Image courtesy: MTC

Abenomics Showing Indications Of Destroying Japan's Economy

Japan's prime minister Abe Shinzo has shaken up the world economic circles with Abenomics, his bold mix of scatter shot fiscal boost, extremely loose (some would say slutty) monetary policy and a bundle of gift-wrapped regulatory changes benefiting supportive company presidents and reticent gestures in the direction of structural reform. Yesterday's government release on GDP in the first quarter of 2013 hints that Abenomics seems to be doing very quickly to the Japanese economy what the Friends of Abe have spent years trying to do to Japanese diplomacy: namely, run it into a ditch.

As the chart indicates, even a modest year like 2012 when Japanese businesses were under the thumb of a socialistic DPJ-led government -- frozen as it was to near immobility by divided control of the houses of the Diet -- the economy still grew at a robust annualized 5.3% rate in the Mar-Jan quarter. However, under the pressure of the Abe government's avowed attack on the value of the national currency, its adding to the national debt at an accelerated rate and the simultaneous destabilization of the bond markets and destruction of the purchasing power of Japan's burgeoning population of retirees, economic confidence has shrivelled. Real growth in Jan-Mar 2013 crashed to a mere 3.5%. In nominal terms, which are the meaningful figures in deflationary economies such as Japan’s, GDP shrank year-on-year at an annualized -4.0% pace...

--

The above is a parody.

However it is no more absurd than many of the prematurely laudatory, rose-colored glasses-wearing articles appearing yesterday in response to the government release of GDP estimates for the Jan-Mar quarter.


Later - Via Bloomberg: Goldman Sachs researchers have tried to find inflation expectations above and beyond those created by the mandated rise in the consumption tax from 5% to 8% next year.

The GS assessment of the net effect of Abenomics on expectations: none. (Link)

Later still - Right now it is impossible to disambiguate:

1) economic behavior driven by a sense of hope for a future of rising incomes, asset prices and employment

2) economic behavior driven by coldly calculated front loading of purchases to avoid paying the extra 3% tax

3） economic behavior driven by a panicked fear of rising interest rates and import prices,

and

4) economic behavior taking advantage of inventory clearance and special promotions in anticipation of companies trying to raise prices via the introduction of new products and services.

Under scenario 1, the economy keeps chugging through 2014 with a small, sharp dip after the tax rise. In scenario 2, economic growth is strong until the imposition of the tax, after which it falls off a cliff. Under scenarios 3 and 4, economic growth declines through this year, then falls of the cliff with the tax rise.

I know that the wealth effect of rising asset prices will provide a kick to certain sectors of the economy -- but the effects of wealth effect driven demand do not seem likely to have major impacts on domestic wages and employment.

How And If Debt Will Change Anything

The Economist's Free Exchange blog has been looking at attempts to inject the behavior of financial intermediaries into macroeconomic modeling. A recent post introduces a paper by Markus K. Brunnermeier and Yuliy Sannikov (Link) which takes a hard look at the tale the post-Bubble Japanese economy has to tell about treating the financial sector as a afterthought or as a fundamental element.

I am trying to wrap my head around two items in the paper.

The first is the statement "Of course, aggregate total debt in a closed economy is zero." This is both obvious and salient for an economy such as Japan's where so much of all forms of debt are held domestically.

The second is this pair of graphs of the aggregate debt levels in the economies of the United States (left) and Japan (right).

What the right hand graph shows is that total debt in Japan is over 600% of GDP whereas in the United States the figure is less than 300%. The right hand graph also shows a massive shift in the creation of debt from the non-financial corporate sector (deepest blue) to the government (lightest blue) after 1991.

No surprises here either.

What I am trying to understand is where is the ceiling -- the point where the various actors inside a largely closed economy say to each other, "We cannot go on borrowing like this from each other anymore"?

Put another way, with Japan having zero incentive to foreclose upon itself, is there a percentage of GDP where the total aggregate liability becomes significant, save as a psychologically depressing factor?

Later - Reader MK points me to the long, graph-rich look at Japan's economy published by John Makin of the American Enterprise Institute (Link). While Makin tries, as most Americans writing on Japan's economy do, to influence ongoing fiscal and monetary policy battles in Washington, the paper gives a comprehensive, if pessimistic view of the likelihood of Abenomics changing Japan's overall economic situation.

One question: how is it that an economist who argues so strongly for the importance of large-scale, inevitably deficit-enlarging government spending, holds a chair at the American Enterprise Institute?


Image courtesy: Brunnermeier and Sannikov (2012)

Shinzo Does The Minimalist Thing

For a guy whose Cabinet and party are riding high in the polls (Link - J and Link - J) Prime Minister Abe Shinzo delivered a subdued and limited policy speech. (Link - J)

Unsurprisingly, he opened with an executive summary of the Algerian gas plant incident and his government's response to the crisis. Surprisingly, he did not connect the events of the last two weeks with a call for an expansion of the capacity of the Self Defense Forces to carry out evacuations of Japanese nationals.

Also surprising was how much of the the body of the exceedingly brief speech consisted of the pattings of the heads of the pet issues of a tiny minority, ignoring big policy issues of interest to the majority of the electorate. How else to explain the call to build a "respectable and proper society" (matto na shakai) -- the answer, it seems, to everything -- or the call for Japan to aim to be #1 -- a reference not, as some commentators are going to say, to Ezra Vogel, but to a question posed by Democratic Party of Japan legislator Ren Ho to bureaucrats defending Japan's next generation supercomputer program?

It was also striking how much of the speech was delivered in an intellectual crouch. Was it really necessary to kick up the hysteria quotient, declaring the economy, reconstruction of the Tohoku, foreign affairs and education in crisis? Yes, if you are trying to seize power in an election. Yes, if you are trying to foist unpopular programs on a doubting electorate. But when you are front-loading the budgetary and monetary goodies and enjoying 65% Cabinet approval ratings -- do you need to do it then too?

Sometimes one had to wonder whether the various parts in Abe's government are speaking to each other. Who is going to listen to Finance Minister Aso Taro's scoffing at the concept of the Japanese government having a beggar-thy-neighbor weak yen policy (Link) when the prime minister says in his Diet policy speech that unless Japanese policy changes, there will be no way to pull out of deflation and a high yen?

As to foreign policy, who made the calls? Mentioned were:

1) the deepening the Japan-U.S. security relationship, including the third rail of the relationship, the move of Marine Corps Air Station Futenma to a replacement facility

2) Japan-ASEAN relations

3) trendy threats: terrorism, cyberwarfare and natural disasters

What of China-Japan relations, other than a pledge to increase the national capacity to police Japan's territorial waters and airspace? What of Russo-Japanese relations? What of Japan-South Korea relations?

What of energy policy? Or energy, period? (Just one mention, PLEASE!) What of pensions, eldercare, youth underemployment?

And what are we supposed to make of a promise to return to primary budget balance in the medium term? Those who are interested in the issue know the promise to be a lie, while those are not interested in the issue cannot understand why the promise is being made.

And why as a conclusion, after making all sorts of promises to better Japan and make the lives of its citizens easier (including an eyebrow-raising pledge to make it easier for domestic companies and organizations to recruit non-Japanese employees) wind up the speech with an "Do not ask others what will be done -- the only way to improve your own lives is by your own hands?"

All in all, a surprisingly surprising little speech.


Later, much later - Here is a translated Yomiuri Shimbun article (Link) providing the background to Abe's rhetorical question, "Everyone, shall we not go forward from this day with a goal of being the best in the world?"

Signs of the Apocalypse #4

William Pesek and I in agreement regarding something, in this case Abenomics. (Link)

Pesek dives, as usual, way too deep in the smarmy snark and cynicism tanks. Nevertheless, he sees pretty much the same weaknesses I do.

I guess this means I need to take a hard look at my current levels of coffee intake.


Later - I should emphasize that I do not disagree with the fundamental policy -- that if one wishes to attempt a revival of economic growth, then one needs a combination of targeted fiscal stimulus, imprudent monetary policy and economic restructuring. I just cannot trust the Liberal Democratic Party and Abe Shinzo to make the tough decisions. Recall, the folks ostensibly running the country are the same crowd who, even when they possessed a supermajority in the House of Representatives, could not figure out how to renew a law 60 days prior to its expiration date.

[For those confused by the above, check out what happened to the Indian Ocean dispatch, the road construction and the gasoline levy laws in 2008. The LDP's mismanagement of the calendar staggers the mind.]

If Dr. Krugman, Matthew Yglesias and other Americans want the United States government to shrug off demands for fiscal probity, please do not point to the actions of an LDP-led government as a guide star. There is simply no way to idiot-proof a policy so that it is impervious to Abe and Company's ability to mess it up.

Show And Tell

The Industrial Competitiveness Council (Sangyo Kyosoryoku Kaigi) is an ultra-high voltage group of folks. Its non-government members are:

Akimoto Sakie (Jodie), President, Saki Corporation

Hasegawa Yasuchika, President, Takeda Pharmaceutical Co. and Chairman, Japan Association of Corporate Executives (Keizai Doyukai)

Hashimoto Kazuhito, Professor, Tokyo University

Mikitani Hiroshi, President and Founder, Rakuten

Niinami Takeshi, President, Lawson

Sakakibara Toshiyuki, President, Toray Group

Sakane Masahiro, Chairman, Komatsu Group

Sato Yasuhiro, President, Mizuho Financial Group

Takenaka Heizo, Professor, Keio University

Credit where credit is due: one could not pick a more photogenic and knowledgeable set of representatives of Japan's management and business development worlds (applied chemist Hashimoto, one of the two academics on the council, is a poster boy of academic-industrial cooperation).

Which is the first problem.

All of these folks have day jobs running successful companies or academic enterprises. Hasegawa, Amaterasu bless him, has two day jobs.

Which means the amount of time and attention these persons can consecrate to the Industrial Competitiveness Council is minuscule.

Unfortunately, the amount of energy and effort needed to come up with a feasible action plan for improving the competitiveness of Japanese business would be immense. If this were a real, functional council on competitiveness, membership in the council would not just be one's day job, it would be one's life.

The Council had its first meeting yesterday. (Link - J)

Which is the second problem.

The Abe administration's economic revival plan is a trident with three prongs. The first is fiscal stimulus, either in a single burst or a steady program (Abe has unsurprisingly been silent about multi-year stimulus since the election). This debt-fueled kick start to the economy is geared to/needed to (there is a healthy debate as to the necessity) revive Japan's animal spirits.

The second is an ultra-accommodative monetary policy, driving down the value of the yen and savings and supporting mild (2%) inflation.

The third prong is supposed to be restructuring the economy. Since economic restructuring has an bad reputation, risutora being the euphemism for being laid off from work, the effort has been rebranded as economic revitalization, which sounds so much more hopeful.

Strangely, while the Abe government has needed no advice on how to structure a fiscal stimulus package (Liberal Democratic Party-led governments having done so well in this department in the past) or how to work with the Bank of Japan on monetary policy ("Push outgoing Bank Governor Shirakawa Masaaki into a corner? Nailed it!") it seems, on the subject of changing the way Japanese government and business do business, to be in need of wise counsel, delivered at a measured pace.

Could this need for advice, and not immediately, be because restructuring revitalization, requiring a strategy, meaning that one would have to pick winners and losers, meaning that one would have to dismantle or abandon inefficient market participants, which means demanding sacrifices from folks who tend to vote for the LDP, is...unpleasant?

Unpopular?

Hard?

To put it another way -- if you wanted to have a credible revival economic plan, would you not want to have the bitter and the sweet together so as to make the whole more palatable, rather do than what the Abe government is doing, which is tossing out the honey pell-mell whilst retaining the bitter pill for a council of wisemen and wisewomen to ponder over?

So let us say it together: the Industrial Competitiveness Council is a public relations stunt.

Takenaka will stick around until such time as the Abe government makes its choice for the next Bank of Japan Governor. He will then leave, either to take up the governorship or to spend his free moments more wisely (Takenaka should open a training school on how to shrug off unprofitable activities without a shred of remorse). Other members of the council will continue to attend meetings but only to tell shaggy dog tales.

Which is possibly the point of the whole exercise.

Politics and Poetry: Senryu For the Week Of January 19, 2013 - Money Troubles

The comic verses (senryu) printed in the Tokyo Shimbun of January 19, 2013 reflect the current focus on the Abenomics, the prime minister's mix of inflation targeting and fiscal stimulus intent on jolting the economy out of its current recession.

年替わり
「金」の話題
ばかりなり

Toshigawari
"Kane"　no wadai
bakari nari

As the year switches over
"Money" is the sole subject
of discussion

In December of each year, the monks of Kiyomizu Temple in Kyoto hold a special memorial event. A large blank piece of paper is propped up on an easel set on the temple's famous giant deck.　A monk, wielding an immense brush, writes upon the paper the Chinese character of the year.

Here is a photo from last December's ceremony.

The character for 2012 was kin - "gold" - a reference to the large number of medals won by Japanese athletes competing in the London Olympics.

Kin, however, can also be read as kane - "money." The author of the verse is noting that even with the change of the years -- the specific kawaru used denotes a change where one takes up something new after ridding oneself of the old -- the subject of conversation remains the same.

One of the questions regarding the inflation targeting aspects of Abenomics is what happens to consumption. The academic argument for inflation is that consumers, knowing that prices will rise, will make purchases now rather than later. There is certainly supporting evidence for this assertion in the way consumers reacted to the raising of the consumption tax level from 3% to 5% in 1997.

However, the 1997 example has its negative side. While consumers did splurge up until the date of the raising of the consumption tax, sales fell through the floor immediately afterward. Given Japan's demographics reliance on bank deposits to supplement pensions (not to mention high level of public debt held by domestic financial institutions as liquid capital) there is a reasonable fear that inflation will be a wash, as older workers and retirees respond not by exchanging depreciating money for real goods but by restricting their spending even more than current low levels.

In addition, the politically-motivated and directed fiscal stimulus package, funded through a sale of construction bonds, is seen as only adding to future tax burdens.

For one author, the end result is:

爺ちゃんの
財布を国が
狙っている

Jiichan no
saifu o kuni ga
neratte iru

The State is
taking aim
at Grandpa's wallet

Japan has been enjoying, if that is the word one wishes to use, a long span of cold, snowy weather. The extreme cold has led to a huge increase in the prices of fresh vegetables, particularly leafy greens. While some consumers have simple swallowed the rise in prices, most are responding by substitution (the other day on NHK, a vegetables specialist suggesting tiding oneself over through by increasing one's consumption of onions and kabu -- a distinctly medieval-sounding solution) or by going without.

Which left one author to look askance at the Abe government's inflation targeting scheme.

インフレ
レハーサルかな
野菜高

Infure
rihasaru ka na
yasadaka

A rehearsal
For inflation is it,
these costly vegetables?

As regards fiscal outlays, the Tokyo Shimbun has been following Liberal Democratic Party maverick Kono Taro's investigation into just one tiny slice of the budget pie: the Finance Ministry's request in the Special Account for the Recovery of the Tohoku for 2.5 billion yen to fund the acquisition of "A Large-Scale CT Scanner For Sendai Airport, Et Cetera." Kono has taken a look into what is inside that "Et Cetera" (等 - nado). Unsurprisingly, he found that more than half of the items listed under the aferementioned heading have nothing to do with with replacing Sendai's airport tsunami-damaged large CT scanner.

Of the 2.5 billion yen request,

- 1.2 billion is to purchase the CT scanner

- 800 million is to upgrade the National Tax Office's computer systems to handle the imposition of the special tax for the recovery of the Tohoku

- 320 million are to pay for the earthquake retrofitting of National Tax Office buildings in Osaka and Hyogo

- 120 million for "Other - unspecified"

The exposure of more than half of the items in a tiny corner of the Tohoku recovery account as being for non-Tohoku related expenditures, including some that the bureaucrats have not even bothered to specify, stimulated one author to acidly remark:

一文字で
予算を食べる
「等」怖し

Hitomoji de
yosan o taberu
"Nado" kowashi

A single character
That devours the budget
A frightening "Et cetera"

What I Am Reading And Why

- Dr. Adam Posen, one of the merry band of Neo-Keynesians who spent the latter half of the 1990s and the early 00's slapping around the degraded intellectual descendants of Milton Friedman, suggests that Dr. Paul Krugman's recent much linked-to praise of Abenomics (Link) is off base. While the Abe government's monetary program may be fathomable (Nota bene: Posen was a member of the Bank of England's Monetary Policy Committee from 2009 to 2012) the fiscal stimulus package is at best pointless. (Link)

Dr. Posen does not mention his more famous comrade-in-arms. Nevertheless he is offering Dr. Krugman a friendly hand that the Nobel laureate might pull himself up out of the swamp of Yglesianism (interim definition: "the act of writing about a largely imaginary Japan in an attempt to influence U.S. policy discussions").

Meanwhile, having dug himself into a hole in earlier praise for Abenomics, Matthew Yglesias just keeps on digging. (Link)

- Robert Manning of the Atlantic Council writes a brief background essay (ostensibly as a frame for the emergency visit of U.S. Assistant Secretary of State for East Asia and Pacific Affairs Kurt Cambpell to Seoul and Tokyo -- Link) highlighting one of the factors driving the Chinese government toward more militant behavior in the East and South China Seas: radical overestimation of exploitable hydrocarbon resources. (Link)

Manning's essay showcases the mismatch in between Chinese and non-Chinese estimates of recoverable petroleum in the seas under dispute. Difference in the estimates of recoverable of natural gas are even starker, with Chinese estimates running 125 to 250 times as high as U.S. Geological Service estimates. (Link - tip of the hat to reader JLK)

Anyone think that a fine little bureaucratic quid-pro-quo -- worked out between the Ministry of Land and Resources and the People's Liberation Army against, let us say, the Ministry of Foreign Affairs -- could be a cause of this extraordinary difference of opinion among geologists?

Blog On Economics With A Strong Japan Component

Okumura Jun has linked to Dr. Noah Smith's blog Noahpinion and it is a worthwhile read (Link). Dr. Smith is a rare Japan hand in the high stakes economics blogosphere, having lived in this blessed land for a number of years. Dr. Smith has some admirers in Japan, notably noted economics blogger Ikeda Nobuo, who has allowed Dr. Smith to post on his Agora site. (Link)

In his latest post on Japan's economy, "Should Japan Reflate?" Dr. Smith wonders whether it matters much if the monetary and fiscal policies of the Abe Cabinet trigger high levels of inflation or even hyperinflation. In his judgment, it would not. (Link)

I hesitate to agree with his conclusion.

While I have to agree with the self-evident statement that inflation destroys debt, which would be good for the economy, it would also destroy the value of bonds, which would be bad. Dr. Smith refers to such value destruction as a "tax" on elderly bondholders -- which it is in terms of outcomes. However, high or hyper-inflation would be dishonest taxation, one not vetted by an electoral test.

Inadvertently Dr. Smith's post highlights, rather than dismisses, the danger posed by the Abe government's enthusiasm for inflation. Dr. Smith claims that previous global incidences of hyperinflation have not been terribly damaging, at least from an economics standpoint (his use of Weimar Germany's hyperinflation as an example of a benign result tests my patience. As I remember, the collapse of faith in the Weimar government had a decidedly negative political outcome). As is often noted, almost all of Japan's debt is held by Japanese investors and institutions. What this means is that if inflation takes off, Japanese creditors get torched. This is completely different from the Latin American hyperinflations, where economic irresponsibility burned overseas bondholders as much as domestic ones (Argentina defaults and Italian pensioners are ruined, in the most recent example). High or hyper-inflation in this latter case is like lighting a stick of dynamite, throwing it, getting knocked down by the shockwave, then picking oneself up grinning, saying, "Whew, that was fun!" In the Japanese case, with Japanese on both sides of the creditor-debtor divide, inflation is like lighting a stick of dynamite, then holding on to it.

Not so fun.


Later - Dr. Smith replies in Comments.