Japan: An Inflationary Spiral Ahead?
by
Claus Vogt
During the past few years you have most likely read about
Japan's so-called lost decade or its so-called
deflationary malaise. And you may have heard warnings that
the Japanese experience might be the dire blueprint for
what's to come in the U.S.
Since there are some striking similarities between Japan
of the early 1990s and the U.S. today, it's definitely
worth the effort to have a closer look at what is going on
in Japan — and what is probably going to happen in the
U.S.
First, the Similarities Between
Japan and the U.S. ...
In
1990 a stock market bubble burst in Japan. Two years later
an even larger real estate bubble burst. The economy was
hit by a recession. Huge monetary and fiscal stimuli were
implemented, and government indebtedness went through the
roof, rising from 60 percent of GDP to as high as 200
percent, where it stands now.
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In 1990, Japan's stock market took a dive. A
recession followed. In 2000, the same thing happened
in the U.S. |
When
we look at the U.S., we see a similar pattern: The U.S.
stock market bubble burst in 2000, and the U.S. housing
bubble reached its zenith six years later. In each
instance a severe recession followed. And both times the
government reacted with gigantic monetary and fiscal
stimulus. Consequently, government debt is currently at 85
percent of GDP and rising strongly.
In
the case of Japan, many economists are bemoaning a
deflationary and lost decade. They also fear a
deflationary and lost decade in the U.S. And Fed chairman
Ben Bernanke is one of them.
Others are looking at the huge money printing going on in
the U.S. and the equally huge rise in government
indebtedness. They're predicting severe inflation. I'm in
this camp, and I expect inflation not only in the U.S.,
but also in Japan.
Japan: The Deflationary Depression That Wasn't
As
you can see in the chart below, throughout most of the
lost decade, the Japanese economy grew an average of
nearly 2 percent. And inflation as measured by the
consumer price index was also mostly up, but generally
meandering around the zero percent level.
That's called price stability in my book, and certainly
not deflation. And 2 percent real growth is definitely not
a catastrophe. If you don't believe this, go to Japan and
have a look. You'll see a country with a very high
standard of living, with a superb infrastructure and nice
and clean cities.
So
what's behind the bad press Japan has gotten during the
past 15 years?
Maybe the proponents of Japan's deflationary depression
story are somehow confusing the economy with the stock
market or the real estate market. Both are down
tremendously since their respective highs, which may
certainly be depressing for investors.
Why There Hasn't
Been Any Inflation ... Yet
Despite all the money printing and government stimulus
going on in Japan for many years, there hasn't been
inflation — until now, that is. Why this confusing
anomaly?
Two
reasons: First, a very high savings rate combined with
strong patriotism enabled Japan to internally finance the
steeply rising government indebtedness. And, second,
domestic private and institutional investors bought nearly
all government debt issued during these past 15 years.
Hence Japan did not have to compete internationally to
raise capital, thus interest rates not only stayed low but
fell ever lower! Yet this convenient arrangement is
probably coming to an end soon.
Here's why ...
Demographics Are a
Huge Problem in Japan
Japan's population skyrocketed from 58 million in 1950 to
127 million in 2006. Then this up trend reversed. It's
estimated that in just 15 years it will be below the 120
million mark.
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Japan's population is getting older and putting
strains on its pension system. |
That's part one of a huge demographic problem. Part two is
the population structure ...
Japan has the oldest population in the world. The
older-than-65 cohort already accounts for 23 percent of
total population. In 15 years it will be 30 percent.
This
is unbearable for Japan's current social systems. So the
government will have to react by raising taxes or taking
on more debt − probably both. And herein lies a huge
problem ...
Japan's Government Pension Investment Fund used to be the
largest buyer of Japanese government bonds. However, last
year it announced that it would soon become a net
seller of government debt to raise the funds
necessary to pay out pensions.
This
will put upward pressure on interest rates. And rising
rates will put additional pressure on the public budget,
making even more new debts necessary ... a vicious circle
indeed.
Why There Will Be
Inflation in the Future
Who
will show up to buy this mountain of new debt?
International investors?
That's hard to imagine considering all the strongly rising
debt issuance going on around the world.
This
leaves the central bank ... the buyer of last resort. In
other words, I expect the monetization of Japanese
government debt to begin very soon.
Then
the huge inflationary potential that the fiscal and
monetary policies of the past have laid will start to
unfold. That's why I expect the Japanese inflation rate to
shoot to the upside during the coming years.
And
I see the same possibility ahead for the U.S.
Best
wishes,
Claus
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