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Japan Is Going To Inflate Big-Time

Which country has the most irresponsible government in the OECD? Greece? Portugal? USA? No, you are far off, it’s Japan. The land of the rising debt has already accumulated a $10 trillion pile of debt (that is almost as much as what the USA produces in one year of goods and services). Recently the government announced the budget for FY2010. Now hold on to your seat… they are expecting 37 trillion Yen of tax income and they will spend 95 TRILLION YEN.

37, 95…

They spend almost three times as much as what they earn! It’s like spending $10,000 per month when your salary is only $3,500. Now, that is a freakin’ large deficit! How can a country that is so obsessed with precision, perfection, and law and order be so chaotic when it comes to government expenditures?

Until now, the huge pile of debt didn’t stink, because the government sold it mostly to de-facto public institutions like the Bank Of Japan, the pension funds, or the Japan Post. These institutions swallowed the large chunk of debt without complaining, leading to ultra-low interest rates in the range of 1%. Therefore, the Japanese government still spends not more in terms of percentage of GDP for debt service than the USA.

But, and this is a big BUT, what if there is finally too much debt, i.e. nobody can buy it anymore. The Japan Post has been privatized and split up by Koizumi in 2006. One of the new businesses resulting from this split-up has already announced that it might be better to diversify their investments. Until now, they invested 80% in government bonds. The pension funds are facing a wave of baby-boomers pensioners.

So, what if when the Bank Of Japan is left over as the only institution that still supports the government’s irresponsible actions? Clearly, they will resort to monetizing newly issued debt, better known as inflation. And when that happens, all the Keynesians like Paul Krugman will finally get to see that an economy can indeed have inflation in the presence of weak demand.

Furthermore, worldwide governments are currently trying to sell debt in such amounts never seen before in the history of mankind. What kind of debt will meet the lowest demand? Of course, the most fragile one, that is, debt from governments in Greece, Ireland, and Japan.

The funny thing is that Japan is again in deflationary territory as of October 2009. Core consumer prices are falling over 2% on an annual basis. Deflation has reigned over Japan for almost 20 years now. But, as Germans say, “alles hat ein Ende nur die Wurst hat zwei” (Everything has an end, only the sausage has two). The incentives to inflate the debt away are simply too large. The point of no return is soon past.

Japan, es ist (bald) vorbei…

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One comment on “Japan Is Going To Inflate Big-Time

  1. Retro : Marvellous, I’ve been arguing the exact same thing. So has Ambrose-Evans Pritchard (columnist on the Telegraph) despite him being rather off on other economic topics.

    I think the key here is to realize that the threshold for “Japanese print spiral” is EXTREMELY low, it may be less than half a percent higher interest on their debt and the roll combined with their outlays go parabolic.

    “Allting har en ände, korven har två” is the Swedish translation of your German expression, btw 🙂

    Cheers,

    // Hans

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