Something Huge Is Coming From Japan

Pretend, for a minute, that your country responds to the bursting of a credit bubble by borrowing unprecedented amounts of money and using it to prop up banks and construction companies. This doesn’t work, so you create record amounts of new money and push interest rates into negative territory in an attempt to devalue your currency. But this — amazingly — doesn’t work either. Your currency soars and the inflation you’d hoped to generate never materializes.

Now what? Is there even anything left to try, or is it simply time to stand back and let the current system melt down? Those are the questions facing Japan, and the answers are not obvious. Here, for instance, is its inflation rate two years into the largest major-country money creation binge since Wiemar Germany:

Japan inflation July 16

Deflation is to be expected and even desired in a well-run country where debt is minimal, money is sound and rising productivity makes things continuously cheaper. But in an over-indebted financial system, deflation is death because it magnifies the debt burden and raises the odds of an existentially threatening financial crisis. To continue to borrow money under such circumstances is to court disaster. And yet Japan is still at it:

Japan govt debt gdp July 16

What we’re witnessing, in short, is a catastrophic loss in the currency war. Contrary to every mainstream economic theory, debt monetization and full-throttle currency creation have resulted in a rising yen and falling prices. Here’s an excerpt from a recent — and really gloomy — Financial Times analysis of Japan’s situation:

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Boaz Berkowitz 7 years ago Contributor's comment

Lol, yes, meeting the budget by selling bonds with negative interest rates will make the Japanese government very happy. Not sure about the economy as a whole long term. But I think Draghi wants to do the same thing. Banks come first, and the economy is just secondary.

Mohammed Anwar 7 years ago Member's comment

Agreed.

Alpha Stockman 7 years ago Member's comment

Lol, yes, meeting the budget by selling bonds with negative interest rates will make the Japanese government very happy. Not sure about the