Actually I didn’t think it was surprising (as Wolf says) that Japan proved vulnerable — the simple reason is that while the corporate sector was repairing its balance sheet (as the govt had to borrow to support aggregate demand, and the household sector funded the govt, thus accounting for all three sectors of the economy), the industrial structure reverted to its weak Yen, export dependent policy. When the crisis hit, US consumption died, so exports died, the carry trade reversed and the Yen strengthened, which hit Jap exports and economy.

I agree that Japan needs to boost consumption, but who is supposed to consume? Household sector can’t — having drawn down savings to fund govt borrowing through the last 2 decades, and the govt — due to inefficient fiscal stimulus — is in debt.

I agree with Wolf — the corporate sector has to do it, by investment. But if domestic demand is weak, it has, still, unfortunately, got to be exports. So: do we revert to the weak Yen, export driven industrial structure of the past? But surely that would be reverting to status quo global imbalances. Weirdly, while Wolf cautions against global imbalances, he appears to be supporting a weak Yen here, to enable imported inflation. But isn’t this also mercantilistic? Surely you can’t have it both ways.

No, I think the answer is that while Jap corporates have got to spend, so as to be able to hire workers and sustainably close the output gap — which is I think the real reason for Jap deflation, rather than just input costs, which is what arguing for a weaker Yen implies is the deflationary source — they also need to find investment channels that have genuinely positive ROIs based on market forces, and not just because they have cheap capital. Jap corporates need to find new markets, invent new technologies, and export them — a sustained successful effort at this will generate employment, income, and slowly recuperate domestic consumption.

This means that we are back to finding non-US, but also non-Japan even if Asian, sources of consumption. I think it is wrong to lump Jap consumers in with Asian consumers broadly when talking of structural changes to economic structure.

Finally, I don’t understand Wolf’s comparison of Japan to China. I agree there is a relevant comparison, but I don’t think he has it right. Japan’s mistake was not in failing to get its consumer policies right, it was in getting its industrial subsidy policies wrong — and the weakened consumer was a long term collateral damage from the speculative fall out and weak employment/income as a result of misguided investments. Likewise, the lesson for China, I think, is in not letting its industrial policy of cheap exports get out of hand — (i) this policy is renewedly pulling in lots of forex reserves that is partly causing the bubble, (ii) as the ROI on export dependent industries falls, these industries require laxer and laxer monetary policy and credit standards to support them (as per Japan), leading to side effect asset price speculative bubbles.

but also, japan’s endless deficits have had the intended effect. corporate sector leverage as a percentage of GDP was at a 30-year low in 2005. that’s the plan for the US as well, i imagine, if the political willpower is there.

i think of japan as now being in an entirely different crisis than it was from 1990-2005. its corporate delevering is over. its now faced with the more traditional cyclical peril of all mercantile states, in combination with this new antigrowth phenomena of population collapse. the former aspect will correct in time; the latter is pretty new, though, and i wonder how the growth model will be forced to change.

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When you put it that way, it sounds almost as a planned economy. Then again, what else can all this interventionism be called?

Thanks for posting on such arcane stuff – now if only I can get to the practical investment implications of this and all of the stuff you post!

http://www.creditwritedowns.com/2009/11/on-debt-monetization.html

I read this article from Marshall yesterday
http://www.ritholtz.com/blog/2010/01/japan-new-government-but-no-increased-%e2%80%98credit-risk%e2%80%99/

What he is saying (or maywhat I am implying, perhaps incorrectly) is that instead of “financing” deficits by issuing sovereign debt (which pays interest), the government (in Japan as far as the article is concerned, but upon a change of law, could also be in the US I suppose) could just credit bank reserves with printed money (or the electronic equivalent) thereby solving any sovereign debt financing issues voila! I have a few questions and was hoping you could shed light:
1. Am I reading this right?
2. If it was so easy, why doesn’t everyone who issues debt in their own fiat currency do it? Corollary to this question is what effect does this have on the currency value?
3. Of course, the answer to “2″ above is what happens to the currency value and “inflation”? As long as there is significant over capacity, is inflation a concern (Marshall argues it is not)? Again, why doesn’t the Japanese government just QE their way to finance fiscal deficits directly and put an end to this “what happens when interest rates rise” question altogether? Then, of course, the question is what do those fiscal deficits actually accomplish – do they lead to productive and sustained projects or are they wasted on bailouts/malinvestments.
4. Versus US, the big difference lies in that US runs a current a/c deficit while Japan of course has been running surpluses all the time. Can the US “finance its deficits” the same way?

Bottom line, I am trying to get your thoughts on the Marshall piece and why couldn’t Japan just continue for decaded to “finance” their fiscal deficits by just stopping the charade of issuing debt and just credit bank reserves and not even bother with the question of “what happens when long term rates rise”?

Everybody understands this. However, Governments like to stay in power and the people of Japan would have thrown out the LDP long ago if a reduction in capacity (with the implied unemployment) was allowed to happen. I don’t think the DJP will let the failed collapse and shoot itself in the foot politically either. Remember, in Japan, the company is a part of your identity and life (as, BTW, I think it should be) and many expect to be there for life.

So, no I don’t have a policy prescription, but I think saying Koo’s argument is wrong misses the obvious. While it’s clear that the situation is long term unstable, it’s also clear that kicking the can down the road like GoJ (and now the US) are doing is the best political option anyone has thought of. Hopefully someone else is in office when it can no longer be sustained… as Edward said previously, the status quo works for the policy makers.