Athanasios Orphanides’ recent Fed paper touches on aspects of Japan’s extended economic slump (his basic thesis: the BOJ should have done more). This paper served as a reminder of the inadequacies and limitations of mainstream analysis in explaining Japan’s long economic winter. Fortunately, though long unrecognized and unappreciated by the mainstream, there is a good framework for understanding the Japanese boom and bust. As it happens, that sequence was a classic business cycle as predicted by Austrian theory. [More]
Source link: http://archive.mises.org/1833/japans-bust/
Japan’s Bust
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Cogent, but too brief, analysis of the Japan bust. That is a scary, insane country, peopled by the unquestioning minions of socialist giant- government. You left out the latest machination of their interventionism– the bigger-than-ever-in-history manipulation of the dollar/yen in order to allow the Japanese mega corporations/government to continue their mercantilist rape of the American manufacturing worker. The poor, busted, on-its-back nipon economy just posted its biggest March trade surplus ever. Gee, I guess that means the yen needs even more help.
There’s a point raised in this article that I’ve read before, and have never understood. The Bank of Japan has been furiously increasing the money supply to fight “deflation”. But prices in Japan have been falling, by a few percent. So here’s what I don’t get. With all the yen creation, where are they going? If prices are falling, they aren’t going into retail goods. With the Japanese stock market falling, they aren’t going into stocks.
Where are they going? Where are the yen?
I think there are 2 reasons why Japan has had price deflation despite the Bank of Japan´s efforts to inflate the money supply. Firstly, bank lending has fallen because of the sluggish economy and high debt burden. This means that broad money supply is rising relatively slow despite BOJ:s sharp increase of the monetary base. The broad M2+ CD measure of money supply has risen much slower in Japan than in almost all western countries.We saw a similar phenonema in the US during the great depression when the Fed increased the monetary base but broad money supply fell sharply because of the collapsing banking system. In an economy with fractional-reserve banking the behavior of banks and the public is at least as important as the central bank in determining money supply. Secondly, money demand has increased rapidly as interest rates are down to zero and prices are falling.
Oops, posted my comment on this article in the later Blog post by Jim Waddell. Oh well.
Here’s something to chew over: The BoJ hasn’t had just an absurdly low rate of interest, they have repeatedly gone into NEGATIVE interest. The BoJ has simply given tons of money directly to the banks to cover the banks bad loans. This completes the chain. By allowing absurd loans to be made, and no collection done, the money supply is increased without “debt”.
How’s that for a recipe for disaster?
Curt-
Mr. Mayer wrote that interest rates do not drive investment.
Mises (in The Theory of Money and Credit) makes a distinction between the natural rate of interest and the money rate of interest. Whereas the natural rate of interest is completely determined by consumers’ time preferences, with the coordination of the central bank, the banks could still lower the money rate of interest in order to expand credit. If this were not true, then credit would never be expanded beyond real savings, businesses would not be able to make malinvestments, and we would never have the trade cycle. It is true that this policy is unsustainable but it occurs, which indicates that interest rates (be they are naturally determined by time preferences or artificially altered by the central bank) actually do drive investment.
What is probably happening in Japan is that malinvestments have reached a saturation point. Japan’s bad debts have been accumulating for more than a decade without substantial write offs on the banks’ balance sheets. Capital is tied up in these malinvestments that even though the interest rates are practically zero, there is no more room for more (mal)investments that would supposedly pull their economy out of a depression and create another boom. The zero interest rate actually goes to perpetuate the huge bad debt corporations without giving a chance for more productive firms to get hold of capital resources.
Mr. Mayer wrote that interest rates do not drive investment.
Mises (in The Theory of Money and Credit) makes a distinction between the natural rate of interest and the money rate of interest. Whereas the natural rate of interest is completely determined by consumers’ time preferences, with the coordination of the central bank, the banks could still lower the money rate of interest in order to expand credit. If this were not true, then credit would never be expanded beyond real savings, businesses would not be able to make malinvestments, and we would never have the trade cycle. It is true that this policy is unsustainable but it occurs, which indicates that interest rates (be they are naturally determined by time preferences or artificially altered by the central bank) actually do drive investment.
What is probably happening in Japan is that malinvestments have reached a saturation point. Japan’s bad debts have been accumulating for more than a decade without substantial write offs on the banks’ balance sheets. Capital is tied up in these malinvestments that even though the interest rates are practically zero, there is no more room for more (mal)investments that would supposedly pull their economy out of a depression and create another boom. The zero interest rate actually goes to perpetuate the huge bad debt corporations without giving a chance for more productive firms to get hold of capital resources.
I think the general mistake of all economic interventionism is to have the view that one can interfere with the market without causing any real, measurable differences in it’s state, and minimizing bad results.
Of course, one interventionism leads to another, which leads to still more, and in the end, we are usually better off if the State had just left us well enough alone.
As economists say, there is no such thing as a free lunch. Unfortunately, Japan seems to be getting a more sobering version of this truism.
The theory of malinvestments seems to contain a kernel of truth. What one wants to see from this approach, I think, is a move from verbal arguments to the construction of a quantitative model that one can take to the data and test. The situation seems ripe for an Austrian twist on the neoclassical real business cycle theory, which suffers from being a 1-sector model. Thus it cannot address Austrian issues
Nominally speaking, Japan’s money supply has not contracted. However, I suspect that in reality it has contracted. Does the calculation of Japan’s money supply factor in the repercussions of trillions of Yen of defaulting and non-performing loans (which are still kept on the books as good loans)? Can anyone shed some light on this?
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