One reason why Japan allows deflation

by on April 23, 2012 at 3:14 pm in Economics | Permalink

Why do Japanese investors keep buying their own public sector debt, which is racing to 250% of GDP by 2015, twice the level that got Greece in trouble? Part of the explanation is what we call financial repression, where thegovernment puts pressure on domestic institutional investors, frequently through regulations. But much of the explanation is likely deflation, which creates acceptable real return to bonds, that are not taxed. The eventual JGB crisis must await 2015 or later, when demographics drive the country into an external balance that requires foreign borrowing, something that will not be possible at current yields.

The post offers good points on other topics too.  Here is more on Japan’s future funding issues.

1 KLO April 23, 2012 at 5:13 pm

If the Japanese have a strong propensity to save, do not the low yields on Japanese bonds encourage saving rather than consumption? Or, to ask the question another way, could the BOJ increase demand in the Japanese economy by increasing interest rates? Is this a crazy idea? While it is true that bondholders’ return in a deflationary environment includes appreciation of the principal, this return cannot be readily spent by buy-and-hold savers holding the bonds. With only interest in-flows, the bondholders do not have much liquid income to spend at rates below 2%. Thus, they buy still more bonds to make up for the fact that they aren’t getting much liquid income.

2 8 April 24, 2012 at 2:29 am

It is not crazy. This is exactly how it works in China. Just place yourself in the mindset of a saver: you have a target value you are aiming for, such as a retirement nest egg, down payment for a home, new car. When your return increases, you can save less and still hit the target.

3 mulp April 23, 2012 at 7:16 pm

The alternative is to tax the Japanese people, so it is better for the Japanese people to loan the money to government in the hopes they can spend it before the government takes by taxes of default.

Perhaps not so obviously, higher taxes two decades ago would have reduced the debt build up and thus the debt burden, so that dealing with the predictable natural disasters that hit Japan with regularity, and the predictable man-made disasters that result, can be done in ways that are positive for the economy instead of drags on the economy.

I’m sure that some argue that a nation as a whole should not be forced to bear the burden of a natural disaster hitting part of Japan, and that only those who chose to live where natural disasters happen should be required to suffer the costs. But no place in Japan is exempt from earthquake and tsunami. Or demographics.

By not taxing everyone over the past two decades to control the debt, and to pay for recovering from disasters, Japan has burdened the economy and is now creating a disaster for the younger people who have suffered most from the refusal to tax to pay the bills.

4 maguro April 23, 2012 at 9:13 pm

But Krugman tells us that deficit spending on domestic infrastructure projects is stimulative, so at least their economy’s been kicking ass, right?

5 Rahul April 24, 2012 at 12:03 am

Their domestic infrastructure does kick ass.

6 Sbard April 24, 2012 at 2:26 am

Their bridges and roads to nowhere put ours to shame. Lots of the infrastructure that is useful tends to be too expensive to use so it stays well underutilized. It can frequently cost more to drive from Tokyo to Osaka than to fly there.

7 Rahul April 24, 2012 at 4:24 am

Isn’t the” flights-cheaper-than-driving” point often true in the US too? A round trip from NYC to Pittsburgh (chose it for being about the Tokyo-Osaka distance) is about 800 miles. If I price that at IRS mileage it is around $400, isn’t it?

Even at a lower, “actuals” mileage rate would driving be cheaper than flying at a $150 round-trip ticket?

I don’t see how the statistic condemns Japan specifically?

8 dead serious April 24, 2012 at 8:36 am

In a country in which public transportation doesn’t have to be encouraged because it is interwoven in the fabric of everyday life and is par excellence, why would you ever want to or need to drive long distances?

9 Sbard April 24, 2012 at 9:45 am

The difference is that the tolls alone on that route would cost the equivalent of over $120 in Japan.

10 JWatts April 24, 2012 at 10:55 am

“Even at a lower, “actuals” mileage rate would driving be cheaper than flying at a $150 round-trip ticket?”

Can you buy intra-Japan airline tickets that cheap?

11 Rahul April 24, 2012 at 12:33 pm

@J Watts

Good point. Cheapest Tokyo-Osaka round-trip flight on Kayak is around $550. If @Sbard’s assertion about flying being cheaper is indeed true I cringe to think how high tolls / gas for that route are.

12 dead serious April 24, 2012 at 12:58 pm

Why on earth would you drive OR fly when you have the option of taking the bullet train – which is a bargain – and would get you there quicker than either alternative?

13 maguro April 24, 2012 at 1:25 pm

I dunno, maybe you should flag down some of the vehicles travelling between Tokyo and Osaka and ask the drivers why they’re driving when they could be taking the train.

14 William Ryan Kus April 23, 2012 at 8:08 pm

Capitalism and the current monetary system are completely broken and corrupt. It requires a slave class and requires profits obtained from looting, conquest, andstealing. It is, by design, a corrupt and criminal system that was created to only benefit a few.

Now that normal, everyday people are able to see what our “leaders” and the “elite” are doing, we see it is a big smoke screen. I mean, for God sakes, we print money and it has more value than a person’s life. People are insane. Capitalism does not work. It only works if a large portion of the world suffers and toils for the West. Now that nations are revolting and trying to make profits for themselves, the colonial powers that were bleeding African, Asian, and Latin American countries are now seeing their profits disappearing.

Oh wait, did we forget to mention the enslavement of the entire Middle East? These things happen throughout history. It is an ebb and flow and eventually it will shift back the other way. I do not like the way things are now.

America is corrupt and stupid, full of drug addicts. Every kind of drug and addiction is encouraged here.

Please end our misery, World.

Signed, Will Kus.

15 will April 23, 2012 at 8:46 pm

Please tell me this is a troll post.

16 Thor April 23, 2012 at 11:52 pm

It is a troll post.

17 JWatts April 24, 2012 at 10:56 am

Please, tell me it was sarcastic.

18 Adam April 23, 2012 at 8:28 pm

Love watching deficit terrorists explain away the fact that countries with sovereign currencies never have to borrow money.

Maybe the big difference between Japan and Greece is that Japan has its own currency.

19 Nick April 23, 2012 at 9:09 pm

You seriously think that Japan isn’t several years away from a sovereign debt crisis? I would hardly call a 250 percent debt-to-gdp and two decade long economic slump something to strive for.

20 maguro April 23, 2012 at 9:11 pm

Debt service now constitutes 23% of Japan’s budget. What happens to that number when interest rates rise?

21 Cameron Murray April 24, 2012 at 1:04 am

Even if debt servicing was 50% of the Japanese government budget, it wouldn’t be more than a transfer from tax paying entities, to owners of Japan’s public debt – many of whom would be the same people/entities, but all of whom are the domestic population.

22 Cliff April 24, 2012 at 2:04 am

But surely they would not be able to afford their other spending without tax increases?

23 Doc Merlin April 24, 2012 at 4:37 am

“Deficit terrorists”?


24 Jon Smith April 24, 2012 at 10:53 am

Not sure what plonk means in this context, but in my country we have this term “plonker” that fits anyone who uses the phrase “deficit terrorists” rather well.

25 Ranjit Suresh April 23, 2012 at 11:53 pm

The difference is Japan is an exporting nation and Greece was living in part off the manufacturing prowess of Germany.

Japan will be fine. For twenty years we’ve heard tales of woe, but really their only crime is reaching the technological frontier along with the rest of us while simultaneously retaining low immigration and high national cohesiveness.

26 Cliff April 24, 2012 at 12:41 am

You mean their only problem is having an extremely low birthrate, no immigration, a low rate of productivity increase, and a massive debt spiraling out of control due to rampant and wasteful public spending?

27 8 April 24, 2012 at 2:33 am

Japan shut down all their nuclear plants and have swung into a trade deficit. Low immigration and low birth rates by themselves aren’t bad, it’s the debt that is killing them. Debt, debt, debt, no matter what the Keynesians say.

28 Rahul April 24, 2012 at 3:39 am

In the face of low birth rates is there any nation that has had low immigration and yet stayed out of the debt spiral?

29 Doc Merlin April 24, 2012 at 4:38 am

Yes, but they maintained balanced budgets and low government spending.

30 Rahul April 24, 2012 at 4:47 am

@Doc Merlin

Which countries do you have in mind?

31 JWatts April 24, 2012 at 11:11 am

Switzerland perhaps? Debt is roughly 50% of GDP (and shrinking), yearly Federal budget is in surplus, birth rate is low.

32 Rahul April 24, 2012 at 2:23 pm


….and about 20% of the current Swiss population was born abroad. Clearly they did not choose the low immigration route.

33 TallDave April 24, 2012 at 2:53 pm

North Korea is debt-free.

34 NAME REDACTED April 23, 2012 at 11:57 pm

Demographic decline is a B***.

35 edwardseco April 24, 2012 at 12:31 am

Financial repression, shades of Phillip Coggan’s Paper Promises..

36 Jay H. Mani April 24, 2012 at 10:23 am

It all has to deal with deflation. Why hold hard assets (equities) that seemingly always depreciate? Why not own Yen Based Assets like JGB’s or the physical currency. Its about return of your investment rather return on your investment. Sadly, there is no inflation in the goods that Japanese want and deflation in everything they own. This causes massive changes in buying/saving behavior. This I believe is a secular change.

37 TallDave April 24, 2012 at 2:51 pm

The eventual JGB crisis must await 2015 or later, when demographics drive the country into an external balance that requires foreign borrowing, something that will not be possible at current yields.

And then Godzilla will come out of the waves and level the whole country, and Paul Krugman will claim this should create economic growth.

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