How Japan avoided a bond market panic

This paper explores the history of Japanese fiscal policy over the past two decades with the aim of better understanding where previous forecasts have erred. As such, Japan provides an important case study of how a country facing intense fiscal pressures can avoid a hyperinflation or financial panic. We find that there were three key forces that likely improved Japan’s fiscal situation relative to more pessimistic predictions. First, the Japanese government has shown remarkable ability to hold down per capita expenditures on social pensions and healthcare. Second, the Japanese government has been able to raise taxes substantially. Third, the remarkable monetary policy pursued by the Bank of Japan has resulted in a dramatic decline in the amount of government bonds held by the private sector.

That is the abstract of a 2017 paper by Mark T. Greenan and David E. Weinstein.  You will note that the Japanese government just announced that the Japanese economy contracted at an annualized rate of -6.3% (not a typo) last quarter.  Of course, maybe they should have just kept on borrowing money forever.  As you can see from the recent tweet of Krugman, many of the Keynesians now favor stimulative policy all the time, even at full employment, with no need for eventual consolidation.

And the next time you see a calculation of a multiplier, ask yourself if the entire time horizon is being considered.  Usually not.

Via the excellent and reality-based Wojtek Kopczuk.


Trump seemingly favors a stimulative policy all the time too.

The time Trump is president. That's standard Republican economics: fiscal and monetary stimulus during Republican administrations.

Standard Democrat economics: raise taxes, regulate everything, transfer monies to politically-connected/community agitators, spend, spend, spend with no benefit to the private economy.

Donald John Trump is not your standard Republican, Thank God.

Of course, most the rest of Planet Earth has been on hyper-stimulative fiscal and monetary steroids since 2008.

Meantime, the US Fed raised short rates eight times (Fed short rate target rose from 0.25% - 0.50% before the 2016 election to 2.25% - 2.50% in December 2018; same timeframe prime rate rose from 3.25% to 5.50%) from the month (December 2016) after President Trump's November 2016 election through December 2018, which caused a sharp decline in equities markets (buying opportunity for some).

Evidently, hyperinflation is bad, but I worry my children will have to endure the same lifing standards stagnation my generation has had to endure. Since 1994, I have always voted Republican, but not this year. I have made my mind: I will vote for Mike. Mike gets things done!

This sounds like Modern Monetary Theory - spending huge gobs of printed money, then using taxes to choke off inflation.

God help us all.

If the government spends that money on infrastructure, that would push up the savings rate, right? Sounds a bit like the East Asian economic development model. I am not sure it is a great idea for an economy at the technological frontier.

Inflation? At 0.8%?

Economist doesn't get it. Man bites dog. The asset bubble in Japan burst long ago and never returned, tax increases on the wealthy being a stabilizer of asset prices, the deflation in asset prices causing a decline in consumption (the wealth effect). Meanwhile the asset bubble in the U.S. burst in 2007-08 but soon returned with a combination of expansionary monetary and fiscal policy, tax cuts for the wealthy, and deficits, rising asset prices also fueling a sharp rise in consumption (the wealth effect). Wealth inequality in Japan is one of the lowest among developed countries, while wealth inequality in the U.S. is one of the highest. Of course, rising asset prices increase wealth inequality while falling asset prices decrease wealth inequality. Two very different pictures. Which picture portends trouble ahead?

Amazing, almost every sentence is wrong.

“tax increases on the wealthy being a stabilizer of asset prices”. No...what? That’s not how DCF works

“the deflation in asset prices causing a decline in consumption (the wealth effect)” no, the 10% unemployment caused the drop in consumption

“rising asset prices also fueling a sharp rise in consumption (the wealth effect)“ no, the 3% unemployment caused the rise in consumption

“rising asset prices increase wealth inequality while falling asset prices decrease wealth inequality” this is tautologically true given a nonuniform distribution of wealth. So yes, but literally means nothing

Good, but you don’t understand rayward. It’s all about the need to post something, anything.

So the path to prosperity is to pay off bond holders infinitely with money taken from taxpayers.

Good thing the population of Japan is old. If it were younger I think we would see a rather interesting iteration of a guillotine.

What pretty much every nation does is "pay off bond holders infinitely" not through taxes. Taxes pay interest on debt, but so much of Japan's bears negative interest rates that it is paying back the taxpayers, with Japan possibly being on the verge of becoming the first nation in world history to have a national debt that earns money on net.

Oh, I did not finish that. How most nations pay off debt is by simply issuing new debt to replace the old debt, with the taxpayers continuing to pay the interest, assuming the debt has positive interest rates, which is largely not the case for new debt in Japan now. The more benign term for this way of paying off is "rolling over debt," while a more unpleasant sounding phrase is "robbing Peter to pay Paul," although in this case Peter is voluntarily providing the funds rather than being obviously "robbed."

The reason why the bonds have negative interest is because the Japanese government buys enough of it's own bonds to keep the price high.

As I said, they are lucky that their population is old. The northern democracies hit a wall in the beginning 80's where interest payments were consuming more money than deficit spending could generate via economic activity. The populations were young and responsive to the idea that government would live within it's means. The result has been a multi decade long improvement in the economy and standards of living. Governments who overspend were voted out.

Essentially Japan decided on a long decline. Old people die, whether by neglect or old age, not news. At one point no one really cares, and if they did they wouldn't have the energy to do anything about it. The asian boom of the last couple decades has consumed the young and ambitious, moving the Japanese manufacturing proficiencies to places where there are more young people.

Interestingly in my industry the Japanese are buying up brands with their distribution and service networks. The products are very good, better than US manufactured. Nothing is made in Japan.

Ah yes, "Nothing is made in Japan." Sure. They have the third highest GDP in the world and it is all services. Sure.

India's economy is more than twice as large as Japan's, so the 4th largest economy.

It's a good bet that everyone on this thread has never been to don't know WTF they're talking about..blah blah blah

Last one was for Todd K.

To Surfie, you are wrong, WTF. I have spent substantial time in Japan and have published papers and portions of books on the Japanese economy. Your knowledge comes from where, please, blah blah blah? Just how stupid are you?

In PPP terms, but not nominally.

After a certain level of development and size, I would think that the PPP GDP would be the more important number, as it is indicating the ability of the nation to sustain industry agglomerations dependent on deep pools of highly skilled workers. I don’t think that India has reached that point yet, but perhaps South Korea has, and maybe China is pretty close. I know that I met several people in China who had studied and lived in WEIRD nations and had returned to live in China because the differences in quality of life and professional opportunities just weren’t large enough to make it worth living on the other side of the world, away from family, friends, culture, etc. This in spite of the fact that the US GDP per capita in exchange rate terms is perhaps six times that of China .

Where nominal matters is in terms of relations with rest of the world. US is still nominally #1 and it allows US to have more economic power in the world still, even though China something like 30% ahead on PPP GDP. Japan has more international economic power than India, with India's PPP larger economy more important internally.

BTW, it is obviously stupid nationalism, but almost all media stories still simply say the US has "the world's largest economy" without even mentioning at all that this is now far from true in "real" PPP terms.

@rayward - nice synopsis, except for the first two sentences, which make no sense. TC doesn't get what? Apples and oranges.

Bonus trivia: Japan's government debt-to-GDP ratio is not the 200% often reported by popular media but more like Greece's 120% (and still ominously close to the 120% redline identified by GM Ken Rogoff), since there's a very large pool of domestic savings in Japan of about 80% of GDP. Compare to America's single digit domestic savings. If foreigner buyers stopped buying US debt it would be the end of the US government (they'd have to default or hyperinflate away the debt).

Is my reference to TC or Krugman? By assuming it was to TC, he might be offended. Ray owes an apology, to paraphrase Tom Hagen.


And the source of your "bonus trivia" is what? This may be true on some measure, but most data sources I see have Japanese national debt more like at at 250% debt/GDP ratio. Of course, note my reply to derek, much of this debt is earning money as it has negative interest rates attached to it.

Also, Rogoff's magic cutoff was 90%, note 120%, and it has since been shown there is no magic cutoff, although there is a negative correlatoin between high GDP/debt ratios and GDP growth rates. But keep in mind an important part of that is slow growth countries (or even ones with declining GDPs), which tends to push up debt/GDP ratios. Some with high debt/GDP ratios are not in serious trouble, with Japan the ultimate poster boy for that group, with its debt overwhelmingly domestically held and much of it actually earning money with its negative interrest rates. Not a drag on GDP growth at all.

@Sir Barkley - yes, true, but for now, for now...JP is the coal mine canary.

PS - Source for my 120% figure (and your more commonly cited 90% figure) is here:


Even the revised version is wrong. There is not critical cutoff, not 90, not 120. Sorry.

@Sir Charles - yes, I know, and so do you, that there's no "magic cutoff" (your words), and of course you know about the Excel spreadsheet error. But it's a useful shorthand. In fact, "developing" countries like Argentina and others have defaulted at low Debt-to-GDP ratios of like 70% or so, as sourced in GM Rogoff et al's book "This Time is Different". Catch you on another thread.

Does "negative interest" mean the bondholder/investor sends semi-annual cash interest payments to the bond issuer?

That is correct, Dick. Something like 1/6 of global govenrment-issued bonds bear such negative interest rares. A fairly substantial set of nations now have negative target rates and even negative 10-year yeilds, such as Switzerland, Sweden, Germany, Netherlands, and several others besides Japan.

Close but not quite. Principal is reduced by the amount of the negative interest accrual. There is no transfer of cash.

Probably, but not sure about that. This may vary across countries, with there being many now with negative interest rates on government bonds, including even France.

Either the government is going to have to start spending, or the Japanese are going to need to start having more children.

Krugman talks about austerity but is Abe even doing austerity? I, perhaps stupidly, though stimulus was supposed to be a key element of "Abenomics".

He is taxing more and soaking liquidity, aren't he?

Fiscal expansion, if combined with tax rises of any kind, is austerity?

Those centre-left parties that propose massive fiscal expansion on infrastructure, and more effective tax on corporates and high income earners (through more robust tax compliance, or higher nominal rates), are actually austerians?

It is not billionaries Abe is taxing. It is common salarymen and housewives. He is killing demand. And Central Bank is contractionist, too.

Sure, it's a broad based tax. And of course it will shift or reduced demand and consumption to some degree.

But any increase in broad based tax (income, sales, tariff etc) is now 'austerity' even under conditions of fiscal expansion?

I've been to Japan a few times. It's like traveling 15 years into the future. Nice place to visit. Not sure about living there. Clean, great food, trains run on time, practically no street crime. They are quite adept at hiding all this decline and decay we read about in economics press.

Yes, at 0.5% or 1% growth you get rich very slowly, not quickly as they had become accustomed to. Japan is very pleasant.

But decay does happen - look at France. They are just consuming past accumulated capital. France is much more beautiful than most of the United States, because they have been working on it for 800 years, and the living *appears* easy because they are living off borrowed money. But I would not want to be a 25-year-old Frenchman trying to get a foothold in the job market.

I mean, and I appreciate that I am probably coming at this from a fairly low level of knowledge, but, "austerity" had, I think, a somewhat coherent definition at some time in the early '10s.

Fiscal contraction (cutting spending) or restraint during a time of recession and rising unemployment in the private economy which then, according to the Keynesian story, is bad because it is pro-cyclical, not using the gov's counter-cyclical "tools" or "options" fully to smooth out the business cycle by fiscal expansion during recession. Right? (With likely some simplification).

Is there still a coherent definition? As it now seems that austerity, per Krug, is applied to fiscal consolidation, contraction or restraint at virtually any point in the business cycle, any concerns of pro-cyclicality either forgotten, or at least dismissed as "Still totally worth it, because we need the infrastructure anyway, and c'mon markets are practically *begging* govt to borrow!".

That definition makes sense to me, at least from a Keynesian standpoint. That is, an austerity policy is one that reduces direct government contribution to GDP, an expansionary policy one that increases direct government contribution to GDP. It doesn’t mean that austerity or expansionary policy is necessarily bad at any moment in time, it just is a consistent definition.

So an increase in sales tax with stable or increasing levels of government contribution to GDP (public expenditures as % GDP), is not austerity?

“As you can see from the recent tweet of Krugman, many of the Keynesians now favor stimulative policy all the time, even at full employment, with no need for eventual consolidation.”

Shocking, really shocking.

So, this post cites a 2017 paper, when today the Japanese Times reports that Japan is heading into a recession because of the increase in their sales tax.

Yeah, it's almost as if they haven't heard that there is no recession. People in Japan knew the sales tax hike was coming, so they did the same thing they did last time a hike was planned, shift their purchases into the quarter before the hike took effect.

So while the higher tax rate will decrease economic activity over the long run, it only causes a quarter of negative growth in an accounting sense, not in the real sense of the economy slowing down over a longer time period. The economic growth was primarily shifted in time.

Avoiding financial panics is a permanent government goal? Sounds like a Kanosian blunder to me. Sounds like a government thaty takesd advice from UC Berkeley, 'Live on the edge of collapse' Japan is now in recession, again. How did economists manage this? Seems rather stupid and seems like this research is simply misinterpreted and should read,'How kanosians keep Japan on the edge of collapse.

With a rapidly aging and declining population, 'recession' might need to be redefined. GDP growth is population growth times productivity, and if the first term is negative, you are going to have negative growth often. Maybe GDP/capita is a better measure.

Yes, per capita GDP is better, and real per capita GDP is still better, but that has always been the case, not something we must now understand because of japan.

However, you are wrong that negative population growth means negative aggregate GDP growth. Population growth is not multiplied by productivity growth. They are added. So if population is declining by 1% while productivity is rising by 2%, GDP will grow by 1%.

>many of the Keynesians now favor stimulative policy all the time

You spelled "many of the Keynesians now freely admit that all they care about is having the largest government possible" wrong.

japan was sabotaged because of the west coast American Asian population tried to get trump splattered like jfk, elect a trumpet, make the trumpet very obnoxious, make the trumpet get splattered like jfks head turning into the ne usa splattered exploded head looks just like the ne usa etc,

that's a fact, the govt sabotaged japan but japan will be fine I got Shinzo a corporate Japanese ring to replace the young vato like Asian americans who tried to get trump elected then killed in the lefts dark fantasy world of silversun pickups been waiting for this moment all my life (kennedy revenge song)

south korea has been rewarded for being good usa teammates and japan has been punished for being asshole democrat sleeper cell like civilians, japan will be fine time to make hybrid trucks if the oil gas fuel mileage racket will let us

fake bezos got real bezos a denied jedi contract, too many downed helicopters for the jedi Bermuda triangle functions, etc

bill gates is still being targeted for execution but barely since steve jobs was killed but is nearly forgotten (steve all you need is a ged to get a job)

paul allen and allen thicke died because of those 2 black men from cedar park who I used to bail out 44 with, same as kobe and cedric benson, you imagine how much work these people put into becoming cedric benson or kobe Bryant or paul allen then watching them die for bailing out 44 and beating back the turkey coup (2009 economist map turkey was Illinois in the 44 game)

not publishable truths, whos penny Goldberg? anyway the intel and defense rings have been talking about how to collect (kill) on the rich traitors who try to flee to other countries after sabotaging their current countrys so her paper on where the rich hide their money makes sense, always pay your taxes and never do anything that affects your ability to sleep well at night

Comments for this post are closed