Japan; from quagmire to Abenomics to collapse! Part II

Part II: From quagmire to Abenomics.

Unsurprisingly the policy lead to a massive increase in debt levels. In order to feed the unsustainable system, consecutive Japanese governments threw money at it with the perverted consequence of depriving corporations of capital. Government debt grew inexorably while corporations got squeezed.

Source: Bank of Japan – Flow of Funds (BoJ), Cabinet Office (CaO), own calculations

The central bank reacted by lowering interest rates from a peak of 6 per cent in the winter of 1990/91 to a low of 0.5 per cent in 1995. In addition they expanded their balance sheet by lending to banks against legacy assets. The insolvent banking system and the overleveraged household sector did not crave liquidity for more than refinancing outstanding bad debt, so the increased base money ended up as excessive reserves in the BoJ deposit account. Sounds familiar?

Source: Bank of Japan (BoJ)

Source: Bank of Japan – Flow of Funds (BoJ), own calculations

 

Now, the initial measures taken may seem tepid compared to what we have been accustomed to today, but these were dramatic and unprecedented steps back then. It is also striking to see how similar the development prior to the bust and response taken after was compared to what we see across the western world today. Needless to say, it does not bode well for the future.

As Japan moved forward in the 1990s and 2000s it became obvious, even to the policy makers, that the situation was unsustainable, with nothing less than a Greek style fiscal Armageddon on the horizon. Tax revenues were dropping and bond issuance rising. New taxes introduced to fund the rapidly growing state harmed private capital accumulation even more. The corresponding spending growth was found mostly in debt service- and social costs. Those two categories account today for more than 50 per cent of total spending, and bar a default or dramatic cut in transfers to a rapidly ageing population, will only continue to eat into the overall budget.

 

Source: Ministry of Finance (MoF), own calculations

For Japan is not only in a dire fiscal situation, they are also the oldest country in the world. Social spending is growing exponentially and the demographic dividend they enjoyed up to the mid-1990s is now turning against them. There will be many more dependents and far fewer breadwinners as we move forward. The demographics in Japan would overwhelm the country even if their fiscal situation was sound.

Source: US Census Bureau, own calculations

Source: Ministry of Finance (MoF), own calculations

 

The only thing clueless policy makers could come up with in this dire situation was even more of the same. With the election of Shinzo Abe in December 16th the people of Japan elected a man based on a promise of shake up the Bank of Japan. The resemblance to William Jennings Bryan and his famous “Cross of Gold” speech is eerie. The Japanese would not be “crucified on a cross of gold” any more. They elected a man who promised to free them of the shackles from a strong yen and save the day with creation of paper wealth. This is the perfect recipe for disaster.

Conclusion:
Public debt is reaching ridiculous levels and spending will only grow from here. When big bulges of old people start to retire they will be dissaving and it will be impossible for the big banks to use excess deposits to roll over government debt. Collapse is at this stage inevitable.

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