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The Problem is Deflation with a Capital "D".

Monetizing Japan

by MIKE WHITNEY

“If possible, I’d like to see the Bank of Japan purchase all of the construction bonds that we need to issue to cover the cost.” Shinzo Abe, President of Japan’s Liberal Democratic Party (LDP)

Japan’s next prime minister has a plan for ending deflation, increasing exports and boosting growth. Unfortunately, entrenched elites in big business and at the Central Bank (Bank of Japan) want to sabotage Shinzo Abe’s strategy in order to preserve the existing system and perpetuate the upward distribution of wealth.

Here’s what’s going on: Shinzo Abe is the head of Japan’s main opposition Liberal Democratic Party. He is the hands-on favorite to become Japan’s next prime minister sometime in mid-December. Abe has called for a number of policy changes that could turn the Japanese economy around and end the country’s 15-year fight with deflation. This has rattled the cages of the bankers and plutocrats who benefit from the present dysfunctional, oligarchical system. This group would rather see policy stay the same, that is, they’d rather see the BOJ continue its ineffective bond buying program that’s pushed the Japanese economy to the brink of recession for the third time in 5 years.

Abe and his political allies want to try a different approach, a Keynesian approach where the BOJ underwrites the purchase of infrastructure bonds to lower unemployment, weaken the yen, increase economic activity, boost GDP, end deflation and strengthen exports. Abe also wants an 3 percent “inflation target”, in other words, he intends to keep printing money and buying construction (and probably corporate) bonds until inflation takes root, expectations change, and the the threat of deflation is passed. Here’s the story from Reuters:

“Japan’s main opposition leader Shinzo Abe said on Wednesday that the Bank of Japan should continue monetary easing until it achieved 3 percent inflation, signalling the central bank could come under more political pressure after the next general election…

“The Bank of Japan basically needs to continue unlimited easing till 3 percent inflation is achieved,” Abe told a gathering of business executives and academics, stressing that beating deflation and countering the yen’s strength were Japan’s most urgent economic policy issues.” (Reuters)

He’s right, of course, but he’s meeting stiff resistance all the same. And the media has been blasting him as well, assuming the same cynical tone as their corporate paymasters. Here’s a jab at Abe’s recommendations from Forex hotshot Adam Button:

“LDP leader Shinzo Abe, who is the favorite to win the Dec 16 election, is campaigning on a ¥200 trillion ($2.5 trillion) infrastructure plan.

How might a highly indebted country pay for such a lavish plan?

‘If possible, I’d like to see the Bank of Japan purchase all of the construction bonds that we need to issue to cover the cost,’ Abe said in a speech.” (“Abe campaigning on direct monetary financing”, Forexlive)

Pretty witty, eh? Indeed, monetary stimulus is derided as “magical” when it serves the public’s interest and puts people back to work, boosts growth and revs up the economy, but when it’s used to exchange trillions in garbage mortgage-backed securities (that no one in their right-mind would ever buy) and stuff the banks full of unused reserves, then it’s “sheer brilliance.” Isn’t that the mantra we’ve heard for the last 5 years, that Bernanke’s “unconventional monetary policies” have strengthened the non existent recovery by boosting bank profitability and bonuses? How much of that public relations narrative is true and how much is pure bunkum?

And, yes, Abe is suggesting that the BOJ “create money out of thin air.” So what? Does anyone seriously believe that Japan’s 15-year deflationary nightmare will end overnight and the country will slip into Wiemar-era hyperinflation?

Don’t make me laugh. The problem in Japan is Deflation with a capital “D”. Just take a look at this from Wednesday Reuters:

“Latest data showed Japan’s core consumer prices fell for the fifth straight month in September, factory output suffered its biggest fall since last year’s earthquake while the government’s index of leading indicators fell to a level suggesting the start of a recession.” (LDP leader Abe: BOJ must ease until inflation hits 3 percent, Reuters)

Did I hear someone say “Deflation”?

And then there’s this tidbit on wages from MNI Market News:

“The total average monthly cash earnings per regular employee in Japan fell 0.5% from a year earlier in September, revised down from being unchanged in the preliminary reading, hit by the global economic slowdown, data from the Ministry of Health, Labour and Welfare released Friday showed…

Both base wages and one-off pay (including bonuses) were revised down, offsetting an upward revision to overtime pay.

Factory operations have been reduced by slumping exports and slower domestic demand. Automobile output has also been hit by the Sino-Japanese territorial dispute over small islands in the East China Sea.

Average “base wages” — the key indicator for a recovery in employee earnings — fell 0.4% on year (revised from being were flat) in September, marking the fourth straight y/y drop after -0.5% in August.” (“Japan Sep Average Wages Revised Down To -0.5% Y/Y Vs Flat”, MNI News)

Prices are falling, wages are flatlining, and the economy is slipping back into recession. Get the picture? Japan’s economy is in the toilet because the people who are steering the ship of state are morons. Here’s more proof from the Wall Street Journal:

“Prices have been under pressure for the past 14 years, leaving the consumer price index 3.6% lower than where it was in 1998. Politicians of both the opposition and ruling parties have said the BOJ should do more to bring back at least low levels of inflation to help spur broader growth. In price deflation, it makes more sense to hold cash since future spending will be less-expensive, slowing the pace of consumption.” (“Economists Caution Japan Politicians on Policies”, Wall Street Journal)

C’mon now; does it really take 14 years to figure out that demand is weak and that workers need more money to buy the widgets that industry produces?

It does when your main policymakers–like Bank of Japan chief Masaaki Shirakawa—matriculated at the University of Economic Malpractice in Chicago and studied under voodoo snakeoil-salesman, Milton Freidman. Then you’ve got real problems.

Similar to his US counterpart Ben Bernanke, Shirakawa has a million excuses for why his policies don’t work. One week, it’s Japan’s shrinking workforce, and next week, it’s Japan’s high debt levels (now above 200% of GDP) But the real reason is obvious to anyone with even one operating braincell, that is, zero rates and piling up reserves at the banks doesn’t do a damn thing to strengthen demand, and that’s the crux of the matter: DEMAND. All this supply-side monetary claptrap hasn’t amounted to a hill of beans, because the availability of funds does not create demand for loans. It’s that simple. In other words, don’t expect to kick start the economy by loading the banks with money. It won’t work. Shirakawa has proved it.

Here’s more from the Wall Street Journal:

“The BOJ became a laboratory for unorthodox but ultimately ineffective policies. It has bought Japanese government bonds, asset-backed securities, corporate debt and even stocks. The purchases pumped money into the financial system and were also meant to encourage risk-taking by banks and investors, Mr. Shirakawa says. But they failed to reinvigorate the economy or end deflation.

In October, the BOJ added a new twist—5 trillion yen of securities purchases that included exchange-traded stock funds and real-estate investment trusts. After an intense debate last year the bank took the especially unusual step of channeling cheap loans toward a few favored industrial sectors, including energy, environment and health care.

“The facility in itself may not be able to solve the fundamental problems that Japan is faced with,” Mr. Shirakawa says. “But it could perform as a catalyst to initiate much-needed reactions by the government, firms and banks to collectively address the problem.”(“Japan’s Bernanke Hits Out at His Critics in the West”, Wall Street Journal)

Have you ever read anything more ridiculous in your life? Shirakawa is basically admitting that his lamebrain monetarist theories don’t work but shrugging it off saying, “Oh well, maybe the government will fix it.” Pathetic!

This is why Shirakawa is under attack by Abe and The Anti-Deflation League which has ballooned in Parliament and threatens the BOJ’s prized “independence”, which is an Orwellian term that bankers use to describe our bank-run New World Order. Shirakawa has become a symbol of everything that is wrong with Japanese politics, the failed policies that persist forever because they serve the interests of the establishment elites.

Of course, we face the same problems in the US thanks to the failed stewardship of “Subprime Bennie,” the madcap Fed chair whose ZIRP (zero interest rate policy) and QEternity have shoveled trillions to Wall Stree fraudsters while the real economy has languishes in a permanent state of depression.

There was a time when Bernanke would have agreed with Abe’s idea that the central bank should print money to invest in people not bankers. In fact, Bernanke gave a speech in 2002 where he seems to support that very policy. Here’s an excerpt from the speech:

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.

…the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example,accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. … A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

…the government could increase spending on current goods and services or even acquire existing real or financial assets.
If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.” (“Deflation: Making Sure “It” Doesn’t Happen Here”, Ben Bernanke, Federal Reserve, 2002)

Okay, let’s break this down into plain English. Bernanke is saying that the government could stimulate demand by buying goods and services (which could be “infrastructure projects” the same as Abe is suggesting) by printing money. (“money-financed” or “helicopter drop” of money) In other words, Bernanke’s understanding of economic fundamentals was not much different than Abe’s until, of course, he became Fed chairman and contracted a bad case of professional amnesia. Now Bernanke–like Shirakawa– believes the only remedy for deflation, slow growth, unemployment or any other nagging economic problem is pumping more liquidity into the black-hole banking system. Which just goes to show that class interests always shape the policy. Always.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.