Japan as Number One again

Since the sub-prime crisis began in 2008, we've seen story after story on the supposed lessons Japan holds for the US.

Most of these seem to be of use to those who want to push their own political/economic agenda at home using Japan as evidence to support their opinions. On his NYT blog recently, Paul Krugman used Japan as an example of why Friedman's monetarism does not work. However he has not, to my knowledge, used Japan's experience with Keynesian stimulus to claim that Keynesian economics do not work except to say that not enough was done and what was done was not soon enough---just as he says is the problem in the US.*

R.Taggert Murphy has posted a short piece on Japan Focus, Japan as Number One in the Global Economic Crisis: Lessons for the World?, which looks at Japan from another perspective. My short, overly simplistic summary of his piece is that Japan may have been the first country to experience the "New Normal."

*Krugman's blog, his NYT column, and perhaps his ABC This Week appearances are where he pushes partisan political opinion and probably should not be regarded in the same light as his economic work.

Lookin' for trouble and finding it.

Most folks around these parts go out of their way to avoid trouble, such as some idiot hanging around in back alleys in the rain taking pictures.

Others do not hesitate to look for it. For them, the NYT and Martin Fackler have published the second in the series on Japan (or is it the US?) and the "Great Deflation." Today, the never before discussed well-worn theoretical possibility of the US turning into Japan is explored in a nice quick way that answers no questions: U.S. Hears Echo of Japan's Woes. Could there be a better way to spend a rainy Saturday afternoon in Tokyo?

I guess we should just be thankful that Japan is even mentioned in a major US newspaper.

31 Oct: edited to correct spelling as neither blogger spell check nor I can spell.

Don't worry, be happy

Japan's debt is apx 200% of GDP---the world's largest---but it isn't as bad as it seems 'cause most of the debt is owed to domestic suckers holders of government bonds.

"...Given Japan’s demographics, the current-account surplus may decrease and some even say it will go into deficit” in the long term, Masaaki Kaizuka, director of debt management at the ministry, said in Tokyo today. “We may see the need to increase reliance from abroad, whether we want to or not.” Bloomberg Businessweek

According to the article, Japan's debt may rise to 246% of GDP in 2012. Will Japan still have a AA- credit rating? Will foreign investors care? Will they rush in for the same 1.4% yield on a 10-year bond?

We should refrain from panic because according to Naoki Izuka of Mizuho, the government simply* needs a "feasible, credible and sustainable fiscal plan" and to resolve the problem within 5-years and "we'll be fine."

Nothing to it. A simple thing for any government, but especially the government here, whether led by the DPJ, the LDP, the Commies, or whatever. And we know how welcome foreign investors have been in the past.

*My word, not his.

The Smart Money ain't on Japan

....Smart Money is looking at Japan as the next short because its debt is 100% of GDP, and it will be more difficult to refinance as the population gets older and may need to spend its savings, rather than buy more poorly yielding securities. The cost of shorting Japanese government debt is cheap as interest rates are so low... Forbes

For what it's worth.We've been hearing these sorts of things about Japan, the US and everywhere else for a gadzillion years now. "It can't go on! We can't continue to borrow and borrow and borrow!" But we do.

But if the above occurs sometime in the distant future, what will happen to the US when its one of its two major financiers goes belly up? Will China be able take up all the slack? US taxpayers certainly won't.

China 3

For more on the Krugman (and C. Fred. Bergsten) stand on China and its undervalued currency see The Political Economy of Pressuring China, plenty of links there to Krugman's argument and follow ups and rebuttals by others.

And the un-shut-upable Peter Schiff has posted his YouTube response to Krugman. (Again, I'd advise avoiding the comments.) I never thought Paul could create such entertainment.

We all know C. Fred Bergsten, don't we? For about a gadzillion years he pushed a theory that the Japan-US trade imbalance was a result of an undervalued yen. I once had to transcribe one of his speeches for translators, leaving in all the hmm, huh, eh, and everything else. I lost any urge to read/hear any thing more by C. after that. Krugman/Bergsten video here.

Oops. I found a 1991 C. Fred B./James Fallows spat over his yen theory and more:

Virtually every speech on economics by a Japanese government official or Keidanren (big-business alliance) representative quoted Bergsten or Cline. The purpose of the quotation was to show that the strong dollar was the real cause of US-Japan economic problems, so Americans shouldn't waste their breath talking about other issues, such as trade barriers or deep structural differences between the US and Japanese versions of capitalism. Anyone who has met Japanese economic officials in the last five years has heard Bergsten's work referred to in this way... nybooks.com (Note that Fallows was not questioning Bergsten's integrity. You have to read the full article to understand the argument.)

Natsukashii....

China 2

...The challenge now is how to persuade China to at least moderate its strategy without unleashing something even more destructive. As the decibel level has risen in Washington, Chinese officials have implicitly warned that they could retaliate by dumping Treasury bills from their central bank’s $2.4 trillion cache.

This would be risky for both countries. The move would weaken the dollar and lessen the value of China’s holdings. The United States might weather a sell-off or even benefit from the drop in the dollar’s value, but any precipitous move could further disrupt the skittish financial markets. And Beijing has other potential weapons, like tariffs and quotas. There is no guarantee of rationality in these showdowns. NYT editorial: Will China Listen?

No, there isn't a guarantee of rationality*. There is much more certainty of irrationality in varied doses on both sides. The real question is how the US allowed itself to get into this sort of position to begin with.

Ol' Blinky Ishihara once suggested that Japan dump its US holdings.** According to Blinky, although it would severely damage the US and global economy, in the end Japan and Asia would emerge from the crisis first because that's where all the quality products come from. Apparently nobody took/takes him seriously and relegated him to being a loonytune local-yokel populist (or as the US media tends to refer to the bigot: a controversial nationalist) whose ideas were good enough to get him elected and re-elected. Whatever the reason, we paid no attention.

We still don't. Paul Krugman argues that even if China did dump its US dollar holdings, it would not really have a serious effect. If he is wrong then he personally has a lot to lose....uhhh...well maybe not. Plenty of other economists disagree, but Paul has a Noble Prize. So did Milton Friedman, and I still futilely run outside hoping for money to be dropped every time a helicopter passes overhead.

Anyway, I'll take another wild guess and assume that China, after some displays of irrationality, will ultimately "listen" to some degree. If I am right, I can write a book with a blurb on the rear that reads: "One of the visionary few who predicted that China would avoid a trade war with the US." If I am wrong, I'll claim I work for ABC News and it was simply an unfortunate slip.

Note to self: Must get a life soon.

Note to Google. Google spell check is not aware of the existence of the word "futilely" or "futily". As an American for the US who cannot spell because I had no spelling classes except that I did, I chose the former spelling and then misspelled it. Worse than Google spell check.

*Wait, isn't rationality---according to M. Fujiwara-kun---a Western thing anyway?

**I am not able to find a link. The version I read several years ago was translated to English by a Japanese guy. It should be at least as reliable as an ABC report.

Back to the 80s

Only it's a different country and a different dispute, but very similar to the type of rhetoric that we heard back then. This time, it is China and the US, instead of Japan and the US:

....we’ve been reasoning with China [insert 1980s Japan] for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao [insert, oh say Nakasone or later PM Miyazawa], the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued [insert "Japan's PM declared---absurdly---that the country does not have a closed market and does not discriminate against US/foreign goods. It's because foreigners don't understand Japan and don't try hard enough. Besides, Japan cannot let some foreign products in because its consumers won't buy them and their intestines are not long enough or whatever.]... ....And Mr. Wen accused other nations of doing what China [insert Japan] actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.” Italicized portion from Paul Krugman NYT

Despite all the hot air of the time, and several attempts to right a trade imbalance with a country that did not adhere to the free market religion that the US rather absurdly seemed/seems to take as gospel, in the end it never succeeded. Nobody can deny that Japanese markets are more open than they were back then, but "free" they ain't. Japan and Japanese companies come first. Then again, name a market that is free using a definition of free that means free.

The US is now (finally) making a little more noise about China's currency manipulation and hypocrisy, but in the end, I kind of suspect it will be a lot of nudging from the US with some gradual, grudging changes by China. To me, the most interesting part about Krugman's column is his explanation on why the US need not fear China suddenly unloading all its dollar reserves:

...It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China...Paul Krugman, NYT

It's not the usual economic version of M.A.D.---Whoever shoots first, dies second---in which both countries are damaged, but seems to indicate that it would do little real harm to the US. Krugman has hinted at this in the past, but it's the first time I have seen his rational.

1600: An opposing view---(well, it is economics so no two economists agree on anything anyway)---Krugman's Reminbi Fantasy. Thanks to soma for the link.

Pauper's Alliance

From the NYT article Huge Deficits may alter US politics and Global Power:

....the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade.* As debt grew more rapidly than income, that country’s influence around the world eroded.

... Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending...NYT

Should this turn out to be an accurate guess, then one has to wonder what is the biggest threat, the ones which require the US to keep its forces all over the planet to protect the planet from itself; the one(s) (China?) which require it to keep its forces in Okinawa while debating just where in Okinawa to keep them with the people who own the country; or the continuation of borrowing from everyone until it can borrow no more?

The US-Japan Security arrangement looks like it might have a bright future with each country out of money, but expecting the same or more from one another while at the same time China and others whiz on by.

China has warned the US president that it will harm ties between the two countries if he meets the Dalai Lama.

Chinese Communist Party official Zhu Weiqun said there would be "corresponding action" if the meeting went ahead. BBC

China does not seem to be very cowed.

*OK, this is a bit nonsensical. Japan's problems are not the result of excessive borrowing from other countries. Not much else similar between the two countries and their financial problems that I can see. The always imminent Japan Disease.

There isn't much to say to introduce this, except to note that R. Taggart Murphy has written another extremely interesting article for Japan Focus: In the Eye of the Storm: Updating the Economics of Global Turbulence, an Introduction to Robert Brenner's Update*---so interesting that I don't know where to begin. After seeing and living the results of the financial crisis and the resulting economic fallout for the last year, it seems obvious that there are much bigger, more serious problems facing the DPJ and Japan (and the US) than the current Futenma issue. And I'll bet the latest "stimulus" won't change that.

Murphy discusses and expands on Brenner's ideas especially as pertains to Japan, China, and the US.

Just a few excerpts from the article:

...Brenner fully grasps the significance to global capitalism of what has happened in East Asia since the appearance of the export-led, state-directed Japanese growth model...

...“the premature entry of high-competitive lower cost producers, especially in the newly developing regions of East Asia” would have led to serious crisis were it not for the ability of advanced capitalist governments to make available “titanic volumes of credit.”

...the continuation of capital accumulation has come literally to depend upon historic waves of speculation...

Japan had, from the mid 1950s on, deliberately staked its prosperity on the construction of excess global capacity in a series of key industries... ...Japan did not launch industries. Rather, it targeted markets that were already served by existing capacity... ...result was to destroy profitability...

He goes on to examine the current seemingly "bright spot" of China, and notes the country is heading toward the same "Mutual Assured Destruction" financial relationship that Japan and US have due to its up-to-now focus on an export-led economy and the reinvestment of profits into excess capacity and financing of US debt so that the US can continue purchasing those exports.

Now what was it that Obama has been running around the world saying about the world having to put an end to this sort of warped produce and loan/borrow and spend system?

*A link is also provided for Brenner's What's good for Goldman Sachs is Good for America: The Origins of the Current Crisis. At 73-pages, it is a bit long for reading on a computer, but is time better spent than reading about Tiger Woods' non-longer private affairs.

The party winds down?

Monthly figures can be volatile, and can be revised, so it is risky to draw conclusions from one month’s data. (Why should we ever let that stop us?)

...Asia’s appetite for Treasury securities is not growing as fast as it once did. That means the United States will have to turn to other buyers, including American citizens, who are now saving as they did not do during the boom years, to finance the deficits...

As usual, Japan fails to surprise:

...Japan, which was replaced by China as the largest foreign holder of Treasuries last year, has been a larger buyer this year, taking up 11 percent of the new supply of Treasuries...New York Times

Perhaps that is what Yukio Hatoyama meant by "maintain its....economic independence."

In 5 years we'll look back and see if any of this turned out to be true. Otherwise, it's just an interesting fluctuation which is useful for newspaper reports and blog posts derived from them.