Turning Stones Into Bread – The Japanese Miracle

Stuffing the Futon

Our friend Ramsey Su just asked what Haruhiko Kuroda and Shinzo Abe are going to do now in light of the strong yen (aside from perhaps doing the honorable thing). Isn’t it time to just “wipe out some debt with the stroke of a pen”?

We will return to that question further below, but first a few words on the new Samurai futon. Apparently the Japanese are becoming more than a little antsy about Kuroda-san’s negative interest rate policy (and the threats of more of the same coming down the pike). Bloomberg informs us of the latest developments in this saga: “Manga Worker Stuffs Cash in Futon to Flee Japan’s Negative Rates”:

Stuffing the money at home

When the Bank of Japan unexpectedly announced negative interest-rate policies in January, the first thing Tomomi Sato did was withdraw a 10th of the money in her bank account and stash it at home.

“It made me think of bank runs and shutdowns like I’ve heard there were in the past,” said the 30-something assistant to manga comic artists, who commutes for two hours from a small apartment in Tokyo’s suburbs. “Eventually, I feel like they’ll start charging me to keep my money there. When I think about that, I begin to worry.”

Sato is emblematic of a challenge facing the central bank that rates below zero only deepened: average Japanese aren’t feeling the benefits of more than three years of extraordinary monetary stimulus, and cash withdrawals suggest they are losing faith. About 40 trillion yen ($360 billion) has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate — equivalent to about 8 percent of gross domestic product. That’s money banks could be lending on or using to buy bonds.

Newsflash to Bloomberg: Japan is already drowning in debt. The banks wouldn’t “lend the money on” even if it were deposited with them. They have been doing the opposite for years and years. No-one wants to borrow more, and no-one in his right mind wants to lend out money for zilch.

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(emphasis added)

 Sales of Safes Climb

Financially, there’s little that separates the futon from a savings account that pays 0.001 percent annual interest. And perceptions that a negative deposit rate could become a tax on savers has exacerbated the migration of funds. Sales of safes in March were the highest in government data going back five years, and paper money exceeded coins in circulation by the most last month in BOJ figures to 1970.”

A far greater danger though is that the Japanese authorities will eventually answer Ramsey’s above question in the affirmative.

Stones Into Bread

“All present-day governments are fanatically committed to an easy money policy. As has been mentioned already, the British Government has asserted that credit expansion has performed “the miracle… of turning a stone into bread.” – Ludwig von Mises, Human Action

While Japan’s citizens are worrying about Kuroda-san’s assaults on market interest rates, Bloomberg also tells us that a miracle is currently performed in Japan. It seems Japanese policymakers have finally discovered the financial equivalent of the perpetuum mobile. If the British government can “turn stones into bread”, surely the Japanese government can as well!

According to Bloomberg, Japan’s huge public debtberg is now disappearing at record rates – and it is actually disappearing into itself, so to speak.

Abe Spending like a drunken Sailor

Is it because Shinzo Abe’s government has stopped spending like a drunken sailor? Not quite:

Japan for years has been renowned for having the world’s largest government debt load. No longer. That’s if you consider how the effective public borrowing burden is plunging — by one estimate as much as the equivalent of 15 percentage points of gross domestic product a year, putting it on track toward a more manageable level.

Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift.

“Japan is the country where public debt in private hands is falling the fastest anywhere,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100 percent of GDP in two to three years, from 177 percent just before Prime Minister Shinzo Abe took power in late 2012, he estimates.”

For once we actually find ourselves agreeing with Adair Turner, if only in terms of his analysis of the situation:

“I do not believe that there is any credible scenario in which Japanese government debt can be repaid in the normal sense of the word repay,” said Adair Turner, chairman of the Institute for New Economic Thinking and a former head of Britain’s financial regulator.”

He’s undoubtedly right about that. Mises knew it in 1949 already, when he noted:

“Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”

However, Adair Turner immediately lets his inner Silvio Gesell (the prototypical monetary crank) hang out again by adding:

“It would therefore be useful to make clear to the Japanese people that the public debt does not all have to be repaid, since some of it can be permanently monetized by the Bank of Japan.”

Useful for whom? We doubt it would make holders of the yen happy. They would probably find the yen suddenly beginning to eerily resemble those Reichsmarks issued by Havenstein’s central bank.

To be sure, things can chug along just fine for quite some time – but as noted above, once confidence in a currency is lost, these situations tend to go haywire in a non-linear manner. Go beyond the unknowable threshold, and what used to be money will quite suddenly become toilet paper. When confidence in a fiat money goes, it tends to do so rapidly and irretrievably.

Oh well, at least no-one will have to worry anymore about people “saving too much” in that case, or about the Japanese stuffing yen into futons. They will probably make pyres out of them instead. Perhaps the BoJ should hire this guy:

At least  Bloomberg mentions the view of a skeptic as well, who reminds us that there is actually such a thing as an “endgame”. He rightly notes that Turner’s prescription would in the end amount to a “suicide policy”:

“If the objective is to raise inflation and inflation expectations, it’s possible it could work,” Kanno said. Debt monetization could spur foreign investors to drive down the yen, as happened with Kuroda’s first easing, leading to a burst in inflation, he said. “But how would it affect the endgame — that’s my big concern,” said Kanno, who used to work at the BOJ. “It’s a suicide policy.” 

This is certainly true – but on the other hand, what other way out is there? In spite of not lacking in imagination, we can no longer really see one.  We find it quite amusing though that as long as everybody manages to pretend that everything is still normal, the yen is actually strong like an ox (as an aside to this, we remain bullish on the yen short to medium term on technical grounds – even though it is probably ultimately a lost cause):