Experiencing the dramatic collapse of an unfair system can be one of life’s unexpected pleasures. Recently, we were treated to a vivid display of such failures, reminiscent of a competitive eating contest in both style and excitement. It’s quite a spectacle to witness.
This week brought forth a series of gripping stories highlighting societal troubles, adorned across the pages of leading digital news platforms. Yet, the true source of our intrigue lay buried beneath the surface, overshadowed by the latest political tweets and constant updates on global military tensions. Nonetheless, our chosen focus is worth examining.
The protagonist of today’s narrative is Haruhiko Kuroda, the Governor of the Bank of Japan (BoJ). If you are not familiar with Mr. Kuroda, we apologize in advance; the information to follow may shatter your peace of mind.
Kuroda and his BoJ colleagues have been skillfully navigating a precarious path of aggressive monetary debasement for decades. Their well-meaning policies have even become a matter of national pride. There appears to be no monetary policy madness that Japan hasn’t already explored in a bid to rescue its economy from its own flaws.
From negative interest rates to direct government stock purchases through exchange-traded funds (ETFs), and even state-sponsored consumer spending, Japan has tried it all. Extensive measures were taken to combat the deflationary pressures that followed the bursting of an asset bubble fueled by inexpensive credit nearly 30 years ago.
The Brutal Trifecta
With Kuroda at the helm, previous governors have conducted their business with unwavering confidence, blind optimism, and a fervent belief that increasing the money supply could create wealth. Their record is impressive: a perfect track record of failure.
The Japanese economy has languished for the past 25 years, while government debt has soared alarmingly. Currently, Japan’s government debt is over 250 percent of the nation’s gross domestic product (GDP).
This figure is remarkable, more than double the U.S. ratio of approximately 105 percent. It stretches the boundaries of credible understanding into the realm of the absurd, as there is little else to explain it.
To clarify, Japan’s skyrocketing debt levels stem largely from extensive central bank asset buying. The BoJ owns approximately 41 percent of the Japanese government bond market, purchasing bonds using money created from thin air.
Japan also stands at the forefront of what happens when an economy faces an aging population, mounting debt obligations, and stagnant growth. Collectively, these issues form a daunting trifecta.
The Rise of the Japanese Androids
Japan’s demographic decline is generally anticipated to outpace the European Union by about five years and the United States by roughly nine years. The trend regarding government debt has similarly preceded these regions by about a decade. As Japan’s population is predicted to decrease by nearly a third by 2065, how will the country manage its enormous debt obligations?
Something will inevitably have to give. When a government can no longer sustain its debt, two outcomes are possible: it may default or resort to inflating the debt away.
If you guessed that the Japanese government, much like its Western counterparts including the United States, will choose the latter option, you’re absolutely correct.
In this context, we encountered several significant statements from Kuroda regarding the potential normalization of Japan’s overly stimulative monetary policy. Here are some of Kuroda’s key remarks from his recent press conference marking his reappointment for another five-year term:
“We’ll do our utmost to achieve our price target, but we will also need to consider initiating a process toward policy normalization.”
“Any shift from easy policy would likely be cautious and gradual, similar to the approaches of U.S. and European central banks.”
Question: When does the abnormal transform into the normal?
After nearly 30 years of unusual monetary practice, isn’t the abnormal our new normal?
We believe the BoJ will remain instrumental in shaping money and credit markets in Japan indefinitely. They will persist in their efforts until no market exists to manipulate. Eventually, the population of Japanese androids may well surpass that of human beings.
This trajectory undeniably illustrates the consequences of an economy governed by an abnormal monetary system—a path leading straight into an unusual world.
Sincerely,
MN Gordon
for Economic Prism
