Japan just got even more inflationary

Japan is one of the most inflationary economies in the world.  Oh, of course most mainstream mugs won’t tell you that.  They’ll say something like, “Japan suffers from perpetual and prolonged DEFLATION”.  But if you know your monetary economics then you know better.  Japan has been printing money since the late 80’s at an alarming rate, adopting QE policies way before they became the cool-aid du jour in Washington, and monetising vast swathes of public debt with freshly printed notes - Gono style!

I can hear the cries already: “But that’s ridiculous! Prices have been falling in Japan for 20 years!  Japanese CPI is falling all the time!”

Indeed, but, as always, those defining inflation as rising prices are misled.  Price inflation is not rising prices but an inflated or expanding or rising money supply.  What’s the difference? Huge!  A rising money supply, all else equal, WILL ALWAYS cause goods and services prices to be higher THAN THEY OTHERWISE WOULD HAVE BEEN.  That is very different to rising prices per se.  It may mean prices that fall slower instead of faster, or prices that stagnate instead of fall.

Those who only look at prices are misled because they don’t see how far prices would have fallen absent monetary pumping.

Let me ask you all this: If Japan has had deflation for two decades, why isn’t Japan cheap?  Honestly, try going to Japan and seeing how far your piddly currency gets you in Tokyo.  Not very far that’s for sure.  But how come?  I thought deflation was supposed to make things cheaper.  Everything except Japanese living costs it would seem.

You see the problem with Japan is not deflation, or a liquidity trap or earthquakes.  The problem with Japan’s economy is that PRICES HAVEN’T FALLEN FAR ENOUGH.

After the huge bubble of the 80’s Japan sat with a completely inflated economy and asset base, and couldn’t stomach the systemic risk that a deflation of that asset base would mean (sound like another central bank you know of?).  Instead of letting the rot deflate and reallocate capital, the Japanese authorities decided to pretend they could print and borrow their way out of the mess.  And the release-valve that’s kept it all together for 20 years? Yip, GOVERNMENT DEBT, which has ballooned as the state tries to borrow and print and pretend its all ok.

What’s my point?  Well, you see, Japan just got hit my a massive earthquake and tsunami that destroyed a large portion of it northeast coast up to 10km inland.  It then printed $300bn and pumped it into the financial system.  Japan needs to deflate en mass, but losing huge swathes of physical capital and then pumping more money in (i.e. EVEN MORE money chasing after EVEN FEWER goods) is making it even more inflationary.

In weakening the yen the Japanese authorities, because they do not understand monetary economics, have just made it harder for the country to rebuild and for people to get their lives back on track.  As if the actual disaster wasn’t enough, a money disaster followed.  What is sure is that this hyper-inflationary bias in Japan will keep making Japanese poorer in real terms, will never allow prices to deflate as much as they need to raise real buying power and spending, and will make rebuilding the crisis torn areas harder and more expensive.

The G7 members to their shame are complicit in this idiocy.  Here’s the official G7 statement on the yen policy immediately after the tsunami:

Statement of G-7 Finance Ministers and Central Bank Governors
March 18, 2011

We, the G-7 Finance Ministers and Central Bank Governors, discussed the recent dramatic events in Japan and were briefed by our Japanese colleagues on the current situation and the economic and financial response put in place by the authorities.

We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector.

In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate. [HA emphasis]

What they mean is they will help the Bank of Japan weaken the yen by printing up their own currencies, swapping them for printed yen, and selling the yen into foreign exchange markets to artificially weaken the yen.  They do this even as the market is trying to call forth a stronger yen as capital is repatriated from offshore back to Japan to commence the re-building efforts.

This would be funny were it not so tragic, and the everyday man on the street will foot the final bill.

In the meantime, most of the world goes on oblivious to the greatest monetary injustice in history, and Japan insists on remaining hyper-inflationary and thereby destroying wealth and making its people poorer.