Crisis in Japan: What Happens When You Meddle With the Economy

The problem with taxes in most nations is that the people and the governrning body must come to an agreement to impose and pay them. Sure, there might be an intermediate step, like a representative governrnment, or even a socialist ruling party that makes noise about it being everyone’s “duty,” but at the end of the day, the population can still upend the process by voting against tax hikes. This makes it harder for the governrnment to get people’s money if they don’t want to fork it over.

But from governrnment’s perspective, who needs taxes when you have quantitative easing?

Through this mechanism, typically unelected bureaucrats with little business experience can decide that people just aren’t doing enough with their money to stimulate the economy, so their funds must be appropriated by other means.

The group creates money out of thin air, which devalues the rest of the currency in circulation, taking the most from those who have saved the most. The newly-printed currency eventually finds its way back to the governrnment’s coffers where it is judiciously spent by the powers that be.

You might think this is about the U.S., where we printed roughly $4 trillion, or even the euro zone, where the European Central Bank has just started printing 60 billion euros per month.

Nope. This is about the country that introduced the world to the first governrnment debt that is measured in quadrillions — Japan, where the governrnment debt now exceeds 1 quadrillion yen.

The Land of the Rising Sun has transformed its central bank, the Bank of Japan (BoJ), from the moderator of stable prices and interest rates to the biggest source of governrnment revenue the country has ever known.

In a country whose annual deficit is around 36 trillion yen, printing 80 trillion is a big deal. Using the vast majority of the money to buy governrnment bonds, the BoJ is sucking up twice as many bonds each year as the governrnment is selling.

That means the BoJ is buying Japanese governrnment bonds out of the holdings of other entities, like the nation’s pension funds. Since all debt held by the central bank is essentially forgiven debt, the governrnment is keen on the BoJ buying as much of their debt as possible.

Unfortunately, as mentioned above, someone has to pay the price for all of this buying.

That someone is the average Japanese saver/consumer, who is watching the purchasing power of his yen melt away before his eyes. From the middle of 2013 through the end of last year, the yen fell from 77 to 121 per U.S. dollar, losing more than half its value.

For a bunch of people who live on rocky islands that import both food and energy, this can make life a tad more expensive.

The Japanese governrnment points out that this is no problem, because eventually wages will go up as costs increase… or at least, that’s the theory.

Unfortunately, that won’t apply to everyone.

In the Land of the (Setting?) Sun, one in four people are over 65, which means around a quarter of their population is living on a fixed income.

As for workers, 40% of those are temporary workers, the kind that can be fired any time and aren’t part of the “employee-for-life” segment for which Japanese business is famous. The temporary group earnrns 38% less than regular workers and they don’t get extra pay just because prices move up.

These policies can’t go on forever. Eventually, foreign entities — other governrnments, corporations, trade partners — will lose faith in the currency and refuse to accept it as payment. At that point, the Japanese economy will unravel, taking down the banking system and slashing the value of assets.

Japan’s governrnment keeps backing itself into a cornrner. Given the age structure of the country and its unwillingness to allow migration, they have few options left to recover.

But until outsiders lose faith, the BoJ will keep printing money, capturing more governrnment debt in its net with a currency that is under constant pressure.

How this story unfolds should serve as a cautionary tale to other governrnments.

Maybe taxes and the legislative process aren’t the realm of “sissies” after all. While QE is the path of least resistance, it’s also the path of least responsibility that should be avoided at all costs.

At least then Japan, the countries of the euro zone, and the U.S. would have a clear picture of where they stand, instead of relying on monetary sleight-of-hand in an effort to get something for nothing.

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