STAFF NEWS & ANALYSIS
Japan: The Tipping Point
By Staff News & Analysis - March 14, 2011

The Bank of Japan, which holds a policy meeting on Monday, injected 7 trillion yen into the money market via a same-day operation. It later injected an additional 5 trillion yen in same-day funds and a BOJ official said the central bank will closely monitor the currency market in deciding the need for further market operations. – Nagoya

Dominant Social Theme: It will be OK. The Japanese are industrious.

Free-Market Analysis: Demographically, the Japanese population has continued to age at a substantial rate, aggravating many of the problems that the Japanese economic infrastructure already faces. This is actually the best evidence we have of the dysfunction of Japanese society; demography doesn't lie. The Japanese system is dysfunctional and discouraging population growth.

All economies are similar in the age of central banking. When confronted with disasters, economic or otherwise, the first instinct is to print money (see article excerpt above). Many things in life are uncertain, but central banking is not one of them. Central banks in the modern era print money from nothing. They print money-from-nothing when times are good and the economy demands increased liquidity. They print money-from-nothing when times are bad and banks have additional liquidity needs because the system is "stressed." But they always print. That's the point. They never stop printing and devaluing purchasing power.

One would think that people would be fairly wealthy given all the money that central banks around the world are printing on a consistent basis. But for some reason (actually ones that we explain regularly) it doesn't work that way. Western economies have surely been on a downhill slide since 2008; in Japan the trends have been flashing negative not for two years but for two decades. The miserable post-bubble economy that was supposed to return to health numerous times has never quite managed to break out. The Nikkei stock market average, once hovering around 40,000 remains stuck around 10,000 and as of this writing is actually under 10,000 and probably headed down farther.

When people are truly miserable they stop reproducing. They don't get married, don't build families, don't have children. That's what's going on in Japan. There are plenty of commentators who will tell you that Japanese social and economic misery is over-emphasized and that things are not nearly as bad as they are made out to be, but the demographics tell a different story. This is a society in seemingly terminal decline; one in which Western style central-banking economics has been grafted onto an ancient, hierarchical culture with devastating results.

The economy has never recovered; and this earthquake, which has destroyed some seven percent of the productive Japanese economy, is likely to make things a lot worse. Let's examine some of the potential ramifications of the earthquake and subsequent devastation. What is noteworthy to begin with is the inevitable economic illiteracy on display. The Broken Window fallacy has already assumed the predictable high-profile, with plenty of economic commentators who should know better opining that the devastation should be good for the Japanese economy as rebuilding is always a profitable enterprise.

How people can make such points with straight faces is always a wonder to us; if they really believed such things why are they not advocating regularized "creative destruction" at home. Perhaps they ought to be setting fire to their own cities or working out clever ways to flood their business districts with seawater. If natural disasters are so very good for economies, surely they should find ways to institutionalize them so as to better mount satisfying and profitable recoveries.

In truth, the costs of natural disasters can be measured in broken homes, broken families, lowered living standards for all. People lose loved ones, husbands, fathers, mothers and daughters; families are uprooted and whole communities vanish never to be reestablished. The costs are measured out in individual tragedies; but this is not the calculus commentators wish to notice. These are the discounted expenses, the invisible side of the ledger. Only the profitability of corporate rebuilding is to be noted, the efficiencies of modern reconstruction. The broken window fallacy is an alluring myth. It's unfortunate that so many ignore the truth whenever convenient.

There are other more straightforward ramifications to the earthquake damage. Leaving aside Japan, it is going to aggravate the EU's problems as the Eurocrats had cleverly figured out a way to ameliorate their own profligacy and miscalculations via Asia. Yes, the Japanese and Chinese governments were going to start to make coordinated purchases of the bonds of reeling Southern European economies; that won't happen now, or not with Japan anyway.

Japanese wealth will be needed closer to home, what's left of it. And there is substantially less of it than there was even 20 years ago. It is true that the Japanese have an enviable savings rate, even when confronted by the inevitable inflationary depredations of central banking that makes savings illogical. But what inflation hasn't robbed, the Japanese habit of writing bonds against non-existent assets has quietly pilfered away.

It is Japanese savings that has underwritten the endless profligacy of the Japanese government and it is likely this current disaster will only aggravate the situation. Already, the Bank of Japan has printed another 12 trillion yen from "thin air" to ensure there is enough "liquidity" in the face of a sudden surge of withdrawals from the Japanese banks. Doubtless there will be more such printing in the coming weeks and months. There are estimates that that the Bank of Japan stands ready to issue into the market some 40 trillion yen – all of it printed from nothing.

This is in fact part of Japan's larger problem. Japanese society like many Asian societies places a premium on social comity and obedience. What this means in practice is that Western regulatory democracy – even more so than the EU and America – has run amuck in Japan, manifesting itself most notably in the gridlock of Japanese political parties. As in other countries, political power has begun to change hands regularly but the underlying policies do not change. Japan still spends more money than it has and the corruption within the federal politics is notable and systemic.

Recently, AFP reported via Yahoo that "Japan's beleaguered premier faced an internal party revolt when 16 of his own lawmakers failed to vote for his centre-left government's record $1.1-trillion budget." The premiere, Prime Minister Naoto Kan, in office less than a year has approval ratings BELOW 20 percent and legislative gridlock from the "conservative opposition" is once more the order of the day.

Of course this miserable state of affairs was PRIOR to the earthquake. One can only imagine what Japan's sclerotic establishment will do now. Some are predicting that the earthquake and subsequent misery will galvanize the political establishment and shock it into changing and become more responsive and efficient. But disasters of any kind usually do not have a salutary effect on corrupt governments, merely making them more dysfunctional in our opinion.

There is however the beginning of a change overtaking society, as reported by the Economist recently in an article "Maverick as hell." The Economist noted that reformist politico Takashi Kawamura won a landslide re-election as mayor of Nagoya, a big industrial city. This was not of itself especially newsworthy, but the platform that Kawamura was running on emphasized reductions of all kinds – of the bureaucracy, taxes and overlapping public services.

Kawamura himself characterized his victory as the beginning of a new era in Japanese politics and compared his nascent movement to the Tea Party in America. He was not alone in victory; his political ally – someone who shares his views – Hideaki Omura, won a similar victory on the same day, gaining the governorship of the surrounding prefecture of Aichi, which is the home of Toyota. Omura was quoted as saying, "This is a citizen's revolution."

Predictably, the national media claimed the victories were nothing out of the ordinary, merely a protest vote against the unpopular Prime Minister Naoto Kan. Yet there was more. As the Economist noted, "Nagoya citizens not only gave Mr. Kawamura three times the votes of his DPJ rival. Nearly three-quarters of them supported a referendum to dissolve the current Nagoya assembly, an unprecedented revolt…"

We've pointed out that disasters – natural and otherwise – don't usually bring out the best in large, corrupt government entities. (The New Orleans flooding and FEMA spring to mind.) And the earthquake is an unmitigated disaster, broken-window fallacies aside. But optimistically, one can make the case that the current troubles could support the kind of governmental efficiencies that Kawamura and Omura want to introduce in Japan.

Editor's Note: Edited on date of publication. A speculative cite involving unmarried Japanese women was removed from the article.

After Thoughts

So much of the world is already subject to various kinds of democratic convulsions and regime changes; Japan may be due for its own modest socio-political reconfiguration. That would be at least one positive that could come out of the current disaster.

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