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Japan Goes Stark Raving Keynesian

The opinions expressed by columnists are their own and do not necessarily represent the views of

At the end of October, the Bank of Japan went stark raving Keynesian. Led by the governor of the Bank of Japan, 5 of the 9 dithering old men who control Japan’s money supply voted to increase the BoJ’s purchase of government bonds to 80 trillion yen next year, instead of 50 trillion, and then the same every year for the next ten years. This announcement of a new round of massive quantitative easing sent the yen plummeting. The day before the announcement you could get 109 yen for the US dollar, but by that afternoon it was going for more than 112. It will probably hit 120 soon.


The announcement was welcomed initially by Japanese investors and the Nikkei average soared. A few days later, the investors woke up with a hangover and stock prices fell a bit.

Why did they do it? Why did the Bank of Japan go with another round of QE when the US and Europe are phasing out their programs?

Answer: Keynesian economics.

The Keynesians believe that deflation is bad and inflation good. The Japanese old men are not any more Keynesian than the American and European old men, but Japan has had mild deflation for much of the past 20 years. But instead of seeing an overpriced market and a natural correction, the Bank of Japan blames deflation for the stagnant economy. In the minds of the Japanese bankers, the lack of growth couldn’t possible be caused by overregulation, high taxation, cronyism, corruption, etc., it must be deflation’s fault. This view is also held by Prime Minister Shinzo Abe, whose economic policies called for a target inflation rate of 2 percent. Despite on-and-off quantitative easing for almost 13 years, the Japanese have more-or-less resisted higher prices, so, as the blog Zerohedge noted “It’s 2 percent on the CPI...come hell or high water.”

Then again, inflation may not stop at 2 percent. It might head towards 10 or 20 percent? And as we know, inflation always outpaces workers’ wages. Aren’t the ordinary Japanese going to suffer more under inflation than under the mild deflation they had? Oh, well.


By some measures, Japan has already achieved 3 percent inflation this year, but to others the core prices are still low. Assuming, however, that Abe achieves his target of 2 percent inflation and the yen falls further against the dollar, then what? The Bank of Japan has already revealed their hand. The Japanese yen, like the US dollar, is fiat money. Not backed up by precious metals or anything else of value, it only has value as long as people believe in it. What will happen when the Japanese people stop believing in it? Won’t they seek out other places to store value like gold, silver, foreign currencies, fine art, etc? Look at Argentines hoarding dollars and you might see Japan’s future. The Bank of Japan has just shown everyone that it can print as much money as it wants anytime it wants. In other words, the yen has no intrinsic value. Was it wise to tell everyone that?

Abe, of course, hopes that the weaker yen will stimulate exports. But his hopes are unmoored from reality. A small drop in price is not going to make Americans or Germans rush out and buy Japanese products; there are other factors involved. What is Japan going to sell? Americans who grew up in the 1960s and 1970s remember when almost everything they bought had labels saying “Made in Japan.” Back then almost every toy came from Japan. Now toys come from China. Shirts come from El Savador or Bangladesh. Furniture comes from Finland. We still buy Japanese electronics and cars, but will a favorable yen exchange rate make Americans go out and buy more TVs and automobiles? The yen will have to revisit the levels of the early 1980s of 200 plus yen to the dollar for Japanese products to seem “cheap.”


In the meantimne, bad things could happen. Many of us have seen this Keynesian scenario before. The first time I visited Yugoslavia, back in 1981, the exchange rate was something like 35 dinars to the dollar. A few years later, when I visited the country again, it was over a thousand dinars to the dollar. A couple of years after that, it was millions of dinars to the dollar. I own a bill that says “500,000,000 Dinars” on it. During that era of high inflation, shop clerks had to spend every minute of every working day, changing the prices on all the goods in their stores. Unemployment hit 25 percent in some parts of the country before civil war broke out.

Abe assumes, however, that Japan is immune to the laws of economics. His “Three Arrows” economic plan, widely praised by the mainstream media as “bold,” has failed to stimulate the economy, but that hasn’t caused him to change his mind or change course. It’s as Thomas Sowell once said, “When deep thinkers see that the world doesn’t match their theories, they try to change the world. It must be awfully hard to change theories.” The only thing Abe can show for his policies is a massive jump in public debt, which rose from 200 percent of GDP to an astounding 230 percent. But why let reality get in the way of fantasy utopias? The Keynesians can coin a new maxim which says, if massive government spending and bigger government does not succeed in creating a robust economy the first 17 times you try them, try them again with even more spending and even bigger government.


That seems to be what Abe and the Bank of Japan septuagenarians are thinking. NHK News has justreported that the Japanese government is considering raising taxes again next year – probably because raising them this year did not send the country into a deep-enough recession.

It’s funny: the only thing NHK News has never announced is that Prime Minister Abe is considering reducing the size of government, or reducing regulations on businesses, or lowering taxes.

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