The Arrival of Japan's Sunset
25 February, 2013
For a successful technology, reality must take precedence over public relations, for nature cannot be fooled. ~ Richard Feynman
Waiting for Japan’s economy to make a strong recovery has been an ongoing game since 1990. Shall we play that game one more time?
There have been many false dawns in Japan over the past 20 years. Struggling with a combination of crushing debt and deadly demographics, Japan’s economy has stubbornly refused to make progress, despite numerous government efforts that range from currency devaluation to endless public works projects.
None of this was enough, however, to prevent further declines in the country’s fertility rate, for example, which only exacerbated deflationary pressures on the economy. Nor were the collective set of policy measures enough to boot capital flows away from the bond market, as Japan’s savers simply kept on saving.
For the past twenty years, value investors have probed the individual names in the Nikkei for cash rich insurance companies, debt-free manufacturing companies, and for rock-bottom low P/E names, all in the hopes of riding a broader recovery higher. Alas, no sustainable recovery in Japan’s economy or stock market has ever unfolded.
One can only smile at the reaction that more senior, experienced Japan recoverists must now be feeling as they watch a new generation succumb to the excitement of the latest resurrection of Japan’s economy. That the Nikkei is up by 25% in just 90 days has triggered all sorts of congratulatory commentary, even from Nobel Prize winners like Paul Krugman, who also is swept up in the latest round of recovery fever:
Krugman explains that one of the problems with modern central banking is that people believe they’re too credible in their desire to stamp out inflation when it starts to pick up. So in other words, the Central Bank may say it will let growth and inflation run hot for awhile (so that nominal GDP can catch up to trend) but nobody believes that they’ll actually do that. What Japan may be in the process of doing — by having the Bank of Japan take orders from the Ministry of Finance and the new Prime Minister — is solve this problem, by having the bank commit to being irresponsible.
Thankfully, Japan’s latest attempt to recover by aggressive devaluation is almost assured to provide resolution to its generational quagmire. But the outcome will not look anything like recovery.
Instead, Japan has entered the terminal phase of its long, reflationary road.
Culturally, the frustration and exhaustion at the country’s lack of progress has unsurprisingly led to this important juncture. The Japan recoverists are correct that the latest round of monetary policy “is not like the others.” However, the results are likely to provide a real-world test case of the limits of Keynesian policy at a time when the world faces scarce resources.
This final chapter will be spectacular. So in a lurid sort of way, we should be thankful that Japan has now crossed the threshold and is ready to proceed to its denouement.
The Miracle of Post-War Japan & Resource Arbitrage
Students of ecological economics should pay close attention. Japan is about to add itself as a test case.
Ecological Economics is a thesis of elegant simplicity. Simply put, the economy is a subset of the environment – and not, as neoliberal economists would have you believe, the other way around. Economies can “grow” up to the limit of the natural resources which they can extract, or acquire.
In a time of cheap resources, when the cost of inputs is extremely low, the importance of these inputs tends to be ignored. Thus, we can see the most obvious implication of environmental economics is that extraordinary profits can be harvested when the price of resource inputs is low and the purchasing power of consumers in the market place is high.
This is exactly the condition that allowed post-war economies like Japan to reap gigantic capital windfalls during their post-war industrial phase. Additionally, it is also critical to point out that the prices of energy inputs in the post-war era were so cheap that it was not necessary for countries like Japan to own any such resources domestically. Indeed, as it’s well known, Japan is nearly barren of any large deposits of energy resources.
Countries like Sweden, South Korea, and Japan during the 1945-2000 period essentially engaged in a kind of resource arbitrage: sourcing energy inputs from abroad and using them to manufacture high quality goods for export. If the resource-curse explains how countries rich in oil, copper, iron ore, and coal often wind up in a place of stagnation and corruption, bereft of innovation and diversity in their economies, then a country like post-war Japan received a kind of resource-poor blessing. Short of raw materials, Japan’s only choice was to become expert in using raw materials to get rich. And rich, indeed, did Japan become.
But all things must pass. The greatest gains from Japan’s industrial arbitrage were harvested from after the war up to 1990. It would be impossible to exaggerate how much capital the country extracted from the world economy during this time.
It would also have been impossible, given the tidal wave of that capital, for Japan to have avoided the asset bubble, whose bursting, just a decade before the new millennium, would prove so crippling. By the time Japan had hobbled into the year 2000, new low-cost manufacturers like Mexico, China, and other Asian countries had appeared on the scene to essentially imitate Japan’s post-war triumph.
Japan & Ecological Economics
Economies consume natural resource inputs, produce useful services for people, and generate waste. Fed a steady diet of affordable energy, the global economy grew and produced waste for most of the post-war period. Until, of course, the energy shock of high oil prices and the bursting of the credit bubble halted growth, in 2008-2009.
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