There is still no antidote to the dilemma of Japanese government bonds!

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Source: trendy Meditations (id:xinchaochensi)

Author: wuhuawang

Recently, many people are paying attention to the situation of Japanese government bonds. According to media statistics, the Bank of Japan purchased 14.8 trillion yen (US $110billion) worth of Japanese government bonds in June 2022, exceeding the 11.1 trillion yen purchased in November 2002, setting the highest monthly total, and its holdings of Japanese government bonds exceeded 50% of the total: quick database statistics showed that as of June 20, the total market value of long-term Japanese Treasury bills (JGBs) reached 1021.1 trillion yen (about 50.56 trillion yuan), In nominal terms, the position of the Bank of Japan reached 514.9 trillion yen, accounting for 50.4% of the corresponding position. [1]


Figure 1 the monthly purchase of treasury bonds by the Bank of Japan


Proportion of treasury bonds held by major central banks in the world

The widening interest rate gap between Japan and Europe and the United States has made the yen exchange rate depreciate all the way, and the yen has fallen to the lowest level against the dollar in 24 years. If we consider the real effective exchange rate [2], the yen exchange rate has been at the lowest level in 50 years.

According to Gu chaoming, chief economist of Nomura comprehensive research institute, one of the international “rules” of economic policy is that countries with trade surpluses (by definition, countries with savings surpluses) should use these savings to stimulate domestic demand and promote economic growth during the recession.

In addition, countries with trade deficits have insufficient savings, so they believe that it is acceptable to devalue their currencies and use external demand to balance their trade accounts. In the 22 years from the bursting of the foam to 2012, the prime minister, finance minister and deputy finance minister of Japan repeatedly tried to devalue the yen, but because Japan was one of the countries with the largest trade surplus in the world, they failed in the end. When it tried to boost the economy by devaluing the yen during the period of trade surplus, its trading partners naturally opposed Japan’s trade deficit, believing that it would aggravate the already serious global imbalance. Such official statements caused the rapid response of the foreign exchange market to the strengthening of the yen, which made it difficult for the Japanese government to guide the depreciation of the yen in the past 22 years.

However, before the recent round of sharp depreciation of the yen, Japan had a trade deficit for 10 consecutive months, and the depreciation of the yen was natural.

By the end of March, banks and other depository institutions held 11.4% of the total Japanese government bonds, while insurance and pension funds held 23.2%. The holders in the market were basically in the “controllable” category, and external investors accounted for only a small proportion of the Japanese government bond market. In fact, in the initial stage of “super quantitative easing” of “abenomics” ten years ago, the yen also experienced a phased depreciation. The central bank bought a large number of treasury bonds, and the issuance of treasury bonds surged. Overseas hedge funds once bet that the price of Japanese treasury bonds fell sharply, but failed.

The Bank of Japan continues to use the current low interest rate treasury bonds to replace the relatively high interest rate treasury bonds issued in the past. As a result, although the balance of treasury bond issuance has increased, the actual interest paid by the government is decreasing, from 10.8 trillion yen in fiscal year 1998 to 7.0 trillion yen in fiscal year 2006. In 2012, the interest payment of treasury bonds was only 8.0 trillion yen. According to Shirakawa Fangming, the former governor of the Bank of Japan [3], one of the main reasons for the exchange rate between the yen and the US dollar is the change in the proportion of the number of Japanese base currencies. As the Bank of Japan continues to increase the issuance of currencies, these currencies are basically used by enterprises for overseas investment as internal debt guarantee in the Japanese financial system, and have not entered the domestic market of Japan, Therefore, it can be called “no waves” in Japan’s domestic prices and asset prices.

In the long run, it still depends on how far the Federal Reserve and the European central bank can go in the process of “shrinking the table” and “raising interest rates”. For Japan, an economy that also relies heavily on overseas resources and overseas markets, its domestic interest rate and exchange rate policy space has been almost exhausted in the past historical years. Today, let’s sort out the context. The full text is more than 10000 words.


The exchange rate of the yen against the US dollar, nearly 50 years


Effective exchange rate of yen, nearly 50 years


Figure 5 Japanese government debt and shares held by the central bank


Figure 6 number of base currencies and Japan US exchange rate

Is the price of the foam over?

In the three decades of cultivating “Heicheng abandoned houses”, the Japanese economy has created an unsolved mystery of macroeconomics, that is, the coexistence of “three low” and “three high”.

Three lows: low interest rate, low inflation and low growth.

Three highs: high welfare, high currency and high debt.

In order to deal with the serious impact of the bursting of the foam economy, Japan’s “money printing machine” has been rolling on for 25 years. By 2013, Japan’s total base currency had expanded to 2.6 times that of March 1997, accounting for nearly 30% of nominal GDP. In the following decade, under the “abenomics” line, Japan’s M1 balance has reached twice the nominal GDP.

However, according to the calculation of Koo chaoming in his book “resumption” [4], Japan lost a total of 1570 trillion yen in capital value during the “lost 20 years”, which is close to three times the nominal GDP of Japan in 2020. In order to make up for the loss of these capital values, Japan’s money supply may be slightly insufficient. The data provided by Shirakawa Fangming is that from 1996 to 1999, the Bank of Japan eliminated 50 trillion yen of uncollectible bad debts (about $5000 trillion), but when the economy slowed down again from 1997 to 1998 and new bad debts appeared again, its growth rate was the same as that of eliminating old bad debts. By 2002, the total amount of static debt accumulated by Japan’s top six banks (accounting for about half of the entire banking industry) had actually increased to 8% of all bad debts.


Estimation of capital loss in Japan (source: resumption, Gu chaoming)

Koo chaoming claimed that from 1990 to 2005, the Japanese government spent 460 trillion yen on deficit spending, creating a GDP growth of 2000 trillion yen (2-2.5 trillion US dollars, depending on the exchange rate). In other words, 1 yen of spending was exchanged for 4-5 yen of GDP. He believes that this is a very cost-effective deal. Without it, the Japanese government may have fallen into the abyss of depression. After the bursting of the foam, the price loss of personal financial assets in Japan was equal to Japan’s GDP in 1989.

For a company that bought 10billion yen of assets with 1billion yen of its own money and 9billion yen of debt, the bursting of the foam reduced the value of land to 2billion yen, but the debt of that company was still 9billion yen. The foundation of Japanese business – its ability to develop technology and sell products – remains sound. The capital flow is very strong, and the profits are increasing every year.

However, the sharp fall in domestic asset prices caused by the bursting of the foam has opened a big hole in the balance sheet of enterprises. They will transfer the capital flow of the core business to repay the loan as soon as possible. As long as the main business can continue to generate capital flow, the loan can be repaid. And because asset prices will never become negative, as long as enterprises can continue to repay debt, the balance sheet will eventually be repaired. Only then will enterprises return to the profit maximization mode mentioned in economic literature.

Japanese companies have been using more loans than their American or European counterparts in the late 1980s. They borrowed heavily because they enjoyed high growth rates and the prices of assets they bought with loans continued to rise until the foam burst. Any businessman who uses high leverage is very sensitive to the risks that follow. When they see the slightest signs of economic recession or the decline in asset prices, they will act quickly and repay their debts, because this is the most effective self-defense.

Gu chaoming concluded that the synthesis fallacy refers to that when everyone participates, the behavior beneficial to the individual has adverse consequences for the enterprise. The synthetic fallacy arises because if people stop borrowing and start returning funds to the financial system, while others are storing funds or repaying loans, a country’s economy will stagnate. If everyone chooses to deposit or repay the loan, and no one borrows or consumes, the total demand will be reduced because the bank savings have not been lent out.

According to his calculation, the demand of Japanese enterprises decreased by 22% of GDP from 1990 to 2003. In other words, the sharp fall in asset prices reduced the demand of enterprises equivalent to more than 20% of GDP. No matter how strong the economy is, this sharp decline in demand will trigger a recession. According to the 1929 model, the United States lost the national wealth equivalent to a whole year of GNP, and the subsequent deflationary spiral led to a 46% decline in GNP. In view of this, it is not surprising that Japan, which has lost the national wealth equivalent to three years’ GDP, saw its output value decline by more than half. However, Japan’s GDP has basically remained stable.

“It is absolutely a miracle that Japan’s GDP can still maintain its peak during the foam period when the price of commercial real estate has fallen by 87% and the enterprise sector is eager to repay the debt accounting for 6% of the annual GDP.

This is a miracle achieved by government expenditure. “



The 460trillion yen deficit of the Japanese government (source: resumption of trading, Koo chaoming)


Figure 9 Japan’s money supply balance


Comparison of money supply and price trends in Japan


Proportion of money supply in GDP

In the era of turbulence, Shirakawa mentioned a set of data: if the central government and local governments are combined with the social security fund to form a “general government”, the debt balance of Japan’s general government in 2012 was 991.6 trillion yen, which is 209.8% of the nominal GDP. Although it is not easy to accurately compare the financial situation of various countries on an international scale, from the perspective of the GDP proportion of the general total government debt balance, Japan exceeds 123.4% of Italy, and is the country with the most severe financial situation among developed countries. Even after deducting financial assets, Japan’s net debt balance has reached 596.3 trillion yen, accounting for 120.5% of GDP, which is basically the same as Italy. The increase of Japan’s fiscal deficit is due to two reasons: fiscal revenue and expenditure.

In terms of general accounting expenditure, the pension, medical and nursing related social security expenditure brought by aging increased year by year, from 69.3 trillion yen in 1990 to 101 trillion yen in 2009. As the reason for the expansion of the fiscal deficit, the increase of public investment was often cited in the past, but in the past 20 years or so, the situation has changed greatly. Public investment peaked at 34.5 trillion yen in 1996 and fell to 17.7 trillion yen in 2011.

In terms of general accounting tax revenue, it decreased from about 60 trillion yen at the peak of the foam economy to 47.2 trillion yen in 1999. It once recovered to 51 trillion yen in 2007, and then decreased again due to the global financial crisis. The lowest tax revenue in 2009 was only 38.7 trillion yen.

When the central bank provides funds through treasury bonds, it usually has two methods: one is to provide loans with treasury bonds as collateral, and the other is to directly purchase treasury bonds. The Bank of Japan has taken these two approaches at the same time. Bai Chuan pointed out that the biggest concern of the central bank When Purchasing Treasury bonds is that it cannot become an automatic financing channel for the government. In fact, because of this concern, many countries expressly prohibit the central bank from underwriting and subscribing for treasury bonds, that is, buying Treasury bonds in the issuance stage.

Even in the circulation stage, if the central bank actually falls into the situation of having to buy treasury bonds, In essence, it is not much different from the off purchase: “the reason why the central bank can provide funds without restrictions is not so much because the central bank itself has such capacity, but rather because people believe in the commitment made by the government to ensure future financial sustainability. Monetary stability ultimately depends on the sustainability of government finance”.


Ratio of Japanese government debt to GDP

However, domestic prices in Japan have been depressed for a long time. Since 1992, Japan’s CPI has never exceeded 4%. Japanese prices began to decline after 1998. If we take March 1997 as the benchmark to observe the change trend of base currency and prices in March every year, we can find that by March 2013, the consumer price index fell by 2.9%, while the balance of base currency increased by 166% in the same period. Shirakawa Fangming believes that under the condition of zero interest rate, even if the central bank supplies a large amount of base money, the opportunity cost of holding central bank money is almost zero, so the increased part meets the demand for holding money intact. In other words, there is no excess demand for the base currency that is considered to cause price increases.

Gu chaoming believed that since the currency multiplier was negative during the economic recession, the central bank could not cause inflation no matter how many bonds it bought. If speculators try to shake the foundation of the Treasury bond market through targeted selling, the Bank of Japan can simply actively buy on a scale sufficient to eliminate short sellers. Once the speculators are eliminated and the market stabilizes, the central bank can gradually sell the purchased bonds to Japanese institutional investors.

It is precisely because the behavior of Japanese enterprises, rather than households, has changed that public debt has grown to its current size. All periods when companies increase their savings coincide with the economic recession. In other words, although the interest rate is zero, the decision of companies to increase savings has always been the direct cause of Japan’s fiscal deficit. This led to a widening gap in private sector deflation and triggered an economic recession. The reason for this behavior of enterprises is that from 1990 to 2005, they were busy repairing the balance sheets damaged in the collapse of the foam.

Since 2008, they began to work hard to protect themselves from the global financial and economic crisis caused by the bankruptcy of Lehman Brothers. In these two cases, the first is the growth of enterprise savings. Then there is the economic recession, and the fiscal deficit increases. When the financial problem originates from the excess savings of the enterprise sector, it is meaningless to judge the sustainability of public finance by studying the savings of the household sector.

If a government’s fiscal deficit reaches 6% of GDP and private sector savings account for 12% of GDP, the economy will fall into a deflationary spiral, and GDP will decrease at a rate of 6% per year, unless this difference can be made up by exports (i.e. foreign borrowing).

In this case, the fiscal deficit accounting for 6% of GDP is actually too small to stabilize the economy, but it will usually prompt economists and the media to call for reducing the fiscal deficit, as has happened many times in Japan. However, if the annual savings of the private sector exceed 6% of GDP, the economy will be unstable unless the government has a larger fiscal deficit. In the recession of the balance sheet, the only option is to use new current asset savings to slowly repair the excessive debt on the balance sheet. The greater the damage to the balance sheet, the longer it takes to clean it up. For example, if a company has 10billion yen of debt in its balance sheet and the cash flow that can be used to repay is 2billion yen a year, the debt repair process will take five years.

“Enterprises and households strive to reduce excess debt. No matter how many times the Central Bank cuts interest rates, they are not interested in borrowing.” this is what happened in Japan. R. Taggart Murphy pointed out in “Japan and its historical shackles” [5] that the proportion of Japan’s debt in GDP has reached the highest level of developed countries. What is more worrying is that Japan’s debt is equivalent to 93% of total household assets, while the United States accounts for only 41%.

In other words, in today’s Japan, almost all the savings of Japanese households are needed to pay off all debts. In addition, Japan’s impending population crisis means that the proportion of Japan’s working age population to retirees will fall below the crucial three to one ratio.

“The mistake of the Japanese authorities lies in their confidence. They believe that since they can control the rise of mania, they can also control the consequences of mania – to achieve a” soft landing “, not a crash. However, the cost of rescuing the financial system and preventing the great depression is greater than anyone expected. “.


Trend of personal consumption loan balance in Japan


Trend of CPI growth in Japan

The dilemma of “Japan Global Holdings Limited”

In 2021, Japan’s GDP was $4934.715 billion, while its GNP was $5250.69 billion. In dollar terms, Japan’s per capita GDP is still equivalent to the level of 1994. From this perspective, it is not too much to say “three decades lost”. Behind this long-term horizontal trend, the main reason is the population problem:

Japan’s labor force and employment have stopped growing since 1997. The total population of Japan began to decline slowly after reaching the peak of 128million people in 2008, and fell to 127million people in 2016, with an average annual decline of 0.1% after 2009. On the other hand, the working age population, that is, the total population aged 15-64, fell from 87.26 million at the peak in 1995 to 80.17 million in 2012, and fell to 76.56 million in 2016, a decrease of 12% in less than 20 years. At first, the decline rate of the working age population was not fast, but then gradually showed an accelerating trend, especially after 2012, about 1million people were reduced every year, with an average annual decline of more than 1%.

Japan’s demographic dividend period ended as early as the early 1990s. Corresponding to the decline in the working age population, the proportion of the elderly over 65 years old has been rising. At the end of Japan’s rapid growth, it was 10.2% in 1970, 17.3% in 1990, 25.5% in 2000 and 40.4% in 2013. According to the prediction of the National Institute of social security and population, this figure will rise to 49.9% by 2022 and 71.8% by 2048. This rapid aging phenomenon is unprecedented in the history of world economic development.

Shirakawa Fangming believes that from a long time span, the biggest factor determining the GDP growth rate is the number of working age population and the improvement of labor productivity. Therefore, although every worker is working hard, due to the “headwind” phenomenon of “population reduction of working age”, Japan’s economy has shown low-speed GDP growth since 2000. Even if prices rise and the nominal GDP growth rate rises, the real income level and living standard will not be improved. The fundamental problem facing the Japanese economy is not the slow decline in prices, but how to achieve sustainable growth in per capita real GDP in the process of the current reduction in the working age population.


Japan’s GDP in recent 30 years (USD)


Figure16 trend of labor force in Japan in recent 50 years

In the book population reversal [6], Goodhart and Pradhan analyzed the special situation of Japan. They believed that in the face of adverse changes in the domestic labor force, with abundant labor in other parts of the world, Japan sought mitigation measures abroad and introduced a global abundant labor force. Although the labor force decreases by 1% every year, the total output still grows at a rate of about 1% every year, while Japan’s per capita output can grow at an average rate of 2%.


Figure17 Japan’s GDP per worker is much higher than that of other countries. Source: International Monetary Fund, originally from the population reversal

By the beginning of the 21st century, more than 25% of the total investment in Japanese factories and equipment had been spent abroad. By 2004, about one sixth of the production of Japanese companies was carried out abroad. From 1996 to 2012, Japanese foreign direct investment denominated in yen increased by three times, while from 1985 to 2013, compared with investment in domestic companies, investment in foreign subsidiaries increased by 10 times. In 1987, the Japanese company had about 4000 overseas subsidiaries. By 1998, this number had risen rapidly to about 12600, reaching 25000 in the survey of the Ministry of economy, trade and industry of Japan in 2018. In 1996, overseas subsidiaries employed 2.3 million people. In 2016, the figure was 5.6 million. Nearly 40% of the output of Japanese companies with overseas businesses came from overseas, while the overseas production ratio (the ratio of the output of overseas subsidiaries of manufacturing industry to Japan’s domestic output) was 25% in 2017. In the mid-1990s, Japan’s foreign direct investment increased at a rate of 7%, which coincided with the sharp decline in the growth rate of domestic investment (kangand Piao, 2015).

In contrast, from 1990 to 2002, Japan’s domestic investment fell by an average of 4%, while the investment of non manufacturing enterprises fell by about 2%. The overseas capital investment ratio (the ratio of capital investment of foreign subsidiaries to that of domestic companies) was 3% in 1985, quadrupled to 12% in 1997 and reached 30% in 2013.

However, this huge stock of overseas investment is based on the framework of Japan US security system and the world economic and political order dominated by the United States. To put it bluntly, Japan’s overseas investment was realized under the protection of the United States. In the summary of R. Taggart Murphy, in Japan, the impact is not exogenous. It was deliberately used. The impact stems from the consensus of all important power holders in Japan, that is, they believe that the key to Japan’s “miraculous” recovery from the destruction of the war is that it has mastered manufacturing technology and commercialized it. Japan has been committed to maintaining its leading position in almost all key industrial technology fields.

By the mid-1980s, the United States seemed to have fallen into a cycle of debt, dependence and recession, and it was difficult to get rid of it. But at the same time, the United States remains crucial to Japan’s political and economic order. It provides a security umbrella. Without it, Japan will have to face again the existential problem it has been trying to avoid since 1945: how to defend itself in a dangerous world and restrain a powerful military force that is sufficient to undertake the task of defense.

The United States not only helps Japan ensure security, but also provides a political framework to enable the real global economy to operate. Under this framework, Japan can establish and control its dominant position. Key elements of this framework include a global settlement and reserve currency in the form of dollars, as well as a global open trading system.

For the Japanese authorities at that time, the security umbrella or political framework provided by the United States for the global economy seemed irreplaceable. They believed that the important policies of the global economy would be decided by the two super economic powers of Japan and the United States. The United States will continue to provide security and global currency, as well as various commodities. The United States is still good at innovation, while Japan can commercialize technology to consolidate its core competitiveness. Japan will set up a certain number of factories in the United States to make the employment level meet the political requirements of the United States. Japan will also leave several major manufacturing industries to the United States, such as the commercial aircraft industry, which has extensive overlap with the defense industry, but Japanese suppliers will provide most of the added value in these areas. Tokyo and Washington will work together to manage the global monetary and trade framework, while Washington will continue to play the role of global police and receive extensive financial support from Japan.

However, the United States does not care about Japan at all. The national security agency of the United States is not a “mother”, and has no maternal or other feelings for Japan. It only regards Japan as another military dependency, and its expectation is to be obedient and not to cause trouble. American elites only regard Japan as a military asset and a tool to realize their dream. This dream is that the United States can realize a situation comparable to that it has achieved in North America in history in a certain way: a world in which the United States does not have to face potential threats and challenges.


Japan’s direct foreign investment

Based on Japan’s large amount of overseas investment, Shirakawa Fangming believes that the important indicator is not the conceptual per capita GDP, but the per capita GNI (gross national income or consumption). GNI is adjusted on the basis of GDP in two aspects. On the one hand, it takes into account the income of Japanese residents from overseas. Looking forward to the future, as Japan’s domestic market shrinks and its overseas market continues to expand, Japan’s income from foreign direct investment will continue to increase. On the other hand, it is the increase or decrease of real purchasing power with the change of terms of trade.

Yukio Noguchi [7] believes that the trend of contemporary society is to shift from “vertical division of labor” to “horizontal division of labor”. The characteristic of the “vertical integration” method is that all processes of a project from the beginning to the end are carried out in one enterprise. The opposite is “horizontal division of labor”. The characteristic of horizontal division of labor is that all the work of a project is not completed in one enterprise, but multiple enterprises are responsible for different processes, but on the whole, it is like an enterprise to carry out production activities.

He also pointed out that the problem of non-performing creditor’s rights can basically be identified as the problem of financial institutions themselves. From the perspective of the whole Japanese economy, what is more important is the change of the world economic structure. This is caused by the IT revolution and the industrial development of emerging countries and regions, and it is a change in supply. Therefore, this is a problem that cannot be solved by monetary policy. If the loose monetary policy is implemented, the yen will depreciate. In the process of depreciation of the yen, prices will rise, and then the interests of enterprises will increase, and the share price will rise accordingly. However, this is only a temporary phenomenon. It is useless for the Japanese government to place its hopes on exchange rate and monetary policy rather than industrial and innovative reform.

Shirakawa Fangming sighed that the work of formulating monetary policy is like driving a car whose windscreen is shrouded in fog, speedometer fails, and throttle and brake operation procedures are unfamiliar! Moreover, the policy will not be effective in just oneortwo years, sometimes it will take five years, ten years or even longer. In retrospect, he believed that from the perspective of the policies of the central bank and the supervision and regulation departments, the key to the problem was the significant increase in corporate debt, that is, credit inflation brought turbulence to the financial system and hindered sustainable economic growth. He also proposed that the thinking paradigm of reducing current account surplus by expanding domestic demand has the greatest impact on the long-term loose monetary policy. The increase in imports brought about by the expansion of domestic demand can indeed reduce the current account surplus. However, even if the economy has achieved full employment, it is difficult to expect a significant reduction in the current account surplus.

Shirakawa summed up three lessons:

The first lesson is that once the foam collapses, the subsequent long-term economic downturn is inevitable.

The second lesson is the importance of maintaining the stability of the financial system. After the collapse of the foam, there was dissatisfaction with the economic growth trend, which was inevitable. If there were problems in the stability of the financial system, the economy would immediately fall into great chaos beyond this dissatisfaction threshold, which would have a serious negative impact not only on the economy, but also on the whole society.

The third lesson is that if the central bank wants to accurately grasp the fundamental problems facing its own economy, it must also strive to explain or explain to the outside world to win more understanding and support. The failure of a country’s economic operation often does not stem from the wrong judgment of short-term prosperity prediction, but from the wrong judgment of the fundamental problems faced by the economy.

Is economic growth sustainable? Shirakawa Fangming believes that this depends on two imbalances. The first is the imbalance between departments. To illustrate the importance of this, we need to understand the concept of supply-demand gap. The gap between supply and demand is the gap between total demand and total supply, but this concept eliminates the imbalance between the commodity and service sectors. In many cases, imbalances occur between different sectors, such as consumer and investment goods, housing and non housing expenditures, trade and non trade goods, as well as borrowers and lenders. The second is the imbalance between the present and the future. In the period of foam economy, if we spend a lot based on the high economic growth expectation in the future, we have to cut a lot of spending after the collapse of foam. It is the existence of credit that makes excessive expenditure possible, and operating credit is the role of finance.

First, we should not continue to treat price stability and the stability of the financial system differently as in the past. Relying solely on the independent and accountable monetary policy operation mechanism established under the goal of price stability can not guarantee macroeconomic stability.

Second, the macroeconomic stability of countries is increasingly affected by the stability of the world economy. It can be expected that the financial environment of various countries is gradually developing in the direction jointly decided by all central banks around the world. The current central bank governance mechanism is only designed to promote local optimization with its own country as the core. If we want to solve this problem in a positive way, it theoretically requires close policy coordination between central banks, but it is difficult to achieve.

Third, in order to stabilize the value of money, it is essential to maintain trust in fiscal sustainability. However, taking into account environmental changes such as the decline of potential economic growth rate, the intensification of the aging trend of young children and the serious differentiation of social strata, it is difficult to form the necessary consensus to achieve fiscal balance. If confidence in fiscal sustainability declines, it will eventually undermine the stability of the value of the currency. If we do not actively take countermeasures in this regard, the operation concept of monetary policy based on independence and accountability design is prone to the phenomenon that the government relies too much on the central bank.

“Three Excesses” refers to excess debt, excess equipment and excess employment. Takashi Koyama believes in “three decades of turmoil in Japan: Heisei economy 1989-2019” [8] that when equipment and employment are in a surplus state, despite the economic upturn, it is still difficult for enterprises to increase equipment investment and improve employment. This glued state lasted for a long time, and the impact of the boom was weakened, so the economy went into a downturn. By the mid-1990s, the economic friction between Japan and the United States gradually subsided. The reason for the subside was that Japan’s idea of expanding exports with overwhelming competitiveness could not be established, and the other side also lost its target.

Takashi Koyama pointed out that the establishment of an EU type community in Asia is almost a dream. The European Union has promoted the concept of a community and even adopted a common currency. The reason why all countries in Europe have broken their borders is that they all have a strong desire not to let war break out again. Asia lacks the basic conditions needed to have a common currency. In economics, there is “the discussion most suitable for the currency circle”. It is generally believed that the advantages of common currency cannot be brought into play without meeting the conditions of similar economic structures and free movement of labor. There are many countries and regions in Asia, which do not meet the conditions most suitable for the currency circle.

Yoshio Noguchi [9] believes that no matter what measures are taken, economic growth cannot be promoted without the emergence of new industries. Many developed countries are relying on highly developed service industries to develop rapidly, while Japan has long lagged behind. The Japanese government should completely abandon the economic growth strategy of revitalizing the manufacturing industry and instead improve the production efficiency of the service industry. Japan’s manufacturing industry should separate its production departments and entrust them to enterprises in emerging countries to specialize in core areas such as product development and design. In the general environment of global division of labor, accelerate the promotion of “service industrialization of manufacturing industry”. Such views as completely abandoning the revitalization of manufacturing industry show that the understanding of the Japanese ruling class still depends on the US dollar division of labor system

Economic experts believe that in the process of moving towards an aging society in the future, it is necessary to rationalize social security, that is, to reduce expenditure, but most people demand “to enrich social security”. This huge cognitive difference also puts Japan’s economy and society in trouble in the future. Perhaps, as Takashi Komeito said, Japanese people and politicians believe too much that “the economy can be controlled by policy”.

But on the other hand, we should probably also listen to Andrew Gordon’s final view in modern Japanese history [10]:

Japan can be said to be at the forefront of post disaster and post-modern situations. The lessons it has learned are not only negative to the world. If calculated by the unit output of carbon dioxide in GDP, Japan is the cleanest and most efficient country in the world; The crime rate in Japan remains at a low level as before; Generally speaking, urban public security is relatively good; Public transportation is efficient and convenient; The capital construction of the city is booming; In 2000, Japan was the first country in the world to implement a national long-term care system for the elderly funded by the government. By 2013, only a few countries could implement such a policy; Its population is the oldest in the world. Therefore, even though Japan is regarded as a declining society, there are still many places in the world to learn from it. Maybe we should rethink how to define “success” and its elements for countries, communities and individuals.

Perhaps, as Loughborough pointed out in his book “creating a new Japan” [11], as long as the United States can still control Japan in essence to ensure the “cheap” opening of the Asian market to the United States, Japan’s national debt dilemma is the cost of its continued existence as the westernmost border of the trans Pacific Empire, just like the era before World War II described in Takahashi is Ching Chuan [12], As the outpost of the British Empire in East Asia, Japan enjoyed the dividends of order. When the order collapsed, it fell into a loss and evaded its historical responsibility with the help of the United States.

To finally solve its own problems, I think Taggart Murphy’s suggestion is right: Japan should return to the perspective of East Asian civilization and think about its own existence. However, we all know that this is not easy for Japan to talk about. Apart from military and political factors, we only talk about economic issues. First of all, we need to raise taxes. Without raising taxes, Japan cannot get rid of its fiscal deficit, nor can it get rid of the dollar system. In addition, Murphy also suggested that if it was not for absolute spending cuts, at least the growth rate of spending should be reduced. To ensure that the economic recovery is in the right direction, Japan must carry out commercial reform, promote social transformation, enhance vitality without undermining unity, establish a government that can lead Japan out of difficulties, and finally maintain healthy relations with major powers. This is an arduous task.

In the final analysis, “the real problem of Japan is that it has never been able to face its past.”


[1] The statistics here refer to “long-term treasury bonds” with a term of more than two years, excluding short-term treasury bonds.

[2] In the specific empirical process, people usually divide the effective exchange rate into nominal effective exchange rate and real effective exchange rate. The nominal effective exchange rate of a country is equal to the weighted average of the bilateral nominal exchange rates between its currency and the currencies of all trading partners. If the impact of inflation on the purchasing power of currencies of all countries is excluded, the real effective exchange rate can be obtained. The real effective exchange rate not only considers the relative changes of all bilateral nominal exchange rates, but also excludes the impact of inflation on the change of the value of the currency itself, which can comprehensively reflect the external value and relative purchasing power of the domestic currency.

[3] Times of turbulence, CITIC press, published in October 2021.

[4] Reply: an economist’s alternative interpretation of macro economy, CITIC press, June 2020

[5] Japan and its historical shackles, CITIC press, February 2021

[6] Population reversal: aging, inequality and inflation, CITIC press, August 2021

[7] Post war Japanese Economic History: 70 years from noise to silence, democracy and construction press, published in April 2018

[8] Three decades of Japanese agitation: Heisei economy 1989-2019, Zhejiang People’s publishing house, published in April 2022

[9] Lost three decades: the economic history of Heisei Japan, China Machine Press, April 2022

[10] Modern Japanese History: from Tokugawa era to the 21st century, CITIC press, November 2017

[11] Creating a new Japan: the history of U.S. – Japan relations since 1853, Shanxi people’s publishing house, published in June 2021

[12] Keynes in Japan – Takahashi is the biography of the Qing Dynasty, China Overseas Chinese press, published in January 2022

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