Japan Is The Case Against Quantitative Easing

Back in the middle of March the land of the rising sun was hit by an extraordinary natural disaster which was followed by elements of a man-made one. Earthquake,tsunami, and nuclear problems with a release of radioactivity were inflicted on her. Fortunately so far the nuclear problems do not seem to be having major health effects but of course this is a matter that needs to be judged over more than a 6 month time period. However Japan also had a tsunami of economic advice which seemed ill conceived to me at the time as I wrote below.

The news media has had various forecasts over the last 48 hours of the scale of the crisis and many of these also try to tell us the scale of this catastrophe and come with a promise of a recovery which is fast. I will leave you with one thought, exactly how do they know that?

As time has passed it has become clear that they did not know that. Indeed some of the more recent data that has come out of Japan is troubling.

Retail Sales

These fell in August for the second month in a row and were 1.7% lower on a monthly basis and 2.6% lower than a year before. The major factors pushing these numbers lower were a fall in machinery and appliances and also a fall in car sales. Whilst these are inconsistent with the recovery pattern suggested above I often argue that retail sales numbers are unreliable and that it is also true when they agree with me.

Accordingly I have also taken a look at Japan’s Family Income and Expenditure Survey which was released today. It has two categories which are divided into two or more person households and workers households and I feel that the results are revealing.

Expenditures for Two-or-more-person Households

The average of monthly consumption expenditures per household for August 2011 was 282,008 yen, down 3.9% in nominal terms and down 4.1% in real terms from the previous year.

Income and Expenditures for Workers’ Households

The average of monthly income per household stood at 463,760 yen, down 1.5% in nominal terms and down 1.7% in real terms from the previous year.

The average of consumption expenditures was 309,078 yen, down 4.5% in nominal terms and down 4.7% in real terms from the previous year.


These numbers make the case that Japan’s recovery from the disaster of mid-March is struggling. If we look at workers expenditure it may well turn out to be very significant that they are reducing their spending faster than their income is falling and I will monitor this going forwards. It is also significant that their income is falling too. In many ways these numbers look worse than the retail sales ones.

There is also a chart which does not load so I will give you the link here.http://www.stat.go.jp/english/data/kakei/156.htm

The reason why I have done that is that the chart of consumption expenditure shows us two things. Firstly there was a post-tsunami recovery but it looks like this has now ended and numbers are dipping again. Secondly if you look at the whole chart it exhibits a theme of Japanese economic life which can be la belled as “insufficient consumption”. We see bursts of recovery but then like so often in the past we also see drops and we are left with the same feeling and pattern that have become familiar over the two “lost decades”. Please remember this chart next time you read an article claiming that the UK or US is the next Japan as there is a clear difference in behaviours in relation to consumption.

The path for unemployment and employment is worrying too

I can start this section in a positive manner by telling you that the Japanese unemployment rate fell to 4.3% in August from 4.7% the month before. But hopes that she may be returning to her previous policy of full employment ( in my time there people were employed counting the numbers crossing bridges and lifts in department stores had someone to press the buttons for you). However the underlying figures show a trend which has been evident in numbers for the UK and US at times in the credit crunch and that is that employment fell too. It fell by 290,000 leaving the level of employment at 59.67 million and this in effect uses up some 64% of the fall in unemployment. We are seeing a familiar pattern of people giving up looking for work here as well as falls in employment.

As ever hopes for recovery rely on exports

Whilst the Japanese manufacturing sector is resilient there are headwinds here too. One impact of post-tsunami life and the closure of some nuclear reactors is power shortages which will limit production. Another is that the Japanese yen remains strong as a currency with it being at 76.81 not far from its all-time high and against the Euro it has strengthened to 103 which is quite a rally from the 169 of July 2008. With the world economy overall slowing there are plainly issues as to how much Japan can export her way out of her problems particularly as virtually everyone plans for export-led growth these days!

One should not perhaps get too tied up in worrying about problems in an increasingly sclerotic Europe and United States but unfortunately problems seem to be building too in what were booming areas of the world. An example of this is today’s purchasing managers index for manufacturing in China which at 49.9 shows a decline for the third month in a row. More important than a very marginal decline on an index with a benchmark of 50 is the fact that the boom is slowing and may have ended.

Industrial Production

This rose in August by 0.8% on a seasonally adjusted basis compared with the month before and it has risen consistently since the tsunami. However if we look at the pre-tsunami level from February of 96.4 with August’s 93.7 we can see that there is still some way to go.

Also if you wish to look at Japan’s recovery from the credit crunch you might wish to compare both numbers with the benchmark of 100 from 2005. Yes industrial output is still a fair way short of what it was then.

Problems with her national debt

Japan has been able to maintain and support a national debt relatively far in excess of the size that anyone else has managed. In terms of gross national debt it is approximately 230% of her Gross Domestic Product or economic output. Her response to the tsunami of a 19 trillion stimulus package will not help with this particularly as the proposed tax package is some 10 trillion Yen smaller.

Here we hit on another feature where Japanese economic life is different as due to her tendency to save she has been able to support an enormous public debt but as the numbers get ever larger even she may begin to struggle. Financial markets tend to be a poor guide here as the Japanese 10-year bond yield of just over 1% gives us no clue to this at all to this risk and if anything tells us the reverse! But we know that when they do respond they move very quickly and give no time for a response in the unstable era in which we now live. In statistical terms standard deviations have risen substantially in the credit crunch era and if I may return to a past occupation out of the money options and warrants which probability theory has in my opinion usually underpriced is way off the mark now.

But can Japan raise taxes?

This debate has existed before on this blog as the International Monetary Fund suggested that she should raise consumption taxes to help with her fiscal deficit of 10.3% of GDP that is only expected to fall to 9.1% in 2012. I felt that this would worsen her consumption problem and could be a mistake and the figures above may indicate consumption falling ahead of expected tax increases.

However that is not my main point which is to say that like Germany and Greece who I have analysed over the past two days any solution for Japan comes with problems and quandaries. How many more of these will we find?


One should not look at Japan without considering her persistent disinflation problem ( prices consistently falling). It is still there I am afraid as even the commodity and oil price boom that has passed over the world has only led the Japanese consumer price index to rise to 0.2% in August to give an index level of 99.9. For a moment I thought that she might have achieved the holy grail of zero inflation but the index was rebased at 100 in 2010 and there have been many relative price changes which tells us that there is no holy grail to be found here.

Cries rise for more Quantitative Easing

I notice that Martin Wolf is calling for more Quantitative Easing in the UK in the Financial Times. I discussed my views on this on Tuesday where I argued that what we really need in the UK is something that Japan never really tried ( the loss of face culture makes it more difficult to admit failure) and that is genuine bank reform.

Nowhere has tried QE more frequently than Japan and it is having another go right now. As it is not prone to inflation then Japan is the country where in many ways QE should work but it has not. Although she has a different issue which is why should a programme where the Bank of Japan buys her debt off her own population work when they do not tend to consume? So everywhere we look we see that QE has record of failure but like a line from a song on a scratched record it keeps being played.

Shaun Richards is a freelance economist who writes the Notayesmanseconomics blog at Mindful Money. He is also a columnist for Benzinga

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