Japs the poor Chaps!

Japan has been in the news for a long time. More recently, the flurry of reforms initiated under the Abeconomics' three arrows of more fiscal stimulus, monetary easing and structural reforms have been some of the positives. I have been following the developments.

So when one thinks about it, what are the key issues that Japan is facing?

1. A high level of public debt at almost 200 % of the GDP. This is higher even compared to the countries like Greece and Italy - the ones that are coming out of severe recession.

2. In-spite of the low level of interest rates in Japan, the country faces the risk of a deflationary spiral.

3. A depreciating yen. It would be a good sign for the export sector, but with lesser and lesser credit availability the output has been constrained (GDP growth at 1.2%) and hence the profits in terms of higher volumes is missing. 

So what are the reasons? How could the Japanese discipline and management go so horribly wrong? Is it really their fault? Perhaps no.

When one looks at the Japanese population it is hard to ignore that a bulge is being created in the 65+ age group. This has had two adverse consequences for them. 

1. An increasing level of savings by households and hence a decline in the credit supply to the corporate sector.

2. A reduction in the workforce and hence the productive output. 

What Japan lacks right now is not supply but demand: Japan's consumers and investors just aren't spending enough to keep the country's shops and factories busy. The excessive saving and the lack of savings is the problem. As Keynes said, when desired savings consistently exceed willing investment, the result is a permanent recession. However, the situation is not so bad for Japan. 

Lower interest rates and more fiscal stimulus in terms of lower taxes (Aabe recently delayed the tax increases much to the dismay of the BoJ Governor) and more government spending has not really encouraged the Japanese to spend more. Moreover, with the high level of public debt (as highlighted earlier), delaying higher taxes or increasing the spending might just give them the final push towards recession. 

Just why is Abe focussing so hard on getting Japan re-inflated and urging the BoJ to print more money while they focus on structural reforms becomes apparent. This is possibly the only option left open to them.

Printing more money to push people to demand more and achieve moderate inflation and a stable yen in the process is what they should be aiming at. Calling for a re-election and the possible disagreements between Abe and the BoJ do not give the right signal though.

The possible reasons for Japan shying away from printing more money may be their scepticism and memories of the Asian crisis. They believe that loose monetary policy created that bubble - which may be true - and that the bursting of the bubble caused the slump of the 1990s - which may also be true. And so they are afraid to increase the money supply now for fear of repeating the experience.