By KT Tan
In 1525, Nicholas Copernicus, the brilliant mathematician and astronomer, was not only the first to propose that the earth revolves around the sun, he also gave the prescient warning that “Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity.”
The Weimar Republic’s economic collapse in 1923 was a testament to that warning, as it experienced a runaway-hyperinflation through unbridled-printing of trillion of marks, 24/7, to pay for war reparations, after Germany’s defeat in the First World War. As a result, though the price of gold in 1919 was only 170 marks an oz, by November 1923 it had soared exponentially to 87 trillion marks per oz.
According to George Santayana, the Spanish philosopher, “Those who do not remember the past are condemned to repeat it.”
In 2006, before the US housing crashed, the Federal Reserve Bank’s (FED) balance sheet was about US$800 billion. Today, it has crossed the Rubicon to over US$4.4 trillion after 3 Quantitative Easings (QEs), printing US$85 billion a month, before a tapering was announced on 19 June 2013, by Chairman Ben Bernanke, ‘contingent upon continued positive economic data.’
But the FED managed to keep ‘price inflation’ low and the US dollar index high today, even though for over six years from 2008, the FED bought US$4.5 trillions’ worth of mortgage-backed securities and Treasury bonds. In September 2013, the six largest US banks’ assets increased by 37 per cent. The United States’ national debt is now US$19 trillion.
Analysts mused that all the QE monies, which the FED used to purchase Mortgage Backed Securities and Treasury bonds, could have gone back to the FED to earn interests and were not in circulation (ie no increase in money supply).
Hundreds of tons of paper gold (ETFs) were sold, via the Globex system, a computerized trading system used for derivatives, currency and futures contracts, causing the price of gold to swoon from its historic high of US$1,900 an oz in 2011 and the US dollar index to rise.
But this strategy is tenuous as the Dow has plunged by over 1,000 points, since the start of the year, and precious metal prices are rising from its lows in 2015.
Abenomics “refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. Abenomics is based upon “three arrows” of fiscal stimulus, monetary easing and structural reforms”.
Japan resorted to QEs under Abenomics and the BoJ purchased 7 trillion yen per month of Japanese government bonds, equivalent to about US$65 billion a month after Abe came into office in Dec 2012, ostensibly, to raise the inflation rate to 2%.
According to Forbes, “The US has roughly 2.5 times more people than Japan. Based on this multiplier, the Japanese QE program equates to US$162.5 billion, or 91% larger than the Fed’s program at its height.
But, according to IMF estimates, the US GDP is 3.3 times larger than Japan. Based on that multiplier, Japanese QE equates to US$214.5 billion per month, or 152% larger.
Professor Masanaga Kumakura wrote: “Despite more than 300 trillion yen (about US$ 2.5 trillion) of Japanese government bonds, as part of its quantitative and qualitative monetary easing (QQE), not only has Japan’s deflation been quantitatively minuscule but much of this deflation is a statistical illusion“.
Japan has gone through two recessions since 2012 and the Nikkei fell to below 15,000 yen on February 12, from a high of 20,000 yen in June last year. Japan’s debt to GDP has also soared to 246%, the highest in the developed world.
This begs the question: “Is the negative interest rate policy, announced by BoJ Governor, Haruhiko Kuroda, on 29 January, a stealth QE and another desperate attempt to weaken the yen to achieve a fabled 2% inflation in Japan?” The jury is still out.
Definition of Inflation
The devil is in the details on how ‘Inflation’ is defined. According to conventional wisdom, the definition includes ‘Core Inflation’ and ‘Headline Inflation’. But these are only ‘Price Inflations’, which are symptomatic of Inflation, which is correctly defined as ‘a general increase in the money supply’.
In Japan’s moribund economy, the symptoms of ‘price deflation’, evidenced by the falling prices of big-ticket items like houses, furniture, cars, refrigerators and so on, could be due to Japan’s demographics as Japan is a Super Aging Society, with a Total Fertility Rate (TFR) of only 1.4, and folks over 50 years of age have long-stopped buying these big-ticket items, exacerbating the lack of aggregate-demand.
Statistically, with a TFR of only 1.4 against the replacement rate of 2.1, Japan’s population is slated to fall by one-third to about 85 million in the next 5 decades, if the current demographic trend continues unabated.
And furthermore, the ‘price deflation’ we see today in commodity prices like oil, copper, iron ore, nickel, zinc, rare earths, and so on, could be due to a slow down in major economies like China, by far the largest consumer of commodities in the world. China’s GDP growth dropped to 6.9% in 2015.
In the case of lower oil prices, analysts say it is the result of a predatory pricing-war to hurt the shale-oil competition in the United States and to punish Iran and Russia, whose economies depend largely on the fortunes of oil and gas prices. A glut of Iranian oil may also depress oil prices further, despite OPEC’s proposed plans to reduce production. This scenario could change dramatically if a land war erupts in Syria.
But, paradoxically, in the precious metal markets in Japan, there is no ‘price deflation’ at all, as gold and silver prices have soared in yen terms since January.
Harry Dent of Economy & Markets wrote “And through this massive Abenomics program, GDP has only grown 1% over 2.25 years, or about 0.4% a year. This makes Europe look strong!”
He added “Make no mistake: Japan’s efforts have been an abysmal failure. They’re mortgaging their future with QE and rising debt as their population and workforce age predictably, even decades into the future. That’s the power of demographics, and they just don’t see it. They think that as long as they get inflation up to 2% – which they haven’t even come close to – consumers will spend more. How little could you understand about your economy?”
It looks like Copernicus’ 1525 warning has been vindicated once again. More importantly, the intriguing question is this: “Where did all the 300 trillions of QE yen go?”
A Zero Hedge analyst asked ominously: “Is Japan actively preparing for war, once the next and final pillar from underneath its economic house of cards – a house of cards that has only gotten worse when Japan followed the US FED into terminal currency devaluation, courtesy of the BoJ’s money printer – is finally pulled?”
Article 9 of Japan’s Constitution states: “Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes. To accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained. The right of belligerency of the state will not be recognized.”
In 1976, Japan ratified the international Nuclear Non-Proliferation Treaty, which bans the development of nuclear weapons, but “according to a senior Japanese government official, Japan has been able to build nuclear weapons ever since it launched a plutonium breeder reactor and a uranium enrichment plant 30 years ago”. Today, Japan has the world’s largest stockpile of plutonium in peace-time.
To add fuel to the fire, last year, Abe’s cabinet has reinterpreted Article 9 of the Japan’s Constitution, though it “prohibits collective self-defense and collective security operations authorized by the UN Security Council” and “This prohibition also means that Japan cannot provide rear area support to the armed forces of other countries engaged in armed conflict”. All these prohibitions are history.
In addition, under Abe’s tutelage, the Diet has also enacted a new security legislation, never mind that a overwhelming majority of Japanese constitutional lawyers considered both moves to be unconstitutional.
Tens of thousands of Japanese took to the streets to protest against the new security policy and Abe’s approval rating fell to its lowest, at 34%, in September last year.
In the same piece, the author explained that “Under Article 96 of the Constitution, revisions to the Constitution can be proposed by two-thirds of the members of each chamber of the Diet and must be approved by a majority of people in a referendum. At present, the LDP and its coalition partner, the Komeito party, have a two-thirds majority in the Lower House and a majority in the House of Councilors.”
But undeterred and with nothing to lose, Abe, who also showed a contemptuous disregard for regional sensitivities by visiting the Yasukuni shrine in 2014, where 14 Class A war criminals were buried, has upped the ante and is now calling for Article 9 of the Japanese Constitution to be amended.
This, ostensibly, is to counter China’s rise, alleged assertiveness and reclamation of islands in the South China Sea, never mind the selective-amnesia that the Nansha (Spratly) and Xisha (Paracel) islands were already returned to China by Japan in the Sino-Japanese Treaty_of_Peace, signed on April 28 1952, under the terms of the Potsdam_Declaration of 1945. The latter was signed by the United States, Britain and the Soviet Union, which referred to the Cairo_Declaration, which was signed by the United States, Britain and China in 1943.
Let us hope that, in the likely event of a referendum in the summer, all the peace-loving people in Japan have the good sense of history to reject Abe’s plans to amend Article 9 of the Constitution, as this may pave the way for a resurgence in Japanese militarism, a conundrum which could end badly for the Japanese people.
*KT Tan is an independent researcher on the South China Sea disputes and on other Asian affairs. He is based in Singapore and has contributed articles to the Eurasia Review and to the S. Rajaratnam School of International Studies, RSIS.