Veneroso: Japan on the Edge of the Abyss

A reader chided me for not making note of the truly dreadful factory output figures released last Thursday, which showed a fall of 9.6%.

I have to confess that I have fallen into “Japan bad news” syndrome, in that I expect bad news out of Japan and therefore did not focus enough on the details. And while I do not aspire to covering every financial news story (that’s what the MSM is for), the latest figures paint a grim picture, even by our new, desensitized standards.

It wasn’t simply that December was truly awful, but it came on top of a nearly-as-bad November. From Bloomberg:

Japanese manufacturers cut production an unprecedented 9.6 percent last month, deepening a recession that’s expected to be the worst in the postwar era.

The drop eclipsed the previous record of 8.5 percent decline set in November, the Trade Ministry said today in Tokyo. Economists predicted a month-on-month decrease of 8.9 percent….

The International Monetary Fund said this week that Japan’s gross domestic product will shrink 2.6 percent this year, the bleakest projection for any Group of Seven economy except the U.K. That contraction would be Japan’s worst since World War II.

Yes, the Baltic Dry Index, which some see as a proxy for international trade, picked up a bit from its near-death level in January, but that may be due to Chinese New Year-related spending.

A hedge fund correspondent sent Frank Veneroso”s ;latest piece, “The Yen: Will The Traders Push The Land Of The Rising Sun Off The Face Of The Earth?” which gives a sense of how bad things could get. Some excerpts:

1)The Japanese industrial production data and METI forecast was bad beyond all imagining. Industrial production might fall by 1/3 in the 12 months ending in January. It could fall in a mere four months between November and February by more than half the U.S. Great Depression decline which took almost four years.

2) Nothing like this has ever happened to a major industrial nation to my knowledge – not even during the 1929 – 1933 Great Contraction.

3) The trade weighted yen is by far the strongest currency in the world. Japan is losing competitiveness fast. Given the lags in trade matters will get worse.

4) The insane trader community continues to push the yen up as a safe haven. It is all so detached from reality I suppose they could take it higher.

Yves here. I only get the privilege of reading Veneroso now and again, but I cannot recall him taking a tone remotely like what follows:

I have been writing about an Asian black hole for almost two months now. I have been crying from the rooftops about an emerging depression in Japan. It has been as though a neutron bomb had gone off in the world. There was no one who seemed to notice, no one who seemed to listen.

Every week it gets worse and worse and worse. Today it was Japan….

THERE HAS NEVER BEEN DATA THIS BAD FOR ANY MAJOR ECONOMY – EVEN IN THE GREAT DEPRESSION. December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.

If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression.

It would be a greater decline in four months than in any 12 month period in the Great Depression in the U.S. We are literally looking at the unimaginable. (I am attaching the U.S. industrial production index from the Great Depression for comparison).


Veneroso later turns to how markets are making matters far worse by pushing the yen to an unwarranted high level:

Financial markets have only one rationale in economic theory: to sift through all of the fundamental information that has a bearing on prospective returns to investments and thereby establish the set of “right” prices that will lead to an optimal allocation of real resources. Because of uncertainty and imperfect information, an optimum allocation will never be reached, but a second best allocation can. There is no other “social” rationale for financial markets.

When financial markets become nothing other than a casino, as they had during the bubble period, and market participants flee fundamentals for the witchcraft of technical analysis and other divinings of market dynamics, market participants will send prices flying about in ways that have nothing to do with prospective returns to real investments. The result will be a serious misallocation of real resources.

When bubblized markets go from a mere speculative casino to a casino in which pivotal players are driven only by the pursuit of short-run fee income by hook or by crook, you can get a more willful proliferation of “false” prices and an even worse misallocation of resources.

This is what has happened over the last ten years. The result is what economic theory says it should be: today’s global financial, economic, and social catastrophe. The ruling maxim in such a regime seems to be that market participants will push prices to the point where they do the maximum financial, economic and social damage. I believe that, despite the massive losses to market participants that such behavior has now brought them, their behavior has not changed. Half a generation is enough to breed a cohort among market participants that knows of no other way. This cohort has been hurt and has had its wings clipped, but the markets have become commensurately less liquid. This cohort still runs the show.

Let us now apply this to the Japanese yen. According to the most recent economic data the land of the rising sun apparently risks falling off the face of the earth. Nonetheless, the Japanese yen soars. We hear the ludicrous mantra from all the investment banks and all of their speculator clients that the yen is a safe haven amidst the global chaos.

To my mind the real reason why the yen soars is because it soars. Except for a brief interlude in the mid 1990s the Japanese yen has been bounded on the upside by a ROUND NUMBER – 100 YEN TO THE DOLLAR. It bumped against the ceiling time and again. In recent months the unwinding of massive yen financed carry trades caused a powerful, though transitory, impetus on the part of yen debtors to panic purchase yen. This impetus broke the yen through its magic barrier of 100. Since everyone now ignores fundamentals and only looks at the witchcraft of charts and technical tools they now all have the next technical objective of 79 yen to the dollar on the brain. That was the spike high in the yen in that brief mid 1990s foray above the great ROUND NUMBER of 100. In my judgment it is this chart objective on the brain that explains yen strength today now that most of the panic buying by yen carry traders has abated.

Yves here. Veneroso does omit a couple of factor: first, that Japanese banks, unlike their US, UK, and Euro counterparts, have almost no exposure to the Anglo-Saxon debt binge. But they have their own issues. Japanese banks still have significant holdings of industrial companies. Under Basel rules, they can count 50% of market value as equity. Japanese stocks and the yen tend to move inversely, and the yen at current levels or higher has pushed the Nikkei to levels that make bank capital look less than solid. And now that the industrial side of the economy is falling off a cliff, the Nikkei is unlikely to soon even if the yen were to fall a fair bit.

Second, with Japan at tantamount to zero rates, its currency is not vulnerable to deprecation due to short-term interest rate cuts, which in theory makes it appealing. Back to his piece:

The yen is strengthening massively against currencies all over. On a trade weighted basis, it is by far the strongest currency on the planet. There are long lags between changes in currencies, exchange rates and trade. The recent take off in the yen is not yet fully reflected in Japanese exports. The lags are too long. The weakness we are seeing in Japanese exports today is in large part derived from aggregate demand weakness from its trading partners. It is the result of an earlier appreciation in the yen for perhaps 120 yen to the dollar to 110 to the dollar or 100 to the dollar. And perhaps, most importantly, it is the result of a secular trend in which its lower wage neighbors in Asia are making inroads – big inroads – into the global markets which it has traditionally dominated as an exporter.

When the long lags between the yen exchange rate change and trade and industrial production fully run their course the land of the rising sun may fall off the face of the earth. And with it will fall all the market participants who refuse to look at fundamentals and chase chart witchcraft and ephemeral market dynamics who have been the big bulls engineering that yen exchange rate that will maximally undermine the markets, economy, and social fabric of Japan.

It’s a little early in the week for apocalyptic forecasts. One can only hope Veneroso is wrong, but it seems likely that the (considerable) damage of an overly high yen is already done.

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  1. the

    Japan produces a lot of stuff in other countries as well. The industrial performance numbers maybe a little bit misleading because of the strong yen.

  2. Timo

    At least they still got a decent size manufacturing sector. Last time I checked Japan has about 11 million manufacturing sector workers out of maybe 60-70 million workers, healthy 23 percent of GDP.

    USA has only 13,4 million out of whopping 157 million and those manufacturing sectors together cannot even cover YEARLY imports! (manufacturing: about 12-13 percent of GDP, imports 15)!

    Unbelievable 100+ million American jobs are service sector aka consumption based aka “easy credit” based. Guess which country is going to more fubar, given those statistics….

    US GDP is going to collapse at least 30 percent, most likely over 50 because in the end consumption must be met with equal amount of production. No country is able to just consume with abandon forever…

  3. Yves Smith

    Fair point, but to my knowledge, mainly in China and Southeast Asia, which are in bad shape too.

  4. the shadow risk

    Japan produces a lot of stuff in other countries as well. The industrial performance numbers maybe a little bit misleading because of the strong yen.

  5. Thomas

    The JPY could also soar thru a 100 because the Government weakened it artificially over the last 10 years. Who doesnt remember the massive interventions of 2004 and earlier. So I would rather subscribe to a view that we now move towards a free market level from an artificial weak one.
    Also Japan is one of the few countries of the world were the people didn’t go on a massive credit financed spending binge in recent history. The Japanese sit on the largest savings on the planet and lend to their own government (FX neutral) and the rest of the world. That lending now comes back, strenghtening the JPY.
    Another idea I would be demographics and that Japan is 10-15 years ahead of the world in that. So now foreign ccys and assets are playing catch up with the moves of that period. (Deutsche had a very good piece on that.) If there’s int out there maybe I can still find it.

    Finally Japan will have a hard time interveening this time around.
    Last G7/8 statement left them pretty much on their own, Lagarde putting the proverbial kick to the man on the ground in.
    The new US administration is not going to watch the TARP dollars flow to Honda/Toyota thru a weaker JPY. (I know both produce in the US, but doubt a Lou Dobbs fueled public will really make that difference.) So if they intervene, expect tradewars….and buy more JPY!

  6. mmckinl

    “Fair point, but to my knowledge, mainly in China and Southeast Asia, which are in bad shape too.”

    Yes, but unlike Japan their currencies are falling …

  7. bb

    so after the lost decade comes the decade of loss?
    you reported some time ago most petty crimes are already committed by retirees. it is time to rebalance again i guess.

  8. purple

    I remember high school, when we were told Japan was going to devour the US alive. It shows the unreliability of predicting the future based upon past results.

    Japan’s GDP, relative to World GDP, topped out in 1994 at 18 %. It is now at 8 %. Japan has been in trouble for a long time.

    As comparison, US GDP, relative to the world, was at 26 % in 1994, and is 25 % now.

    There are many nuances to the story, but for one, the U.S. actively recruits top minds from around the world, and has a relaxed policy to immigration. Japan’s policy to immigration is a liability for them, at this point.

  9. Timo

    “As comparison, US GDP, relative to the world, was at 26 % in 1994, and is 25 % now.”

    It is now 21 percent and declining. 70 percent of GDP based on consumption with abandon. You call that a healthy economy?

    “the U.S. actively recruits top minds from around the world, and has a relaxed policy to immigration”

    Yeah, half the American population believes that humans did not evolve from apes and Adam lived together with dinosaurus.

  10. mft

    There’s no point in parsing this for details. Global economic processes are so out of whack that we have no way of determining what is influencing what anymore.

    The scariest part of what is happening in Japan is, what does it mean for the whole of East Asia? What is REALLY going on in China? Electricity consumption figures suggest it is the same as Japan, but the Chinese government continues to present a much more benign picture.

    Last week a lot of us realized that we are no longer talking about a “possible” depression. THIS IS IT! We’re in it now, World Depression II. And as Buiter’s FT piece, which Yves posts further down, implies, this means that politics, not economics, is now key. We are going to face a world political struggle between globalism and regionalism.

    More academically, I think the news from Japan fits right into the idea that both the First (1929-1933) and Second (2008-201?) World Depressions have their causes in unsustainable global financial imbalances between producer and consumer nations. The subprime and other bubbles were just symptoms of the underlying cancer which destroyed the system. And, of course, as several of us have said (Michael Pettis is good here) this implies that the epicentre of the real economy breakdown will be in East Asia.

    The outlook is really bad, and it seems like this sucker IS going down. I suggest we wish the pilot luck and start to pray.

    Brace for landing…

  11. Anonymous

    Japan’s manufacturing base is concentrated in higher value items, which tend to be more discretionary purchases and tend to see a disproportionate fall in down times. A lot of Japan’s manufacturing base though is now subcontracted to China and elsewhere in Asia, so I am not sure the argument is as clear cut as it is made out to be. You could argue that this really means a depression in China and Asia.

    I am tempted to compare the yen and dollar along with Japan’s and the US’s manufacturing similarities to conclude where Japan goes the US will eventually follow.

  12. Anonymous

    The Japanese government and central bank did this to themselves and they deserve every bit of what they are getting just as their American counterparts will as well.

  13. Lawrence Solomon

    IMHO The main problem causing the instability is continued build-up of debt, which is now unwinding.
    Voices from Nouriel Roubini and Mike Shedlock have picked up on this theme and been predictively correct for at least since summer 2007. The debt bubble burst in 1929-31 and began bursting in 2007.

    Also roiling things is that oil, which once was traded under long-term contracts, is largely in the hands of the speculators. The damage to the economies of both consumers and producers from wild gyrations in the oil price is substantial. A return to long-term fixed price oil contracts would be a Good Thing, IMHO.

  14. robert

    @ TIMO

    They are right- humans did not evolve from apes.

    I think what you mean to say is that they (50% of Americans)believe humans did not evolve from a common ancestor.

    This country was populated by people wishing religious freedom- wherever that path may take them. If they choose to believe in the Bible or any other religious text that is their right as Americans

  15. Bob_in_MA


    The use of the Baltic Dry Index as a proxy for trade is way over-done. It is a COST index. The bump up may just be showing that shippers have taken enough boats off-line to allow prices to come a little nearer to costs.

    Volume may be raising, but it may also be falling.

  16. Anonymous

    “The Japanese government and central bank did this to themselves and they deserve every bit of what they are getting just as their American counterparts will as well.”

    I agree to this mostly. Sixty years ago, Japanese economics policy would have been called “national socialism”. Their government and country has been controlled to the benefit of some mega multi-national corporations that artificially pushed down the yen for so long, that when hard times finally came the yen had nowhere to go but up.

  17. Anonymous

    “You could argue that this really means a depression in China and Asia.”

    No, if you look at the CFR site, the person there demonstrated that while China’s exports are down, it’s down less than Korea, Japan, and Taiwan. So while they are exporting less, they are also importing less as well, so it’s kinda evening out.

  18. Anonymous

    “No, if you look at the CFR site, the person there demonstrated that while China’s exports are down, it’s down less than Korea, Japan, and Taiwan. So while they are exporting less, they are also importing less as well, so it’s kinda evening out.”

    Brad Setser certainly shows that the balance of trade is balancing out as export demand destruction is being matched by internal demand destruction, namely through a housing construction downturn. The recent fall in commodity prices also helped to prop up China’s trade surplus.
    Trade balance though is different to GDP and should be (there are convincing arguments otherwise) a measure of economic activity overall including exports and imports. My conclusion comes from news items like that of Panasonic who have reduced production due to the rise in Yen. A large part of Panasonics manufacturing is done in China and Asia and not Japan.The last factories to close will be the Japanese ones as the Japanese perform their own version of protectionism.

    Brad in his article Asia’s two recessions is picking up on something interesting when he questions whether the chinese have really been increasing their savings and contends they have been flat in China and just plain fallen in Taiwan and South Korea.

  19. FairEconomist

    Man, what’s with the drama queens today? First Buiter, now Veneroso. Japan, a supercreditor nation, is now running a small trade deficit, which is what it should be doing, so the yen is about right. Of course they’re getting a depression in switching from an insanely low manipulated exchange rate to a reasonable one, because they’ve had truly massive misallocation of resources over the past 30 years, due to the crazy low yen value. Basic economics, folks – bad prices cause bad decisions.

    Venerosa is right that the rest of the world doesn’t care – because we all know this is about where things should be. The depression which will result from this return to sanity isn’t something we can do much about anyway. Normally there would be more sympathy but since Japan Inc. has been wrecking everybody else’s manufacturing longer than most working people’s memory nobody’s going to feel too sorry for them now.

    Maybe we can get a bunch of really, really small violins to play along with MITI’s sob story about manufacturing disaster from unfair trade practices – their own. Heck, Japan’s into miniaturization and classical music. Maybe they can provide the violins for us!

  20. Anonymous

    Anybody found it funny that quantitative easy from the BoJ came back to bite them in the ass?

    Also, can you really be going into a depression if you have never been out of one?

  21. barnaby33

    Who says that the carry trade has unwound? Japan spent several decades pushing down its currency and proping ours up. Now all of a sudden lots of that money is trying to return? Just because there isn’t a massive wave of daily selling doesn’t mean people/banks/institutions aren’t heading for the exits and repatriating their money.

    Since nobody I know has offered a concrete example of how the rest of the world has decoupled, why is any of this shocking? Bad news to be certain, but not shocking.

  22. rtah100

    The yen is soaring because the renminbi is fixed. Part of the natural unwinding of the imbalanes is that the currencies of the surplus-zone exporters rise, enabling them to purchase goods and, most importantly, *assets* from the debtor nations. The debtors export more and divest, paying down their debts – and becoming poorer in absolute terms to the degree to which their borrowings were purely for consumption rather than investment. The surplus countries run a trade deficit and export capital to the deficit countries, through purchases and tactical forgiveness of borrowings for mutual benefit.

    The Yen, Euro (~Deutschmark) and Renminbi should be the major beneficiaries of this. But the Eurozone as a whole is a hybrid of life’s debtors and creditors and the Renminbi is pegged against the dollar. So, only the Yen can expand as the air is squeezed out of the debt bubble economies and back into the creditors.

    To a large extent, Japan and China have been the same economy in the past ten years. After the initial push from the 70’s initial oil shocks, Japan’s enviable ecological “lightness” has been a direct result of exporting smoke-stack industries to China and other neighbours. The currency effects may exaggerate the drop in production in Yen terms but both economies are falling off the cliff together.

    The Greater East Asia Co-Prosperity Sphere is also unwinding… Greater East Asia Co-Austerity Sphere anyone?

  23. Cindy

    rtah100 said…

    The Greater East Asia Co-Prosperity Sphere is also unwinding… Greater East Asia Co-Austerity Sphere anyone?

    February 2, 2009 12:30 PM

    I hope you don’t pepper ur language w/ “final solution” as well?

  24. rene-korda

    The yen’s appreciating neither because of some mysterious “trader hysteria”, neither because of the carry-trade unwinding in the fixed-income (borrow the money in yen, put them on deposit in euro, profit from the difference in interest rates) sense of the word: it was for a long time and still is the cheapest to borrow currency in the world, thus most of the borrowed money, used to fund the stock, commodity and other asset purchases comes in the form of yen. Naturally, when the prices of those assets fall the deals get unwound and the borrowed money are returned. Since most of the assets are not denominated in yen, to return the money one has to buy the yen with the currency in which the assets are denominated – which makes the yen appreciate. Pure and simple and quite easy to check – just compare the charts of yen currency pairs with the charts of main stock indices (you can even use only one index – they all move more or less the same). You can also analyze the correlations between the data – the weekly time period would, probably, be best, since the currency transactions may not be executed on the same day the deals are unwound.

  25. S

    The newsflow out of japan is grim. This am: Hitachi, Nippon Paper, Mitsubishi Electric, Panasonic, Nintendo, Sony, Sumintomo Mitsui, Mizuho post record losses…the pace of the reversals is breath talking. It certainly looks like a depression.

    Japan has already moved to offer loan guarantees to small businesses among other “incentives.” The WSJ picks up on the non-tarriff barriers theme in today’s paper.

    Buiter has it exactly right this is about politics. This appears to be the only reason the “solution” hasn;t been forthcoming. taxpayers are in no mood to swallow another 2-3T for the banks. The government thus emphasises lending as if that is the problem with people choking on debt. The information campaign is to soften the public mood for the coming roundhouse. Call me anious to see the purposely convoluted plan aimed at obfuscating as much as humanely possible, both to mitigate civil outrage and likewise shield the US sovereign rating.

    As an aside, the riot watchlist is growing violence, labor, strife, strike): UK, France, Madigascar, China, Russia, Baltics

  26. shtove

    Ambrose Evans Pritchard had a story in the UK Telegraph six months ago that Japanese banks were carrying a lot of US mbs. Haven’t heard reference to it since then.

  27. Jimy

    If you just look at trade and industrial production data, yes the picture is grim all across Asia. Ditto the number of workers in the mnaufacturing sector who lost their jobs. But after nearly 6 months of rapid deceleration in manufacturirng orders, the problem still seems confined to the manufacturing and export sectors. And overall unemployment is still far from the depths seen 10 years ago in the last crisis. Take Japan and Korea as example, their unemployment rates are not half that of Europe and a long way lower than the US. And don’t be too quick to conclude that stimulus won’t work in Asia; in Taiwan and China, consumer confidence, boosted by cash vouchers and lower prices, are not low at all, anecdotal evidenmce suggest that consumption during the Christmas and recent lunar new year was at least as high in many Asian cities, and about 15% higher in China, than the record of 2008. In previous crisis, consumption would have quickly ground to a halt once unemployment starts to rise. At some point re-stocking for domestic demand would kick in and at least ease some pressure on the slowdown in exports; labour mobility among the workers in China is high, and in smaller countries like Taiwan and Southeast Asia, its extremely high. So while the export sector is a huge part of the Asian economies, there had been very visible growth in domestic consumption in recent years, but such growth was dwarfed by crazy export growth figures. Such growth in consumption together with stimuli, would not be sufficient to offset slowdown in exports, but would cushion somewhat the shockingly rapid deceleration in exports to the US/Europe/RoW. Stay tuned.

  28. Anarchus

    I’m with FairEconomist on this one – yes, the numbers are bad out of Japan, but not “THERE HAS NEVER BEEN DATA THIS BAD FOR ANY MAJOR ECONOMY – EVEN IN THE GREAT DEPRESSION. December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year.”

    I don’t know what the writer was looking at or thinking of, but I went back and checked the “vintage data” series for U.S. industrial production – which goes back all the way to January 1919 – and in Feb and Mar 1921, US industrial production declined by just over 30% year-over-year; in Sept and Oct 1930 industrial production declined by about 25% year/year; in May, June and July 1932 there were three consecutive months of 30% declines; and from March 1938 thru June the year/year declines were all more than 30% down.

    Yes, Japan is in a world of hurt, but it’s hardly unprecedented and no gross exaggeration is called for.

  29. Yves Smith


    Your data does not conform with the series that Veneroso provided in his paper. In all of the cases where you claim a greater than 30% YOY fall, the fall was close to but lower than 30%.

    The only case I could find in his data where you were right is July 1932 versus 31. And that was just a teeny bit over 30%.

    And I don’t see any sub-periods where the three month decay was remotely as bad as MITI is forecasting. Even in the worse years, the erosion didn’t look like it had huge step functions down. I don’t see anything approaching a 10% decay in a single month, and Japan has had close to two in a row.

  30. Anarchus


    I stand by my (actual my friend ALFRED's) data:

    There are a couple of revised editions of the "vintage" data series – I used the 1940 revision which has this title: "INDPRO_19400819".

    Using that data series, October 1937 was down 7.0% month-month simple percentage, November 1937 was down 11.2% and the following month of Dec 1937 was down 8.4%.

    We're quibbling a bit over semantics here, but I still think that Veneroso was being a bit alarmist. He was probably also using a more modern dataset than the 1940 edition, but I've never been entirely trusting of data revisions (or of original data either, for that matter).

  31. Anonymous

    Not to add fuel to the fire, but Japan has another huge problem related to its aging population and its massive underfunded pension scheme.

    Japan committed seppuku back in the early to mid 1990’s when it used its Kampo and Yucho accounts (Postal Insurance and Postal Savings) to try to prop up its stock market. Hundreds of billions of dollars were handed out to various foreign and domestic trust banks, who were told to “BUY”. The process came to be called the Price Keeping Operation, or PKO (which was a takeoff on the then UN Peace Keeping Operation in the ME). The average Nikkei level at the time of these purcahses was 18000-22000.

    That, however, is only the half of it. Required payouts on the Kampo/Yucho funds back then were about 6%. The managing trust banks were required to return that amount back to the Japanese Government each year so that the Kampo/Yucho holders could be topped off. Unfortunately, there is a peculiarity to the accounting scheme in Japan that recognizes only realized, i.e., sold positions. Unrealized gains or losses are not counted in the return and could not be used to meet the 6% hurdle rate. What happened, then, is that fund managers sold any winners they had and realized as few losers as possible. This allowed them to make the 6% payment. The losers became dead money. Thus, the actual price level of the positions still held in the PKO funds is probably well above 25000 Nikkei.

    Gains on JGB’s, while good over this period, are unlikely to be able to make up for the stock losses. As Japan ages and folks want to take their funds out, the BoJ is going to have to print yen. Lots of yen, as it will include not only the shortfall in the stock positions but also the hurdle rate which the money should have been earning.

  32. Anarchus

    Interesting comment, Anon.

    As you’re no doubt aware, long-term economic growth is mainly a function of population increases (or labor force, more specifically) and productivity gains.

    Well. Japan’s labor force peaked in 1998 and absent immigration is mathematically certain to decrease steadily for the next 18 years. Given Japan’s xenophobia and the fact that fertility rates are very unlikely to spike upwards in a step function, I think you can assume with a very high degree of confidence that Japan’s labor force won’t be increasing much for the next few decades or longer.

    How on earth, then, will their economy grow? Just my perspective, but I think that modern economies of scale make it much much easier to increase productivity when you can leverage the fixed costs of an economy than when the fixed costs are working against you. Will the astonishing productivity gains of the digital age be enough to bail them out? We’ll be finding out, I think.

  33. pauli

    The Telegraph story on Japan’s banks and hidden debts was wrong. BusinessWeek ran a story a week or so later which explained why it was very unlikely they were hiding anything.

  34. Anonymous

    Japan is carrying 170.4% of GDP as public sector debt.

    This has now taken an interesting turn, for the worse – with the BOJ agreeing to restart purchases of shares, with an initial contribution of a “mere” Y1tr (USD11.1bn).

    I entirely agree that “the BoJ is going to have to print yen. Lots of yen” – Anonymous, February 2, 2009 11:52 PM

    But I think *all* these (including Yves’ rumblings on black holes and depressions) are reasons to sell Yen short, not buy more… the only remaining reason to stay long in Yen is that of the expectation of further gains in price – which is a *classic* sign of an investment bubble…

  35. Anonymous

    I don’t think you can trust any reported bank figures here in Japan, they are masterful at hiding stuff. There must be huge losses to come for Japanese banks, as quite a lot of the borrowed yen won’t be coming back, as countries and companies default.
    If the LBO companies default on mass surely the yen will get hit?
    As regards the old people issue, in Tokyo lots of them can be seen working in gas stations and convenience stores. Don’t forget a lot live with their families, so whilst their pensions will decline, most should have a roof over their heads.

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