The economic fallacy of 'zombie' Japan

Speech by Jean-Claude Trichet, President of the ECB,
at the symposium on "Macroeconomic challenges: the decade ahead",
Jackson Hole, Wyoming, 27 August 2010

What about the option of "living with the debt"? Some have suggested to ignore existing financial imbalances "for the time being" and focus only on the short term. Rather than pressing on with the deleveraging process, more spending could be encouraged to sustain growth in the short term.

I believe that adopting this view would be very dangerous for our economies. There is a very clear example of the consequences of choosing to live with the debt: Japan in the 1990s. The "lost decade" in that country was the result of allowing the banking system to remain fragile over many years.
Central banking in uncertain times: conviction and responsibility

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He is telling that ECB/EU should seek austerity. He also believes that key role of central bank is to fight with inflation. ...um ? They are concerned about deflation, arn't they?

For r

Astroboy said:

Very true. So which criteria/standard should we use then ? Any suggestion would be appreciated.

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For run of the mill, ordinary assessments, the rating agencies do a fairly good job. It's just in the unusual cases that you need to be suspicious. In these cases, you should try to find a second opinion from somewhere.

Roubini Says Fed Is `Running Out of Policy Bullets'
Bloomberg - Are you a robot?

Banks are "sitting on" $1 trillion of excess reserves and cutting the interest rate on excess reserves to zero from 25 basis points isn't going to make them lend money, Roubini said. Additional quantitative easing through purchases of securities also won't jumpstart economic growth, he said.

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US Banks are already full of cash but cannot find borrows as everybody is rushing repayment in the US. This means Fed's further quantitative easing will not work out because problem is not lack of money for lending but lack of borrowers.

Today Japanese banks are troubled with nearly $2 trillion of excess reserves (double of US banks), and they are purchasing JGB. I think .... US Banks/US economy is exactly following zombie Japan.

Astroboy said:

Roubini Says Fed Is `Running Out of Policy Bullets'
Bloomberg - Are you a robot?
US Banks are already full of cash but cannot find borrows as everybody is rushing repayment in the US. This means Fed's further quantitative easing will not work out because problem is not lack of money for lending but lack of borrowers.
Today Japanese banks are troubled with nearly $2 trillion of excess reserves (double of US banks), and they are purchasing JGB. I think .... US Banks/US economy is exactly following zombie Japan.

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If the US becomes like Japan that would not be so bad, but we all know that America is not as structurally sound and a real plunge starting next year is all but assured. Obama is unable to do much, and public sentiment is getting frustrated. They long for the "good old days" but what we are seeing is STRUCTURAL CHANGE and not CYCLICAL CHANGE.

Ireland's `Vicious Circle' Leaves Banks Facing Higher Debt Cost
Bloomberg - Are you a robot?

Central Bank Governor Patrick Honohan said last week that the Anglo Irish bailout may cost about 25 billion euros. S&P said the figure may be 35 billion euros. "Anglo Irish has proved to be an even larger black hole than anyone imagined," said Bill Blain, joint head of fixed income at Matrix Group in London. "There are worries that the cost of banking recapitalization is now beyond the reach of the government."

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Because Irish government does not learn from Japanese lessons, fiscal austerity Irish government adopted is now resulting in serious depression, high unemployment, falling house price and probably deflationary economy ..... as a result, government debt per GDP has not decreased BUT increased, and Int'l rating agency S&P downgraded Irish government's sovereign bonds. Plus, Irish government (aka Irish taxpayers) need to bailout toxic assets of Irish Banks.

Japanese Zombie Lesson No 1: Don't take fiscal austerity after bubble burst, even if IMF/anglo-american rating firms/anglo-american quality newspaper (FT/The Economists/Washington Times/WSJ/etc)/novel-prized economists insist .... "austerity"

Greece's austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long, a leading German economist has warned.
EU austerity policies risk civil war in Greece, warns top German economist Dr Sinn

As I predicted, Greek economy has been becoming chaotic as EU impose austerity on Greece. They are facing To be social unrest/civil war or To be austerity. And because Greece is a domocratic nation, Greek government will not be able to put up with social unrest.

EU countries, lending money to Greece, will need to choose solution, either bailout using taxpayer money of Germany/France/Holland/etc., or civil war in Greece.

It is always interesting to see how EU citizen will solve the Greek mission-impossible under the beautiful EU flag.


Hans-Werner Sinn, head of Germany's prestigious IFO Institute, said it was impossible to cut wages and prices by 30pc without major riots.

I am just afraid that what we see in Europe is just a small part of what we will see in America.

Nobel Prize-winning economist Joseph Stiglitz said "Europe has made a wrong bet with austerity," If Germany, the U.K. and France remain committed to budget cutting, "that will have systemic consequences for the entire Europe."

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Bloomberg - Are you a robot?

Finally Dr Stiglitz is coming near to my thought. And he also points out Irish Example.

Irish Example

The ECB said last week that it expects the economy of the 16 nations sharing the euro to expand about 1.6 percent in 2010 and 1.4 percent in 2011. It previously forecast growth of 1 percent this year and 1.2 percent next.

Ireland's struggle to revitalize its economy after the country's worst recession on record shows the risks of focusing on deficits, Stiglitz said.

Standard & Poor's last month cut Ireland's credit rating to AA-, the lowest since 1995, on concern the cost of supporting the nation's struggling banks will swell the budget deficit. The government plans to narrow the gap to 3 percent of GDP by 2014 after it swelled to 14.3 percent last year, the highest in the euro region.

"The belief that markets will get new confidence has been shown wrong" by Ireland's austerity drive, Stiglitz said.

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Japanese Zombie Lesson No. 2: Government expenditure is indispensable after bubble burst.

A decade ago, Japan was a byword for failed economic policies: years after its real estate bubble burst, it was still suffering from chronic deflation and slow growth. Then America had its own bubble, bust and crisis. And these days, Japan's record doesn't look that bad to an American eye.
Opinion | Things Could Be Worse (Published 2010)

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Oh dear, Dr. Krugman, it is too early to admit that ..... because worse-than-Zombie-Japan is only "dead", and America is not dead yet. USA can boost economy via government-led stimulus programs.

Astroboy said:

Oh dear, Dr. Krugman, it is too early to admit that ..... because worse-than-Zombie-Japan is only "dead", and America is not dead yet. USA can boost economy via government-led stimulus programs.

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Only partially. America has a lot of life yet but most of it is through smoke-and-mirror finance and boom-boom military ventures. The long term things are different. Innovation will be mostly in Asia.

Here's a recent quote from Barron's on Tuesday August 31, 2010

Even so, the specter haunting U.S. officials is that America would have to go through the deflationary lost decades of Japan. To which, David Goldman retorts, "You should be so lucky." (My emphasis)



"During Japan's 'lost decade' of the 1990s, everyone was working, everyone kept their homes, everyone maintained their lifestyle (minus some shopping trips to Paris), and life carried on more or less the same. America enters the second decade of the millennium with un- and underemployment around 20%," the former head of credit research at Bank of America and current senior editor of First Things magazines writes on his Inner Workings blog at Asia Times.


Japan was able to export to earn the income to fund the retirement wave it faced from its aging population, Goldman continues, despite a plunge in consumption and a two-thirds collapse in stock prices from their peak. Americans have forgotten how to export; they have little choice but to cut spending and save and invest in 2.5% Treasuries, or junk bonds, or leave their money in the bank at a fraction of a percent.

President Obama has set a goal of doubling American exports, the path that Japan took to cushion its decline. It did so by cutting prices domestically, which is the definition of deflation. That also is the tack taken by Germany; curbing prices and wages has helped power an export boom. It also helps if you produce what's in demand, such as capital goods for China.


Ultimately, central-bank governors cannot cure such problems by manipulating interest rates, exchange rates and money supplies. Creation of real wealth, as opposed to paper wealth, is lots harder.

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What a crock of BS from the Obama administration. America cannot export that which they don't manufacture anymore and that includes virtually everything. Without making and supplying things that the masses will buy, America has no choice but to keep on monitizing its debt and going further and deeper into debt until it cannot do so any longer.

If Japan and China decides to sell what treasuries they have and/or not purchase them any longer, then America will default on its debt and declare bankruptcy. America cannot keep going into debt forever, nor can it ever hope to repay what they already owe as they are paying over $1 billion per day in interest payments alone and rising. Without exports, how can it ever be paid back? It can't and it won't, plain and simple.

Doubling American exports is a good goal for US economy, but in terms of macro economics (aka GDP), only NET EXPORT is a contributor to economy as

GDP = private consumption + gross investment + government spending + (exports − imports). Gross domestic product - Wikipedia

I suggest US government to promote more manufacturing industry to produce products domestically, not relying on imports. But then, US companies need to slash costs, especially labor costs. And such cost-cutting will accelerate "Deflationary Economy".

As far as US economy want to return to real economy (principally manufacturing-centric) and abondon virtual economy (aka financial gambling), deflationary economy will not be avoidable.

Japan Zombie Lesson No 3: Deflationary Economy is a part of Globalization.

Astroboy said:

Doubling American exports is a good goal for US economy, but in terms of macro economics (aka GDP), only NET EXPORT is a contributor to economy as
GDP = private consumption + gross investment + government spending + (exports − imports). Gross domestic product - Wikipedia
I suggest US government to promote more manufacturing industry to produce products domestically, not relying on imports. But then, US companies need to slash costs, especially labor costs. And such cost-cutting will accelerate "Deflationary Economy".
As far as US economy want to return to real economy (principally manufacturing-centric) and abondon virtual economy (aka financial gambling), deflationary economy will not be avoidable.
Japan Zombie Lesson No 3: Deflationary Economy is a part of Globalization.

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The US standard of lliving is too high for a country that doesn't produce much. It is frightening to see what I am seeing now; a falling standard of living and a wiping out of the middle class. Slowly but surely, this is the trend.

Astroboy said:

I suggest US government to promote more manufacturing industry to produce products domestically, not relying on imports. But then, US companies need to slash costs, especially labor costs. And such cost-cutting will accelerate "Deflationary Economy".

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The point is the US will not do that until they completely destroy the middle class. Nearly all manufacturing jobs have been off-shored to China and other countries as well as services. Call your local gas company or electric company and you will more than likely get a representative in India! Even x-rays are sent via e-mail overseas for interpretation because it is cheaper. GE has even closed it last incandescent light bulb manufacturing plant in the US and moved it to China to save costs.

Washington Post said:

My heart goes out to the GE workers in Winchester, Va., whose incandescent light-bulb plant is being closed ["How innovation killed the lights," front page, Sept. 8]. As long as people in developing countries are willing to work for a fraction of the wages that U.S. workers expect, President Obama's vision of a manufacturing resurgence will remain a mirage.

Now, another 200 workers soon will be unemployed. Why? Because people are demanding fluorescent lights? I sincerely doubt it. Quantity does not equal quality -- neither in the output of a light bulb nor in the brilliance of Congress.

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This is how they are slashing and cutting labor costs, by closing factories and moving them off-shore! A country that doesn't even manufacture light bulbs anymore! Even our florescent bulbs are made in China! What "green" energy plants and manufacturing plants is the Obama administration talking about when it is far, far cheaper to manufacture them overseas? Don't even think we will have them until our pay is equal to China's.

With this, among hundreds of other closings, how in god's name can America produce and export? We have only about 25% of our manufacturing base and factories left as compared to the 1950's and 1960's. Is that any way to revive our economy? Ha!

hsakakibara1 said:

The US standard of lliving is too high for a country that doesn't produce much. It is frightening to see what I am seeing now; a falling standard of living and a wiping out of the middle class. Slowly but surely, this is the trend.

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You got that right hsakakibara1. Too bad others don't see it. Instead they prefer to be spoon-fed the standard dose of BS from the mass media and Washington that things are getting better when nothing could be further from the truth as this story in the Christian Science Monitor shows:

US adds 4.8 million more to ranks of the poor as poverty rate jumps.

The median household income was $49,800 last year, about the same as in 2008. This "hold steady" figure for income may reflect the fact that many people were helped by the government safety net, such as unemployment insurance, which Congress repeatedly extended and which kept some 3.3 million people out of poverty, according to the Census data.

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The only reason why we do not see bread lines and people lined up for jobs and food like in the famous pictures from the Great Depression of the 1930's is due to unemployment insurance, extended unemployment insurance (extended to 99 months!), food stamps, and welfare payments all paid for on the backs of the working middle class through their taxes. If it wasn't for these payments there would be riots and anarchy. Therefore, with no photos to show the real truth, many believe things are really not that bad when those who look know the real truth.

Even in my own job I have had to forfeit over $5,000 in reduced benefits this past year like personal leave, sick days and the company's halt to matching 3% of what we save in our 401k retirement plan! Therefore, I have had a cut in pay of $5,000.

An improving economy? Not on your life. I drive a truck for a living hauling freight and our freight from the manufacturing sector has not increased in more than 3 years. In fact it has gone down more than 15% and shows no signs of improving in the near future as we are 3 months ahead of the curve when it comes to the economy. Hauling imported freight on the other hand, has increased by more than 25%. You do the math.

The standard of living of the average worker is only getting lower and will continue to do so regardless of what you read or hear on the news.

I agree 100%. Also the availability of credit. Obama is printing money like as if it was going out of style. This whole party will end sometime next year I predict. So next year I will move back to Japan. Give me deflation any day.

Pachipro said:

The point is the US will not do that until they completely destroy the middle class. Nearly all manufacturing jobs have been off-shored to China and other countries as well as services. Call your local gas company or electric company and you will more than likely get a representative in India! Even x-rays are sent via e-mail overseas for interpretation because it is cheaper.

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Japan has been suffering from similar problems for past years. But because Japan is culturally isolated (meaning Japan is a country of Japanese language), maybe it's not like US companies. Japanese language itself is being a barrier from competition with overseas cheap service providers.

Offshoring is mostly seen in low-to-mid-end manufacturing, and J-companies keep core segments in Japan as a mother factory for global production network.

Astroboy said:

Japan has been suffering from similar problems for past years. But because Japan is culturally isolated (meaning Japan is a country of Japanese language), maybe it's not like US companies. Japanese language itself is being a barrier from competition with overseas cheap service providers.
Offshoring is mostly seen in low-to-mid-end manufacturing, and J-companies keep core segments in Japan as a mother factory for global production network.

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Also that Japan is not as bad as people make it out to be, and as we Japanese like to think it is. Compared to America, Japan is doing great. Hard to imagine, but it is true.

I think I'll have to start investing in durable goods.

Like survival gear and guns.

"The Nipponization continues."

GOOD NEWS FROM USA: The dollar soared on Friday after data showed U.S. employers added 151,000 jobs in October, blowing past expectations of a 60,000 rise and marking the fastest pace of hiring since April....

But at the same time, Krugman says in his blog "Wages And The Slide Toward Deflation" http://krugman.blogs.nytimes.com/2010/11/05/wages-and-the-slide-toward-deflation/



Probably, US employers has begun to increase employment, but they are mostly freeter/part-time jobs at low wage.

After bubble burst, Japanese companies continued to make gradual labor cost cuttings and restructuring of business portfolio as Japanese companies face tough competitions from Asian companies. Free Trade/Globalization of economies pushed J-companies to do so.

Lowering wage will be indispensable if US companies want to compete with Asian rivals.
And Lower wage will lead economy to deflationary one. As Krugman said, "The Nipponization continues."

Astroboy said:

GOOD NEWS FROM USA: The dollar soared on Friday after data showed U.S. employers added 151,000 jobs in October, blowing past expectations of a 60,000 rise and marking the fastest pace of hiring since April....
But at the same time, Krugman says in his blog "Wages And The Slide Toward Deflation" http://krugman.blogs.nytimes.com/2010/11/05/wages-and-the-slide-toward-deflation/


Probably, US employers has begun to increase employment, but they are mostly freeter/part-time jobs at low wage.
After bubble burst, Japanese companies continued to make gradual labor cost cuttings and restructuring of business portfolio as Japanese companies face tough competitions from Asian companies. Free Trade/Globalization of economies pushed J-companies to do so.
Lowering wage will be indispensable if US companies want to compete with Asian rivals.
And Lower wage will lead economy to deflationary one. As Krugman said, "The Nipponization continues."

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Thank you Astroboy. If you read the links I add from time to time by James Dale Davidson, you will see that he has also said that the US will slide in deflation. The difference with Japan is that the US has already outsourced a lot more jobs abroad than Japan. Also most Japanese debt is born by the Japanese public, unlike America, where most is bought up by foreign central banks who, eventually will get tired of supporting the US economy. Japan has also been investing in Asia for a lot longer than the US.

Many Americans are in denial. They still cling to the belief that America will somehow "overcome," as if this was a God-given promise. (The media only helps to protray this feeling of self-endowed righteousness.) It is not. The world is different, and just as Japanese living standards have taken a slight turn for the worse, American living standards, which were always far higher than Japan, will plummet. Americans cannot coninue their current lifestyle as if nothing were wrong. The 1950s are over. In many ways China will own that country, unless, ofcourse, they decide that their economy is independent enough to warrant a reduction in US government debt buying, and to allow the dollar to collapse.

That is one reason why I am in the process of preparing my move back to my native Japan. I go to Japan at least every two months for business. I see for myself each time that, although the 1980s are gone, that things for the average person are far better than for the average American. In Tokyo you have free magazines with job ads for part-timers. Of course many of these jobs pay only about $10.00 per hour, but they abound. In America, it is hard to get a job at a fast food restaurant-so hard are the times here.

For sure, America is not going to "go away." They still have a lot technology, resources, etc., but compared to where they were in the world until now, their influence and living standards are bound to take a sharp turn downward, if not already.

And prices in Japan are not as low as the press dercies. Yes, I have seen jeans sold for about $8.00, but they are low quality and msot people shrug away from buying such items.

I understand what you wrote in earlier posts about Japanese immigration. Each time I go to Japan I see more and more foreigners working at regular jobs legally. The government itself is about to make major changes to the immigration system. Japan today is very different from even just five years back.

Thank you for your comments.

Portuguese, Irish Debt Lead Peripheral Drop on Budget Concern
The best bid for Irish 10-year bonds was 9.07 percent
Bloomberg - Are you a robot?

Ireland, Portugal, Greece and probably Spain face mission impossible. Euro authority demand them to cut government budget, neglecting that those economies are struggled with recession after property bubble burst. As I said, while government expenditure is the only hope to maintain economy, those countries cannot boost their economies by expanding government expenditure because they are not allowed to print money but being under control of Frankfurt.

9.07% for 10-year-bond's yield is just unbelievable. I can foresee serious social unrest in those countries.

If they want to get out of such mission impossible, I suggest them to learn Japanese lesson. But for following Japanese lesson, they will need to pull out of Euro system.

interesting article and arguments, i appreciate it.

Now tell me, do u think USD value will be sink constantly? if that is the case, then buyying gold or euro money, will be a good choice. am i right?

I like a "honest" educational post. Review on many angle and side.

I like this.

abdalrasyid said:

interesting article and arguments, i appreciate it.
Now tell me, do u think USD value will be sink constantly? if that is the case, then buyying gold or euro money, will be a good choice. am i right?
I like a "honest" educational post. Review on many angle and side.
I like this.

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I don't know.
In general, value of commodity will be determined by Suppy & Demand, and currency will be the same. Therefore, US's QE will weaken USD value theoretically.

However, reality is not always like that in terms of currency value as it is determined by more elements to gauge the value, such as comparative value against JPY, Euro, etc., and political stability, currency liquidity, etc.

So, you better do what you believe to be right.

Astroboy said:

I don't know.
In general, value of commodity will be determined by Suppy & Demand, and currency will be the same. Therefore, US's QE will weaken USD value theoretically.
However, reality is not always like that in terms of currency value as it is determined by more elements to gauge the value, such as comparative value against JPY, Euro, etc., and political stability, currency liquidity, etc.
So, you better do what you believe to be right.

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I need observation first then, thank you Astro Boy

Astroboy said:

Portuguese, Irish Debt Lead Peripheral Drop on Budget Concern
The best bid for Irish 10-year bonds was 9.07 percent
Bloomberg - Are you a robot?
Ireland, Portugal, Greece and probably Spain face mission impossible. Euro authority demand them to cut government budget, neglecting that those economies are struggled with recession after property bubble burst. As I said, while government expenditure is the only hope to maintain economy, those countries cannot boost their economies by expanding government expenditure because they are not allowed to print money but being under control of Frankfurt.
9.07% for 10-year-bond's yield is just unbelievable. I can foresee serious social unrest in those countries.
If they want to get out of such mission impossible, I suggest them to learn Japanese lesson. But for following Japanese lesson, they will need to pull out of Euro system.

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Right you are. But that would mean a lowering of their living standards, and noone is prepared to do that. Japan and for that matter most of Asia has never had the short work weeks and high standards of living that the West, especially the US, has enjoyed. That era is coming to an end. Japan is prepared to rough it, cos, well, they/we have always been roughing it. Now that is happening in the West and they are going crazy.
Look at America. People who graduate from university are lucky to get any job. Most are out of work for one year at least, and even when they do find something it is temporary or low wage, etc. In America I also see a trend for adult children to move back in with their parents due to high rents, low wages, loss of jobs etc. All this is only going to increase. Sad, but true.