Title: Japan's Lowflation Problem
Headings: Japan's Lowflation Problem
May 30, 2021,05:30pm EDT
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Japan's Lowflation Problem

Content: Shorting Japanese government bonds is known as the “widowmaker” trade for very good reasons. Secondly, I don’t think hyperinflation is remotely likely either. Hyperinflation occurs when the population rejects the currency. But Mrs. Watanabe’s life savings are in yen, and she isn’t getting any younger – the median age in Japan is already over 46 for men and 48 for women. Why would she reject the yen? Much more likely, in my view, is that the Japanese government will continue to issue debt to support the Japanese population’s saving habit, the Bank of Japan will continue to monetize that debt to suppress interest rates, inflation will remain on the floor, and interest rates will remain zero or negative. Provided that the central bank holds its nerve and doesn’t react to silly stories about “sustainability” based upon completely spurious metrics, this is potentially a stable economic model, though (from an outsider’s perspective) sadly unexciting. It would help if the Japanese government also held its nerve and didn’t react to calls for tax rises to “make its debt sustainable.” Last time the Japanese government tried to raise sales taxes, Mrs. Watanabe cut spending so hard it pushed the economy into recession. Another attempt at raising sales taxes is scheduled for 2019.