Japanese Inflation Hits 4%

For years, Japan has had near zero or even below zero increases in its consumer prices. Like every other country in the world, ever since lockdowns were lifted, during 2021, that has changed, and prices have risen significantly. Now, even Japan has consumer prices rising by 4%, year on year, according to the latest figures. 

Japan is a good example of the phenomenon I described several years ago, whereby, QE, promoted as a means of raising inflation, actually results in a disinflation of consumer prices, as liquidity is drained from the real economy, and diverted into the purchase of assets. In the case of Japan, the purchase of those assets was not even, just in Japan, but, via the so called carry trade, a purchase of assets in other countries, particularly the US.

Japanese headline inflation rose from 3.8% in November to 4% in December. It is the highest level since January 1991. The headline figure, as in other economies, discussed recently, hides the fact of much higher rates of increase in particular sectors that affect workers. Food prices, for example, rose 7%, as against 6.9% in November. Fuel prices rose by 15.2% as against 14.1%, and within that electricity prices rose by 21.3% as against 20.1%, as Japan, too, has been affected by the global rise in energy prices caused by NATO's boycott of cheap Russian oil and gas.

Core consumer prices also rose by 4%, the most since 1981, copying the picture seen in other developed economies, where inflation has risen to levels not seen in 40 years. The only bright spot was that, month on month, prices rose by only 0.3%, as against 0.4% in the last 3 months, but, despite that, the projections are for the headline rate to continue rising in coming months.

The reasons for this inflation, in Japan, are the same as for the inflation across the globe. That is the injection of excess liquidity into circulation, devaluing its Yen money tokens, each, then representing a smaller quantum of universal social labour-time, and so reducing its value as standard of prices. That process has been going on for more than 30 years, and the reason it is appearing, now, has also been previously explained.

For thirty years, and specifically after 2008, that excess liquidity was actively targeted at, and directed into the purchase of financial and property assets, causing an astronomical inflation of their prices, and, as those prices inflated, creating huge capital gains for the owners of those assets – the form in which the global ruling class now owns its wealth, and from which it derives its power – gains that were made a one-way, bet, as central banks ensured that the gains remained private, but any subsequent losses were always socialised, as the state was called in to bail out the speculators and the banks and finance houses which act as their conduit.

With such a one-way bet, it ensured that liquidity was sucked out of the real economy, and into this fictitious economy, thereby, causing a disinflation of commodity prices, and, in combination with fiscal austerity, slowed the real economy, so that potential money-capital was diverted away from real productive investment, and into this speculation, not only by the purchase of financial and property assets, but by the use of profits to buy back shares to inflate their prices and so on.

As Marx put it,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

(Capital III, Chapter 33)

When all of these methods still failed to stop the global economy from growing, as developing economies took the opportunity to close the gap on their reluctant elder brethren, and smaller capitals grew at the expense of larger capitals, as competition is bound to bring about, when those larger capitals look to the interests of shareholders rather than real capital investment, more direct means of slowing economic growth, and so the demand for labour and capital, were resorted to, in the form of lockdowns under the spurious cover of the pandemic. But, that simply exposed the heightened nature of the contradiction that had developed.

As the state insisted that workers not work – though in reality it needed the vast majority of workers to continue working or society would have collapsed, and so it was led into all sorts of absurdities in ignoring its own propaganda over infections and spread, to ensure that those workers did travel to work, and sit alongside other workers all day, engaged in that production – and so, would be deprived of income, it was forced to become the provider of variable-capital of last resort, and to pay the wages of those workers itself in the form of furlough schemes, or else risk immediate rebellion and social unrest.

But, that involved a further inevitable contradiction that also exposed the basic lie at the heart of bourgeois ideology. It is labour that creates new value, and it is from that new value that all revenues derive. Out of that new value, the worker is handed back a part as wages, the equivalent being the wage goods that the working-class as a whole produces, and which it buys with these wages. But, the other part is appropriated as profits by capital, and out of it, is also paid interest to the money lender, rent to the landowner, and taxes to the state. If the worker is prevented from undertaking labour, then no new value is created, and so there is nothing that can be handed back to them as wages, as well as there also being no profits, and consequently no interest, rent or taxes. That is appropriate, because, also, if the worker is not allowed to work, nor are there any consumer goods and services for any of the above revenues to be spent on, nor are their any capital goods produced, to be bought by profits to accumulate additional capital.  Indeed, nor would there be any production to reproduce even the consumed elements of constant capital, so that, not only would GDP fall, but society would be forced to consume its own seed-corn, and consequently to suffer a fundamental reduction in its output, and productive capacity for future years, as its capital is consumed. 

Lockdowns exposed this fundamental lie at the heart of bourgeois society, which is why it had to be hidden by other lies; by pretending that all labour had been locked down, when, in fact, 80% of all labour continued to take place as before, which is why GDP only fell by 20%, and not 100%, and also with the other lie, which is that the worthless paper tokens put in circulation, by central banks, are actually money. In order to pay replacement incomes to workers, the self-employed, and small business owners, at a time when the new value required for those revenues had not been created, it was necessary to create the fiction that these revenues could be produced simply by printing more of these worthless tokens, and handing them out for their recipients to spend.

Over the previous thirty years, this same process, most visible as QE, had been used to inflate asset prices to astronomical levels. Now it was being used, much as the proponents of MMT and UBI had previously advocated, not to buy assets, but to buy consumer goods, to provide households with a basic income, even though they had performed no labour to create the value equivalent of the payment, and also had produced no consumer goods and services to be bought with those revenues!

In the first period of lockdowns, this posed no problem, because, although, initially, financial markets sold off at the prospect of not being able to sell goods and services, and so make no profits, they quickly recovered and soared to new heights, as the speculators realised what had been demonstrated over the previous thirty years, which is that share prices and financial asset prices in general, do not depend on profits being produced, but purely on a Ponzi Scheme, in which speculation, in search of capital gains, drives those prices ever higher, and if those prices drop, the central bank will always step in to buy up the worthless paper, and start everything off all over again. The soaring asset prices are simply the other side of the fact that the money tokens used to buy them, and which act as the measure of their value, have become increasingly worthless, as more and more of them are printed. Its like pretending you have grown taller, by using ever smaller measuring sticks to assess your height.

With large areas of consumer spending made impossible by lockdowns, as the largest areas of consumption, in services, were physically closed down, all of this blizzard of confetti currency, formed itself into drifts in households' bank accounts, after some of their more costly debt had been paid down, and, as a consequence, it also was shovelled up by the banks and financial houses, and poured into speculation, once more, in those financial and property assets. This huge mass of savings, also drove down interest rates to even lower levels, as lockdowns meant that no firms were engaging in actual productive investment, seeing yet another opportunity to use profits to buy back shares and push up share prices. After the initial sell-off in early 2020, bond and share prices soared by around 50%, as the Dow Jones rose from 22,000 to 37,000.

But, once lockdowns inevitably had to be lifted, the nature of that contradiction became manifest, as did the absurdities of MMT, and UBI that I, and others, have pointed out in the past. Not only had all of that confetti money been hugely depreciated in value, as it entered circulation, first in the purchase of financial and property assets, but, also, now, as it surged out into the real economy, as shops opened, bars and restaurants scrambled to recruit staff, and industry after industry found it could not get either the workers or the other inputs required to meet sharply rising demand, as consumers flooded out to make up for lost time, and now armed with wodges of the confetti money the state had issued to them over the last two years.

The surge of demand inevitably subsides after a time, and the problem of obtaining inputs, and increasing supply also resolves itself, eventually, so that these short-term spikes in market prices are reversed, but what is not reversed is the fact that the measure of values, the standard of prices itself – be it Dollars, Pounds, Euros or Yen – has been devalued, as a result of this excess liquidity, and so, the general level of prices is permanently raised. Its like changing from using a yard as your basic unit of measurement to using a foot, the unit measurement of everything becomes three times greater. The only difference is that a devalued Pound continues to be called a Pound, and so on, as though it were the same value as before.  Japan has experienced that inflation of prices just as has every other country. Its 4% inflation might seem mild compared to the 10-14% in Britain, the 10% in the EU, or even the 7% in the US, but given its history, over the last 30 years, and given the specifics of its economy, it is substantial.

In the 1980's, Japan like other developed economies, and particularly the US and UK, experienced a massive inflation of asset prices, be it share, bond or property prices. The Nikkei Index began 1980 at 6,569. At its highest point in 1989, it hit 38,957, a rise of around 500%. Then, in 1990, the bubble burst. It fell precipitously, and unlike the global crash of 1987, when, central bank intervention by the Federal Reserve and others reversed the crash, it continued to fall. It closed 1990 at 23,848, and fell again the next year. By the end of 1992 it was down to 16,925, a fall of 54% from its highs. But, that was not the biggest of the falls in asset prices, as the bubble burst. Japanese property prices fell by up to 90%, and some commercial property by 99%!

As in 1987, with the global crash in asset prices, however, Japan continued to respond to these falling asset prices, by a process of QE, of the central bank printing money tokens, used to buy up the increasingly worthless assets, to prevent their prices falling further. As with QE, the central bank's zero interest policy was promoted as being a means of preventing recession, but, unlike the policies of states, since 2010, the Japanese government also engaged in a series of fiscal expansions, similar to those undertaken, more recently, by the Chinese state, also designed to stimulate the economy, during the 1990's, when the global economy was still experiencing the last stages of the long wave downtrend.

Japan's economy, highly productive, and geared to growth via exports, was susceptible to domestic stagnation, because it could increase output without the need for large increases in employment. In addition, its economy was based on a culture of lifetime employment, and so of labour being hoarded. It also had an ageing population, with a culture of saving, similar to that, now, in China. As the Bank of Japan printed money tokens, used to buy up government debt, and raise bond prices, lowering yields, and introduced its zero-interest policy, that also reduced the yields on other assets, as they became cheap relative to government bonds. Even as the Japanese government engaged in large infrastructure projects, and other fiscal stimulus, issuing additional debt to pay for it, which should have raised yields, and lowered asset prices, the process of QE, and zero-interest rates sucked even more liquidity out of the real economy, and into the purchase of assets.

Japan's elderly savers bought up the debt, meaning that, unlike most other countries, which were reliant upon the kindness of strangers, i.e. foreign purchasers of debt, Japan could keep increasing its debt to GDP, because the debt was debt effectively owed to itself. The fiscal stimulus failed to stimulate the Japanese economy, as Japanese citizens, instead of spending their incomes, continued to devote a large proportion of their revenues to saving, and the purchase of bonds, and other financial assets. But, it had another effect.

With Japanese yields so low, and a seemingly unlimited capacity for Japanese savers to buy up bonds, it became lucrative for foreign borrowers, be they corporations, rich individuals, or financial institutions, to issue Yen denominated bonds, or to borrow in Japan by other means, and then to use the proceeds to buy foreign assets, where the yields were much higher, in particular to buy up US assets, as it had become the world's largest debtor nation, following the Voodoo Economic policy of Reagan, but also those of the UK, which had undertaken a similar policy under Thatcher, and manifest in the Financial Big Bang of 1986.

This is what happened with the Japanese carry trade. Suppose US institution A issues Y100 million in bonds equivalent to, say, $1 million. With Japanese yields being near zero, it is able to borrow this money, at an interest rate of, say, 0.1%. It, then, converts the Yen into Dollars, and uses these Dollars to buy 10 Year US Treasuries, with a Yield, of say 5% p.a. So, now, its cost of borrowing is $1,000, but the interest received is equal to $50,000. What is more, as the Bank of Japan continued to issue more Yen, as part of this policy, so the value of the Yen fell relative to the Dollar. If, instead of there being Y100 to the Dollar, there is Y120, when the Japanese bond is redeemed, the US borrower only has to convert $833,333 into Yen, to do so, thereby, also making a gain on the currency exchange.

Japanese savers, including Japanese corporations, had an incentive to buy up this debt, because, even with near zero interest rates, with a depressed Japanese economy, and near zero or even falling Japanese consumer prices, these yields were still positive in real terms, and also offered the potential of capital gains, as asset prices appreciated. The savings, however, did not fund real capital accumulation in Japan, which would have lifted it out of stagnation, and allowed liquidity to enter its real economy, preventing the continued disinflation and deflation, but, instead flowed into the purchase of financial and property assets, often, not even in Japan itself, and consequently added to the inflation of those asset prices in the US, UK and elsewhere.

The fall in the value of the Yen, resulting from these policies, made Japanese exports cheaper, but that simply emphasised the increasing dependence of the Japanese economy on exports, rather than on the expansion of its domestic economy, and so also enhanced its requirement to also continually increase productivity, expanding output, whilst employing less labour to do so. But, the 1990's were still a period of long wave downtrend, a condition that only begins to change in the late 90's, and particularly after the new uptrend begins in 1999. Moreover, in the 90's, it also faced other obstacles to that growth, with the global recession of the early 90's, and the Asian Currency Crisis of 1997, which impacted, its most immediate markets, in the region.

It also faced another challenge, which was that, by the early 2000's, it faced a new kid on the block, in the guise of a newly emerging, and rapidly expanding China, which not only sucked in investment, but also acted to undercut the role that Japan had had, in being the most efficient and productive producer of large amounts of consumer goods, particularly of consumer electronics. To compete with China, Japan had to become even more productive, and drive its prices ever lower, adding to the stagnation of its domestic market, and deflation of its consumer prices. The zero-interest rate policy, and liquidity injections failed to stimulate the Japanese economy during the 1990's, which became known as the Lost Decade.

Because of its dependence on exports, and so the global economy, and particularly the US, Japanese growth has moved accordingly. With the new long wave upswing after 1999, its economy grew, at around 3%, but, as the US suffered first from the effects of the Tech Wreck of 2000, and, the, the effects of 9/11, followed by the Iraq War, the Japanese economy fell back. After 2004, it resumed a rate of growth around 3%, but was again affected by changes in the Dollar-Yen exchange rate. Like other developed economies, it dropped sharply following the effects of the 2008 financial crisis. But, it rebounded strongly from that reaching a growth rate of around 5%, and, up to 2020, its economy went through alternating periods of growth of around 3%, and stagnation, reflecting changes in the value of the Yen, and of periods of fiscal stimulus by the state. In 2020, its GDP fell by 10%, but bounced back with the lifting of lockdowns, growing by 7.7% in the second quarter of 2021.

Along with that growth, Japanese inflation also began to rise, in 2021, from September onwards, as economies globally started to reopen, and as all of the liquidity injections, handed to households, now flooded into the real economy, rather than into the purchase of financial and property assets.

A look at the chart shows this to be distinctly different to the situation in Japan over recent decades. Another manifestation was the further devaluation of the Yen, particularly relative to the Dollar. In 2011, there were Y76 to the Dollar, but by October of last year, the Yen had almost halved in value to Y148 to the Dollar.

One reason for that is that, whilst the US Federal Reserve was led to end its QE, and tentatively begin QT, as well as raising its nominal policy rates, the Bank of Japan, continued its policy of Yield Curve Control, which required it to continue to print ever more money tokens, to buy up government bonds (JGB's) at the long end, to prevent their yields rising sharply against the yields of 2 Year Bonds, which are largely determined by its official policy rates. But, in conditions of globally rising inflation, as all of the liquidity floods into the real economy, and at a time when other factors have caused market prices to rise, such as frictions caused by lockdowns, trade wars, and the boycott of Russian energy and food exports, the sharply falling Yen, meant much higher import prices, as witnessed by the figures for Japanese energy, cited at the start.

Just as a condition of prolonged disinflation or deflation, creates a vicious circle, particularly in conditions where saving, and speculation in financial and property assets exists, so the opposite applies. As in the early 1990's, rising global interest rates are causing asset prices to fall. Bond prices have suffered their biggest fall ever in 2022, and that has affected Japanese bonds too, causing the Bank of Japan to have to pump even more liquidity into the purchase of assets. Money that was transferred to US assets, as part of the carry trade, now also moves back, because, with such sharp falls in bond and share prices, even the prospect of higher yields, on those US assets, does not match the actual capital losses resulting from those falls, and so that liquidity finds its way back into the Japanese economy. Japanese households, seeing rising consumer prices, now have an incentive to use that liquidity to buy now, at current prices, rather than saving and consuming later, when prices will be higher.

In fact, for the reasons I have previously set out, rising interest rates, and falling asset prices, now create conditions in which saving rates fall, and consumption spending rises, and is a far more effective means of stimulating the real economy than QE, whose real purpose was to inflate asset prices, and protect the paper wealth of the ruling class speculators. The Bank of Japan has been unable to hold the line on its policy of Yield Curve Control, already having had to double the target yield on the 10 Year JGB to 0.50%, a limit to which the market speculators have already pushed it to, and beyond, daring the Bank to continue to spend even more to defend its policy. It will not be able to do so, and so will mark the end of an era, not only for Japan, but also for the global economy.