(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda April 2, 2014
( Free of charge to the people I met)
The Fate of Abenomics
I always say that the economy and people are the same. People are born, enter childhood, and then become adolescents before reaching their prime. They then give birth to children, retire in their later years, and eventually depart from this world.
Right after the introduction of the free economy after the war, Japan’s economy grew rapidly from 1960 to 1970, a period referred to as the “growth period.” Later the Plaza Agreement in 1985 lead to a large devaluation of the US Dollar against the Japanese yen in order to prevent the Japanese economy from destroying the US economy. After the agreement was reached, Japan’s bubble economy grew from 1987 and burst into flames, which was like the instant of brightness witnessed before a candle goes out. Japan’s deflation period, referred to as the “lost 20 years,” continued from 1991. After this period came the creation of the Abe Cabinet which announced that it would eliminate deflation with its “three arrows” plan.
I have previously stated that this period of prolonged deflation is “something necessary for the Japanese economy.”
In contrast, printing additional currency to lower the yen’s value and lowering interest rates through the purchase of national debt using such currency is the wrong path to take. In other words, getting a stagnant economy to grow is not achieved through financial policies but rather by creating demand through fiscal policies.
Although Bank of Japan Governor Haruhiko Kuroda knows that he should be worried about price growth rising over the 2% target, I wonder if he realizes that price increases, maintaining low interest rates, and increasing financial assets through monetary policies are nothing but artificial and temporary solutions. Since Governor Kuroda is also a government official, he is most likely thinking that it is best to avoid problems during his term.
Since prices must be set naturally through supply and actual demand, interest rates must be set through the capital requirements of the actual economy. Any economic policies that attempt to defy this premise will eventually lead to bankruptcy and payment of compensation for mistakes.
The shift from creating products in Japan to creating products overseas which occurred during the “lost 20 years” is “something necessary for the Japanese economy,” similar to how an elderly person lives off interest and dividends from their investments after retirement. Political measures that decrease the purchasing power of the yen lower than that of foreign currencies and using artificial methods to bring the interest rate to zero will do nothing but harm the Japanese economy which is guided by foreign direct investment.
In order to deliver wealth from other countries to the stagnant economy, the yen must be strong for buying power and interest rates should be high in order to bring in capital from other nations.
The “three arrows” of Abenomics seem to be missing their intended targets.
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Written by Toshio Masuda