You Can Polish a %@&#, But You Can’t Make It Shine

By Jared Dillian,

In today’s issue, you’ll read how desperately Japan has been trying to shed the “deflationary curse” it’s been haunted by for decades.

Japan: It’s Getting Interesting.

Shinzo Abe scored a decisive victory in the upper house elections a few nights ago. Let me explain why that is not boring.

Abenomics was conceived in 2012 as a way to combat Japan’s never-ending deflation and pseudo-depression. It included a truly massive program of quantitative easing, which involved the printing of yen to buy all sorts of assets—including stocks!

Abenomics has continued for four years, with mixed results.

Stocks are up about 150%, interest rates are negative, and the yen is appreciably weaker. But there is still no economic growth.

Hence the title of this piece.

So has Abenomics helped?

It might have, if Japanese retail investors owned stocks. But they really don’t—foreign ownership of Japan’s equity market is quite high.

Low interest rates might have sparked off a residential construction boom, but they didn’t—because there is nobody to build houses for. Japan suffers from chronic depopulation, as the birth rate is well below the replacement rate.

The Economics of Depopulation

I say this a lot, but I will say it quite explicitly here: the Earth has experienced explosive population growth for decades, but the rate of growth is slowing, and before long, we will have reached peak population, and the number of people on this planet will actually be declining.

I imagine it will happen faster than people think.

Let’s review, again, how you get economic growth:

• More people working

• Same number of people working more hours

• Productivity increases

If you have fewer people working, the remaining people have to either work longer, harder, or more efficiently to get the same level of output. Ain’t happening in Japan.

So economics as an academic discipline gets quite weird when the population drops, because declines in output, otherwise known as GDP, become the norm, rather than the recessionary exception.

The One Currency That Could Go to Zero

Remember The Dillian Loop as it applies to Japan:

Japan does quantitative easing.

If it works, it is declared a success and they do more.

If it doesn’t work, it means they need to do more.

Right now it’s not really working, so they’re going to do more.

It is possible that the BOJ will print an infinite amount of yen. The helicopter drop is being seriously discussed.

I don’t care what you think of the dollar or the euro or the pound or the Swiss franc—you print an infinite amount of a currency, it is going to decline in value.

But, after the election, there should be no doubt about the political will. They are going to reflate.

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