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Sunday, September 29, 2013

Fujimaki: Japanese Hyperinflation By 2015!

Japan JGB 10-year bond yield - market collapse

One of the public services now provided here at is the tracking of outlandish forecasts about Japan and/or the JGB market. The first entry is provided by Takeshi Fujimaki, an ex-advisor of George Soros and now a member of the Japanese upper house of parliament.

I have enjoyed reading crackpot theories about the collapse of the JGB market since I started covering it around 2001, and this entry by Fujimaki looks like it represents the state of the art in this highly competitive field.

  • “Because the BOJ is buying huge amounts of JGBs, market principles in this country do not work.” The balance sheet of central banks throughout the developed world consist mainly of government bonds, and it has been this way for decades. The most successful means of determining bond yields consists of guessing what policy rate government bureaucrats will set. In other words, even slight familiarity with how government bond markets work will tell you that government bond yields are not really set by “market principles”. However, this statement will make him popular with all the gold bugs.

  • He has an outlandish bond yield forecast:               
Yields on 10-year Japanese government bonds may jump to 70 percent based on what happened in Russia when it defaulted in 1998, Fujimaki said. 
Sure, what happened to Russia is a great benchmark for a country with $1,135 billion in U.S. Treasury holdings (TIC data; July 2013) and no foreign currency debt.
  • He throws in an outlandish inflation prediction:
“If the yen goes up to 120 per dollar, Mr. Abe doesn’t need a third arrow,” according to Fujimaki, who expects the currency to drop to as low as 1,000 when Japan faces hyper-inflation in the next two years.  
Hyperinflation by 2015! Looks like liftoff is starting right now! Really going for the gold bug crowd.
Japan CPI index level

  • He ends of with a sensible-sounding bond-bearish call:
“The Olympics [in 2020 – BR]  will come at the time of a booming economy,” he said. During that period of economic growth “maybe 5 or 6 percent are reasonable levels for the 10-year yield.”
This is actually a very impressive stratagem. Even though his 70% yield forecast has a 0% chance of occurring, there is a chance there could be a “renormalisation” of rates within 7 years; why not? And if the 10-year does rise to something like 4% by 2020, he will be able to say “I told you so”.

What sets this apart, in my mind, is what he did not say.
  • He does not rely on debt-to-GDP ratios (but the reporter does mention them in the piece). Ten years ago, it was enough to state that the debt-to-GDP ratio was “unsustainable” and hence the JGB market was going down “soon”. But such a strategy is now suicidal, as the blogosphere is stocked with tons of charts on research on the (non-)impact of high debt-to-GDP ratios. (This is the result of a previous ill-advised academic paper on the dangerous impact of the 90% debt-to-GDP “threshold”.) 
  • He avoids setting a near-term target for JGB market collapse (like “a few months”). Only people with too much spare time on their hands will remember a blown forecast on a two-year horizon.

Of course, his worries (debt default and hyperinflation) are incompatible. In a hyperinflation, the monthly inflation rate is 50% or higher; so even an inflation-linked bond with a standard monthly computation period of one month will lose at least 50% of its purchasing power due to the indexation lag. If the yen collapses, the Japanese government need only sell a tiny sliver of its Treasury debt to buy back most of its debt. But why quibble, since there’s no chance of it happening anyway?

To be honest, the real story embedded in the Bloomberg article is that he wants to cut corporate taxes. The real logic behind his bizarre forecast:
  1. Lawmaker wants to raise corporate profit share of GDP at the expense of households.
  2. This is to be done by hiking the consumption tax rate, and cutting the corporate tax rate.
  3. Funnily enough, polls say such a policy is unpopular with the voters.
  4. So he makes up risks to the government bond market. 
  5. He then states that the rise in the consumption tax miraculously cures those risks. 

But to end off on a more serious note: this is part of a push to raise the Japanese consumption tax, which appears likely to occur. The theory is that the planned fiscal policy shifts are supposed to be neutral for growth, as there will be offsetting stimulus undertaken. I do not have a fancy model of the impact of their proposed fiscal changes, but it seems that they are effectively replacing “high multiplier” spending by “low multiplier” spending. In order for the impact to be neutral on growth, the fiscal deficit would have to be larger. Additionally, I am skeptical that businesses will take up investment incentives in the current sluggish growth environment – especially if domestic consumption falls due to the tax hike. And so, it appears highly possible that Japanese policymakers will drive their economy into recession yet again due to a foolish focus on fiscal ratios.

(c) Brian Romanchuk 2013


  1. Hello again Brian. I finally responded to your comment on my simulation. Thanks.

    If you are tracking of outlandish forecasts about Japan then I have a couple for you:

    Japan is already printing money at hyperinflationary rates:

    It will only be a few months before Japan goes zooming past their 2% inflation target:

    And I can now explain hyperinflation using many different theories. So if one does not make sense, just keep reading to try another view:

    1. Hi,

      I've read some of your articles. I have not yet had time to write about inflation, never mind hyperinflation. I see hyperinflation linked to the existence of foreign currency "liabilities" (not just formal debt), but these do not really matter for the major economies. I know you reject that explanation for hyperinflation, but I did not see why. I will eventually get around to the topic of inflation once I can get my hands on more data.

      I can imagine a plausible scenario for high Japanese inflation ("core" eventually reaching 5-10%; hey why not?), but this would take years to develop. Japan is vulnerable in that they have to import a lot of raw materials. And they would have to do things that they are currently not doing to get there.

      I am like other MMT writers who reject the quantity theory of money. I take this view based on long empirical studies of monetary data and inflation in the major economies (it was part of my job description), and not based on theory (the only theory I was really familiar with at the time was actually Monetarism). I do not see QE doing anything; it didn't work in the past either (see chart above).

      Sure, Japanese inflation rates have risen over the past couple months. If you look at my chart, we have seen similar things countless times over the past two decades; but Japan has still achieved price level stability. I would be impressed if the CPI manages to rise above the top end of the y-axis of my chart above, never mind having a hyperinflation.

      I may write about hyperinflation later, but I can add your posts to my re-branded list of "Extreme Japanese Forecasts". (It's in the "Theme" section of posts, backdated to July 2013.)

  2. It is ok to reject the quantity theory of money but you are wrong if you reject the eqation of echange. Do you?

    1. I am unsure what equation you are referring to. Is is MV=PQ (or whatever)?

    2. Yes, that equation. The quantity theory of money is that equation with the added assumption that the velocity of money is constant over a long enough period (which rational minds can argue). But I think all real economists agree that this equation is true (though some don't agree that it is useful).

    3. I don't think there's any reasonable argument against the equation, it is essentially a rewriting the definition of velocity.

      V = PQ/M, or V=GDP/M (where GDP is nominal GDP).

      V is obviously not constant; this is readily verified by looking at recent time series.

      Velocity is the defined by the inverse of the ratio of money (a stock variable) to nominal GDP. If you look at stock-flow consistent models, in a steady state, pretty well any stock variable will drift towards a steady ratio to GDP. Correspondingly, reasonable mathematical models of economies will have velocity tend towards a constant.

      But the same is true for any stock variable. So money is not particularly special in this regard.

      I am in the camp that this is just a curiousity, and changes in base money have no major effect on the economy, as long as the central bank supplies the minimum amount needed to for bank reserves. The demand for notes and coins is roughly related to nominal GDP, but the central bank has essentially no control of the amount of paper money in the economy.


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