How Close Is Japan To Hyperinflation?

Government & Bank of Japan Relationships Signs Of Strain

TOKYO -- It is hard to say what, exactly, is going on between Prime Minister Shinzo Abe and Bank of Japan Gov. Haruhiko Kuroda, but one thing is clear: The once rock-solid relationship between the nation's leader and its central banker is starting to crack.
Kuroda, in an unusual move, requested permission to speak and offered straightforward advice for the prime minister, according to a person informed about the matter. The BOJ governor stressed that interest rates could soar in the future if the fiscal credibility of the government is called into doubt.
But the minutes of the meeting, released five days later, included little of what Kuroda actually said. Only vague phrases such as "We need to have serious discussions [on fiscal rehabilitation]" were left in the document.

My view:

Of all developed economies globally, Japan has experienced the worst real estate and stock market decline since the 1989 peak.  Even today at 18,466, the Nikkei has not come close to recovering its December 1989 high of 39,000.  In fact, the stock market of the third largest economy in the world dropped a staggering 80% between 1989 and 2003.  It took 12 years for the index to reach today's value which is only half that of the peak 25 plus years ago.

Japan's demographic challenges are well known, as it has the distinction of being the most aged nation on earth with an average age of 45 as of 2010.  Further, its population is now declining at the rate of approximately 265,000 annually.

It is clear, with the headwinds of a 25 year recession and shrinking population, economic growth will be increasingly difficult to achieve.  Mr. Abe's massive spending campaign "Abenomics", combined with a large Quantitative Easing program, designed to reflate asset prices and increase growth has been a bit disappointing to date.  While to many in the Austrian economics camp, this is not surprising, it seems the neo-Keynesians are baffled by the apparent resistance of the economy to respond.

The concern for Japan, is a high debt load with little prospects to "grow" out of it.  Given the highly unusual move by the Bank of Japan governor expressing his concerns, we can read between the lines that Japanese government bond yields will rise in the not too distant future.  Shorting Japanese bonds may be a profitable strategy at some point.  In the meantime, we may anticipate more QE in Japan as a "remedy" for the nation's economic troubles.  While printing money may eventually produce a severe inflationary period, or even hyperinflation, the deflationary forces at work may prove to be quite formidable to overcome.