This past week it was officially announced that Japan slipped into recession yet again—its 5th since the global crisis of 2008-09.
What does this mean—not only for Japan but for emerging market economies from Latin America to Asia; for the economic ‘hard landing’ apparently underway now in China; and even for Europe and the US?
The latest economic collapse in Japan—the third largest economy after the US and China— comes despite Japan’s massive ‘quantitative easing’ (QE) money injection program introduced by its central bank, the Bank of Japan, in the spring of 2013. That initial program provided more than $650 billion a year in Bank of Japan buying of corporate bonds and stocks—i.e. money that went directly into the pockets of bankers and investors in Japan and globally.
When the initial $650 billion was quickly followed by Japan’s 4th recession less than a year later, in the spring of 2014, it was raised to an estimated total of $1.7 trillion. That was followed once again within months by yet another 5th recession in 2015: Japan’s GDP fell by -0.7 percent this past March-June and another -0.8 percent July-September.
The continued failure of QE and free money to resurrect Japan’s real economy has nevertheless resulted in recent months in calls for the Bank of Japan to buy even more corporate bonds, stocks, and other private securities—illustrating the strange logic that, ‘if a multi-trillion dollar free money (QE) program fails, the solution is to provide even more of the same failed policies’.
But has QE and free money for banks, corporations and investors really failed? The real question is ‘failed for whom’?
Whose Recession?
While central bank subsidy programs everywhere—i.e. QE, zero rates, etc.—have clearly failed to generate much real economic recovery, they certainly have benefitted banks, corporations, and wealthy investors. In the case of just Japan, since spring 2013 its stock markets have risen by 70 percent. Corporate profits have doubled. And Japan corporations now sit on a cash hoard of more than $3 trillion, which they refuse to invest in Japan, in decent paying jobs, or to raise wages.
In contrast to rising stock prices, profits and corporate cash piles, median real wages continue to fall at a rate of 2 percent or more a year, as they have since 2009. Most of the jobs created in Japan in the past few years—as in the US and Europe— have been part time and temporary and therefore low paid. Japan’s ‘contingent’ (part time/temp) labor force is estimated today at about 38 percent of all employed. Many of Japan’s better paid manufacturing jobs have been offshored to China. Facing these dismal prospects, not surprisingly Japan workers have been leaving the labor force. The fixed incomes of retirees are also declining. Further exacerbating all the above is the sharp rise in inflation from imports for Japan households and consumers. A secondary effect of Japan’s QE and monetary policies has been to dramatically reduce the value of Japan’s currency. The Yen in recent years has fallen almost 30 percent against the US dollar; and up to 50 percent against other Asian and emerging market currencies, including China’s. That means Japan prices for imports have risen sharply, further reducing real wages and incomes for workers, retirees, and average consumer households.
Prime minister, Shinzu Abe’s, answer in 2013 was QE and free money for banks and investors and then austerity and taxes on consumers in 2014. And when the 4th recession hit in spring 2014, his answer was not only to expand QE but to introduce tax cuts for corporations within months after he just raised taxes on consumers. To offset wage and income decline Abe’s answer was to plead with Japanese corporations to raise wages voluntarily—a plea which they quickly and arrogantly dismissed publicly as ‘unrealistic’.
Now that another recession has just occurred, last week Abe desperately announced a token adjustment to Japan’s policy of fiscal austerity, by calling for an increase in subsidies to the tens of millions of retired Japanese on fixed incomes who have had no income gains for years and in some cases for decades. He also announced a plan to raise minimum wages. But whether this in fact occurs remains to be seen. If it does, it will represent a reversal of a 25 year history of fiscal austerity for most of the population.
Who’s Next?
What Abe’s monetary policies have accomplished is to set in motion, and then intensify, global currency wars that are devastating emerging market economies in particular.
Japan’s initial 2013 QE policy pushed emerging markets’ currencies lower, as the latter tried to compete with Japan for global exports share. But Japan QE came just as deflation in global commodities prices also began depressing emerging markets in 2013-14 also causing their currencies to decline; and just as the US central bank, the Federal Reserve, announced it’s a long term policy to allow US rates to drift up. This ‘triple impact’ of Japan QE, US interest rate shift, and global commodity deflation accelerated the collapse of emerging markets’ currencies.
Then Europe launched its own QE early in 2015, thus adding a fourth factor intensifying currency collapse. Japan’s QE no doubt had a role in the Eurozone’s decision to devalue the Euro by means of QE. Emerging market economies now faced ‘competition by dueling QEs’ from Europe as well as Japan. Meanwhile, as all parties intensify their fight over a total global trade pie that continues to contract in growth rate terms, the volume of world trade has slowed for the third year in a row in 2015 and by some estimates is now even flat.
For emerging markets, collapsing currencies mean capital flight, and a subsequent decline in their real investment and real growth. Foreign investment into their economies has been shrinking as well. To stem the outward flow and attract new capital, interest rates have been raised by some emerging markets, further slowing their economies. Unemployment has followed, further compressing wages and consumption. Meanwhile, falling currencies have meant rising inflation for imports, and thus even further declines in real wages, income and consumption, and therefore economic growth.
Overlaid on all this is China, which recent data shows is clearly heading for a hard landing. According to a growing number of independent estimates, its economy is not growing at the official 6.8 to 6.9 percent GDP rate but at a much lower 4 to 5 percent rate. New data out of China last week show China’s industrial production and profits have entered a period of major contraction. Its stock markets in November are now begun reflecting this, as China stock prices once again—as during last August—have begun another major contraction phase.
Japan will inevitably introduce yet another QE, likely sometime in 2016, after it waits for the US to raise rates in December 2015. Europe undoubtedly will follow Japan with more QE, maybe even before. And with its own economy slowing faster, China will be forced to devalue its currency further at some point as well.
Thus Japan’s latest recession promises to continue the global currency wars by precipitating yet another Japan QE, another similar response by Europe, and an eventual further devaluation response by China.
And what will the US do? Raise rates next month, of course—and experience yet another GDP contraction in early 2016, as it has four times already since 2011.
by Jack Rasmus
copyright 2015
Jack Rasmus is author of the just published analysis of the global economy, ‘Systemic Fragility in the Global Economy’, Clarity Press, November 2015, available at: http://www.kyklosproductions.com, at http://www.ClarityPress.com/Rasmus.html, or from Amazon.
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 
I recently received an excellent comment on my article above, ‘Japan’s 5th Recession in 7 Years’, that I feel compelled to answer here, on my blog. While that practice of responding to one’s own blog articles is a little odd, my answer is, I hope, worth noting. Here’s what the commentor on my article said:
“What an economic mess. These governments keep repeating the same mistakes or maybe they are not mistakes since the wealthy are getting wealthier despite almost everyone else in these countries struggling.”
And here’s my response, which has general relevance:
“You’re right. They aren’t stupid mistakes. They reflect a view (shared in the US, UK and Europe) that QE and zero rates, i.e. monetary policy, is the preferred ‘solution’ to getting the economy growing again. Their idea is if they can boost stock and other financial markets, it will increase the wealth of investors and corporations. With that added wealth, they will then tend more to invest (i.e. a kind of ‘financial trickle down’), leading to more jobs (which doesn’t happen), and in turn more wage income (ditto) and subsequently more consumption and GDP. That way, the rich get quickly bailed out, and the rest get maybe a little, something, sometime, down the road, maybe… That is preferred to fiscal policy, which bails out the rest of the economy first—not bankers and investors—with the ‘reverse maybe’ of increased consumption leading to more profits and stock price gains and financial wealth for the rich. In other words, fiscal policy is a reverse of monetary policy as to who gets bailed out first, the most, and who has to wait for trickle down. Not surprisingly, they prefer monetary policy. Problem is they’ve become addicted to it. And with their greater political influence and power, they just keep it going. Ironically, it leads not to more investment and non-capital incomes, but to slower growth and even declining such incomes as seniors and retirees earn nothing on savings and workers end up with contingent and bullshit ‘sharing economy’ jobs.
All the c apitalist sectors globally have adopted this strategy. It’s just that Japan has been doing it longest, and it’s economy is the worst of the lot.
That’s why when the Robert Reichs and Krugmans and such keep calling for more fiscal spending benefitting workers and middle classes they are intellectually ‘pissing in the wind’. The elite will not resort to serious fiscal stimulus. They abandoned that long ago. The rest of us can stagnate or experience lower paying jobs, less secure work, no benefits. They just don’t care, so long as the money flows into their financial markets and their capital gains keep coming. This is now the nature of 21st century global capitalism. What we are now experiencing is what they, the elite, see as the ‘new norm’. (see my new book, ‘Systemic Fragility in the Global Economy’, just published for the deeper empirical, policy, and theory analysis).”
Anyone interested is certainly welcome to ‘comment on the comment’…
Jack Rasmus
I think the idea of reponding to your own blog is great, because it allows readers to be in touch directly with the blogger, the one with the expertise. I’ve read this particular posting several times, to try to understand it, but it still leaves me confused. It seems that QE is the preferred response of many Developed Country governments to global stagnation, where countries are competing with each other for a share of an economic cake which is shrinking, or only growing very slowly. But clearly competitive devaluation is a zero-sum game – countries only gain at one another’s expense – and that gain is only temporary anyway.
But isn’t QE a response to a deeper problem – the problem of low profitability? Profitability – the rate of profit – has declined hugely at a global level, from the end of the War. Different methods of measurement (Marxist calculations, but also Goldman Sachs) yield a similar story of economic stagnation. Some methods even show that profitability is still falling now, in 2015. The response (of capitalism) has been to lower wages, even in the USA where they have stagnated for the past thirty years. When that has failed to increase profitability – because it reduced demand – easy credit was made available as, for example, in the US or Spanish housing markets. But this led to default and crisis, and even lower profitability. From this has come a thousand kinds of fraud – insider dealing, LIBOR rigging, and on and on. In a desperate attempt to gain maintain profitability.
But capitalism can only function when producers/capitalists pay their workers, make profits, reinvest those profits into production, which makes profits, and so on. Capitalists don’t reinvest as much now, and they don’t pay their workers enough. Surely capitalism cannot survive unless it does this. QE, low wages, cheap credit, fraud, is not capitalism. Things can only get worse. Not just for the ordinary 99% of the population, but for capitalists too, who are killing the goose which lays the gloden eggs of their privilege .
So where is the mind of capitalism? Who or what thinks about these things, in the engine of capitalism? Anyone? Where are we going?
These are very appropriate questions. Let me reply to some main points you make:
Yes, QE and devaluation by QE is a temporary fix, and not a very effective one. But these economies (especially Europe and Japan) are desperate to get their real growth up again and are willing to opt for a short term solution. However, as you point out, it’s a ‘zero sum’ game over the longer run. Everyone can ‘devalue’ their way to boost exports and therefore domestic growth. In the end, it’s a ‘race to the bottom’. That’s precisely what happened in the 1930s, but then it was devaluation by government edict changing their currency exchange rates. The collapse of trade in the 30s contributed significantly to the extending of the depression.
As to the relationship between QE and profitability, and specifically the rate of profit per Marxist analysis, there’s an error in this analysis. It assumes that investment (or capital accumulation in Marxist and classical economic terms) is solely or even primarily a function of profits, of retained earnings. That’s not the case in the 21st century. Retained earnings (profits) are increasingly not a major determinant of investment. With the massive liquidity generated by capitalist central banks, investment is increasingly financed by debt, or by equity(stock) issuance as liquidity artificially pumps up stock prices. There’s been more than $10 trillion in new corporate debt issued since 2008 alone. That means that profits can fall, and investment still rise; or, more accurately real investment is declining even as profits are escalating rapidly. Marxists are stuck on the classical economics notion (as was Marx himself) that profits primarily generate investment/capital accumulation. And there’s another problem. What kind of investment are we talking about? There’s real investment (in equipment, structures, etc.) and there’s financial asset investment (stocks, bonds, forex, derivatives, etc. etc.). What’s been happening is more and more total investment (real and financial asset) is being diverted into financial assets and speculation. Why? Because it’s simply far more profitable, more quickly, to invest in liquid financial asset markets globally than to invest in producing real things. The latter, by the way, is what creates jobs; the former very little. So we see a problem of capitalism in creating jobs as the relative shift from real asset to financial asset investment occurs. Profits from financial asset investing are largely the consequence of asset price appreciation, rather than revenue from sale of goods. The former is realizable much more quickly. For this and other reasons, there’s a shift to financial asset investing in modern capitalism underway. (The title of chapter 11 of my book,’Systemic Fragility in the Global Economy’, now out).
Another problem with the marxist falling rate of profit hypothesis is that, per Marx, it addresses profits only from the production of goods from what Marx (and classical economists before him) called ‘productive labor’. So it is a very narrow concept of profits itself, thus limiting still further the idea that profits determine investment, which I addressed above as too limited.
I would add that the Marxist falling rate of profit idea is not totally incorrect. It is only half correct. So I’m not really anti-falling rate of profit. Marxists need to update the theory to better consider the ‘circulation and reproduction of capital’ (as Marx called it), after goods are produced and profits from goods production with productive labor occurs. What happens to capital in its circuit after production is what’s missing in Marx and falling rate of profit ideas. For profit, even in Marx, is an exchange value concept, not just a productive value concept. Profits from speculative finance must be addressed, not ignored (as most contemporary Marxists do). You can read all this, my perspective, in much greater detail in Chapter 17 of my book, entitled ‘Mechanical Marxism’.
Apologies to all for the extended reply.