Businesses Highlight Abe’s Error — Reuters Blame Messenger!

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In the past I’ve written about Prime Minister Shinzo Abe’s idiocy.  Abe has a bizarre twist in his form of currency manipulation.  Abe is demanding that the Bank of Japan print so much money that the inflation cycle kicks in.  He’s set a target of 2% inflation, as if there’s something magical about paying more for the same product. 

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Abe has it backwards.  Inflation is a symptom not a cause.  As economies heat up, a natural consequence is inflation.  Inflation works against the gains of an economy.  Why Abe can’t look around the globe and see what’s going on in the U.K. is beyond me.  The U.K. is great at creating inflation!  Sadly, that’s about all they’ve done in the last several years.  What sort of moron seeks inflation for inflation’s sake?  It is true, economies want a steady inflation rate, but that’s for stability.  And, they want a low inflation rate, but, inflation without growth is devastating regardless of how low the inflation rate is.  Abe is trying to get the tail to wag the dog.  It’s backwards and muddled thinking. 

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Japan wants to grow up to be like the U.K. !!!!

Source for graphs

Suddenly, in Japan, there’s some who doesn’t embrace Abe’s way of thinking.  He probably should have got these people in line with his way of thinking before he went down this path of stupid.  It all falls apart without them.  For the sake of identifying these people we’ll call them business owners.  Apparently Reuters doesn’t like this reality based group of people. 

Exclusive: Tight-fisted Japan firms deal blow to Abe’s revival plan – Reuters survey

I’ll just highlight some of the information provided in the article……

Tight-fisted companies in Japan may prove the biggest obstacle in Prime Minister Shinzo Abe’s plan to push the sluggish economy into higher gear as they intend to keep a firm lid on wage levels, a Reuters survey shows.

I love the term….. tight-fisted.  Crazy misers don’t want to play in the inflation game!

Abe has directly appealed to Japan’s biggest business lobbies to raise salaries and break more than two decades of falling average wage levels, aware of how critical rising incomes are if Japan is finally to emerge from years of deflation.

So, what happens to a business which raises salaries without increasing demand for their product?  Of course, some would raise their prices in an effort to recoup the losses from the wage increases, but that works directly against demand. 

Now, here’s the error in thinking which Abe and Reuters hold….

Abe’s gambit is that once a deflationary cycle of price declines that depress sales, business investment and incomes is broken, a virtuous cycle will kick in: investment will rise, leading to more, better paid jobs and greater demand.

Without wage rises, Japan could be left with “bad” inflation, where a weak yen pushes up import prices as household earnings stagnate. That would hurt, rather than boost, demand and growth.

Price declines do not depress sales.  A virtuous cycle?  Economics isn’t good or bad in the sense of having a virtue.  It simply is.  Bad inflation?  All inflation is bad.  Not in the sense it misbehaves, but in the sense that it declines the purchasing power of capital.  Again, a steady low inflation rate may be indicative of a good economy, but inflation in and of itself always works against the ones holding the currency.  Apparently, at least one economist has figured out this tricky concept…….

“Companies could raise bonuses, but this won’t lead to sustainable gains as long as base pay remains unchanged,” said Yusuke Ichikawa, economist at Mizuho Research Institute.

“If people expect prices to rise but don’t expect their wages to rise, then monetary policy would become ineffective.”

Here we see some more idiocy of Abe……

“Companies need to be confident about the long-term outlook for wages to rise, and just weakening the yen won’t make companies confident,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. …..

No, it doesn’t make companies confident.  I can see it now.  Every time the Yen loses value, the business owners pop the champagne and celebrate the fact their fortunes have lost considerable value!  Yea!!!  Back to more insipid stupidity…..

The hope is getting wages to rise will help spark the “good” inflation cycle that accompanies an increase in consumer spending. A modest rise in prices tends to generate demand because consumers aim to buy before the cost gets even higher. Deflation has the opposite effect.

What?  Yes, with inflation, consumer spending will increase in terms of currency spent.  But, the value of the currency will be decreased.  Demand will be decreased if the value of the currency purchases less.  It’s just that simple. 

“It will take a great deal of time and effort for production that once left Japan to come back,” Akio Toyoda, president of Toyota Motor Corp, told reporters last week.

“The yen, which was trading in the 70s against the dollar, has hurt the automotive industry more so than people imagine,” Toyoda added.

They won’t come back.  There’s no reason to do so, unless the Yen becomes so devalued that wages become inconsequential to production costs.  That’s really nothing to aim for.  At least some in Japan are seeing the problem clearly…..

“For wages to rise, demand needs to rise, it’s that simple. The problem is that while there are certain areas of growth in Japan, like e-commerce, the overall pie is not growing,” said Naohiro Muta, an independent management consultant.

Well, Japan’s in a tough spot with few choices.  But, that’s no excuse to run down the path to stupidity at break-neck speed.

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8 Responses to Businesses Highlight Abe’s Error — Reuters Blame Messenger!

  1. Latitude says:

    wow what a great way to solve the elderly problem….
    print more money…then don’t increase the money you give them to live on

  2. cdquarles says:

    I have a quibble, James. A growing economy will not cause inflation. Some prices will rise relative to others (supply constraints or high demand or both) and others will decline. Only government manipulation of money and credit can cause inflation (and this can cause inflation even if the economy goes down, where prices would be lower than they are given supply and demand factors). No price, whether is a wage or a product, is fixed in stone. No value is fixed in stone. Value is something perceived by a buyer. The seller only knows what it took to make the good or service in question and at what price they’d like to get in order to get a return on that effort.

    • suyts says:

      Hmm, I don’t know cd. In a growing economy people typically have more disposable income. With excess cash, the public is always willing to pay more for certain products, and they do. Further, as you noted, demand increases. The richer the public the higher the demand for just about everything. Ie, more food, larger houses, more energy consumption, more TVs, computers, and other gizmos. I’m not saying a growing economy is directly responsible for inflation, I’m saying inflation always accompanies a growing economy. I think this is what is confusing Abe. He sees the correlation and thinks it is causation. But, as you and the post points out, one can have inflation without a growing economy.

      • cdquarles says:

        The thing is, James, is that you can have a growing economy (from more people and more productivity) without growing the ‘money supply’. See Karl Menger and subsequent refinements of the Austrian School. You can have more disposable purchasing power without having more disposable income.

        That said, governments won’t keep their hands off money, so no one in real life gets to live in a society with a fixed money supply. Physical gold or silver is the closest we’ve come (since there is only so much mined and only so much that can be mined in the future economically), and even then governments repeatedly diluted physical gold or silver with other metals.

      • suyts says:

        Well, I certainly agree it is possible. But, as you observe, it just never happens. But, yes, I acknowledge your distinction.

  3. cdquarles says:

    Our Abe is a politician. This is the way a politician thinks. This is why governments will always try to inflate themselves out of trouble, only to find out you create a ‘different’ kind of trouble. The laws of economics are just as hard as the laws of physics. God created both, and until He changes them, you can’t defy them without causing harm in some fashion sooner or later. Yeah I know, the politicians always seem to think that later is better than sooner. Not always. Not always.

  4. tckev says:

    Why not take the easy way out and tie the Yen to the Euro.

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