Economic Japanification: Not What You Think

While the US runs persistent current account deficits, Japan runs persistent current account surpluses, which is how these substantially different NIIPs were built.

This will be interesting for the United States over the next decade. Unlike Japan, which funds its own fiscal deficits domestically, the United States has historically been partially rel

As previously shown, Japan has a rather balanced trade situation, and has a current account surplus. This presents a natural “floor” for the currency vs other currencies.

On the other hand, the United States has a structural multi-decade trade deficit and current account deficit.

Because the US trade deficit is so large and structural, when we shift

As the yen strengthened in those early years, along with general global economic problems, Japan developed a rare trade deficit, which is unusual in its multi-decade history.

When the Bank of Japan began massive QE in late 2012, it began sharply weakening the yen vs other currencies throughout 2013. And then, in 2014, the US Federal Reserve ended th

That’s how Japanese broad money supply grew more slowly than average government deficits. With back-of-the-envelope numbers, about 5% in new broad money was created per year by monetized fiscal deficits and public debt accumulation, which was offset by about -2% of money supply destruction from private deleveraging per year. This resulted in roughl

And from 1991 to 2019, Japan’s broad money supply never grew more than 5% year-over-year. Even last year in 2020, during this pandemic era of actual money-printing, Japan only grew their broad money supply by a little over 10% during the year, compared to 25% during the year for the United States.

Part of this historically slow broad money supply gr

In contrast, during the three decades prior to 2020 (pre-pandemic), Japan never ran a budget deficit larger than 8.3% of GDP. Their deficits were big and persistent, but gradual:

When the Fed’s balance sheet rose sharply from 2008-2014 via QE, it didn’t necessarily translate into broad money supply going up because there was no direct mechanism to turn base money into broad money. However, in 2020, the combination of QE and large fiscal deficits (literally sending checks to people) did cause the broad money supply to go up

Follow the (Broad) Money

There are two primary ways to increase the broad money supply significantly.

The first method is that banks have to lend more, which increases the “money multiplier”, or in other words makes the broad money supply many times larger than the base money supply. Inversely, if debts are paid off, that destroys broad money.

The s

which of the following advanced currency areas had the fastest rate of broad money supply increase per capita over the past twenty years? The United States, Euro Area, or Japan?

Most people would probably guess Japan, since their central bank has been the epic printer.

The answer is actually the opposite. Japan grew their broad money supply far more