Economic Japanification: Not What You Think

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

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

When Paul Volcker became the chairman of the US Federal Reserve in 1979, after years of the United States being unable to control its worsening inflation problems, he proceeded to sharply increase interest rates to approximately 20%, which is associated with finally quelling inflation. The inflation-adjusted yield on bank accounts was very high at

Basically, we engineered a way for the whole world to need dollars (most major oil producers would only sell oil in dollars), and as a result, the forces of supply and demand hold open our trade deficit to provide the rest of the world with dollars.

Export-driven countries like Germany and Japan were able to rise to the occasion on the other side of

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

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:

in the latter half of the 1980s, as their currency rapidly strengthened against the dollar. While a strengthening yen would benefit Japanese consumers, the products of various Japanese exports became a bit less competitive. Fortunately, their quality-to-cost ratio was very high.

Japan responded with monetary easing, fiscal stimulus, and financial re

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

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