E Is Japan Falling Back Into Deflation? Only One Monetary Solution Left

One has to ask if Japan is falling back into deflation. Certainly the dollar failed to strengthen as promised, and that would have helped the BoJ. The Fed is probably going to try to raise rates to help Japan. That could cause a devaluation in China, and that would be a shock. The fragility of the world economy is pretty evident right now. Japan needs a stronger dollar and China could use a weaker dollar.

Here is a Japanese inflation chart:

source: tradingeconomics.com

The policy of creating inflation is slipping. Inflation is becoming something longed for, not something clearly attainable. Japanese risky bets are an indication that banks are expecting inflation, taking the inflation side of bets, while investors are still expecting deflation, taking the floating, low rate side of the bets.

Clearly, two months do not indicate a trend, but the higher inflation trend of early 2015 has been crushed. Abenomics is simply not succeeding. In the face of a stronger dollar, it is time for helicopter money in Japan. The population is shrinking, and therefore each citizen needs more money to spend.There is too much debt, so base money that bypasses traditional QE is simply the only sensible tool the BoJ has left. The BoJ has nothing else left except to threaten the world with a Lehman Brothers moment.

But here is what Japan really needs right now:

The helicopter money (HM) debate that he (Eric Lonergan) started was based on the concept made famous by Milton Friedman. Whatever you think about Friedman, or about neoliberalism, or about monetarism in general, put that all aside. HM is different and better and more fair, and could at least slow the divide between rich and poor. Helicopter money has been called QE for the people but that is not quite right...

...It is important to understand that some in central banking appear to be in love with the concepts of negative interest rates and breaking the zero lower bound with nominal rates. If that is the case, then helicopter money, though a far better idea, will never be implemented.

This would be a big mistake for monetary policy. I hope this love affair with negative is not a sinister plan on the part of some in central banking. If it is sinister, we will have to all shout louder in our commitment to helicopter money, but understand clearly what it is and what it does.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Moon Kil Woong 1 year ago Contributor's comment

The Federal Reserve is copying Japan right into the zirp Q/E hole. The issue is that it leads nowhere but where its hot and lava-like. Japan is seeing that negative rates is close to the mantle. It makes no one better. Rather it will make things worse. Climbing out of hell is not fun.

Sadly, the Federal Reserve also wants to go swimming in lava and wants to try taking money from you for holding money (negative rates). In this system, you have little to no power and they have all the power. This is not capitalism, it's much closer if not completely a socialistic managed economy. You might as well put 666 on your head and declare yourself a slave now.

Gary Anderson 1 year ago Author's comment

If the people would demand that the Fed pay out HM, it would change things on main street. But most people have no clue what the central bank does, or doesn't do.