Dateline: En route to Nagoya, Japan
Greetings today from the Nozomi superexpress train, where I’m headed from Tokyo to central Japan’s Nagoya.
I was in elementary school when modern day Japan was at the height of its greatness. In fourth grade, the school news propaganda service showed us these fabulous new bullet trains that could criss-cross the long coast of Japan in record time.
Today, Japan reminds me a bit of a centuries old story…
Yang Guang was one of the early emperors of China’s seventh century Sui dynasty. Yang Guang was hailed through much of his rule for creating infrastructure within the empire, including an innovative grand canal.
However, Yang Guang’s military prowess did not match his successes at home. Several expeditions to modern day Japan failed, and Yang Guang was highly insulted when he received a letter from Prince Shotoku which read, “The emperor in the land of the rising run sends a letter to the emperor in the land of the setting sun.”
One emperor was acknowledging the decline of the other emperor’s kingdom. He saw the writing on the wall.
That same story is playing out again today not only here in Japan, but in the western world as well.
Just a few years ago, Japanese investors were snatching up US real estate, including much of Manhattan’s skyline, at a frantic pace.
It wasn’t to last.
Empires come and go, and after a brief flirtation with economic world domination, Japan has been mired in a economic malaise for two decades now.
Today, Japan faces a serious economic and demographic disaster. It’s a sad reality for a genuinely gracious culture that has innovated a lot over the years.
But as we’ve seen throughout history, the decline is hard to stop.
Just checking the front page of this morning’s newspaper is just the latest reminder that the economy here in Japan is in total despair.
Imagine waking up to this headline: “GDP plunges 7.1%”.
While the emerging markets boom of recent years has shown positive returns in countries like Cambodia and Mongolia as high as 20%, it’s not that often you see any country – let alone a highly developed, affluent like one Japan – seeing 7% of its entire economic activity fade into the proverbial sunset.
There are a few things that stand out in this story that are particularly troubling to anyone pinning their hopes on some kind of economic miracle in The Land of the Free or the west.
Among the first things that stood out to me is that the GDP plunge was “larger than the drop expected”. No matter where you go, the government always tries to soft sell its own stupidity.
As I always say, bureaucrats and politicians will use even the most brazen methods to keep their own party going long enough to stay in power. Not until they’re being hauled out after a coup will they ever admit just how bad things are.
The Japanese government has been trying to soft sell the disastrous effects of Abenomics and a big tax hike even after their policies have failed miserably.
Beyond the typical propaganda, though, is exactly what has caused Japan’s latest fall from grace.
And that, perhaps, shows the difference between the Japanese media and the lap dog press in the west. Because here – right in the headline in huge print – is the reason.
A massive tax hike.
In an effort to shore up its finances, the Japanese government decided to drastically raise taxes on every consumer. They figured, “hey, let’s have a lot of inflation and raise the price of everything so people can’t afford stuff.”
Brilliant plan, right?
Consumers are staying home and holding on to their wallets as they brace for worse times to come. Yet despite that sentiment, the Prime Minister Shinzo Abe is actually sitting around debating whether his next round of tax increases should go into effect next year as planned.
Can you say, “Abe fiddled while Tokyo burned”?
Japan has the developed world’s most astonishing debt to GDP ratio and a dwindling tax base from which to loot. That means they need to get their hands on money by whatever means necessary.
Raising taxes on everything the Japanese people buy may cause the economy to go into the toilet, but at least it puts some mad money in Shinzo Abe’s pocket.
This was the same guy who figured joining the race-to-the-bottom currency war was a fantastic way to give Japanese exports a boost and create new jobs so that more people could pay his stinging tax increases.
But it didn’t work.
Instead, Japan is now stuck with some of the highest taxes in the world, a currency that has declined double digits in a few years and is poised to decline further, the world’s most impressive sovereign debt, and a shrinking and increasingly impoverished population.
Forget the demographic concern that the Japanese aren’t reproducing or allowing immigration.
The writing has been on the wall in Japan for years.
Yet while the media here in Japan is actually taking the politicians to task for claiming that a 7% GDP plunge is part of a “moderate recovery”, the media in the western world are not. And most people in the western world not only fail to understand what has happened in Japan, but what is happening at home.
The United States and western Europe are plagued by the exact problems that have made Japan yesterday’s news in a serious way.
Out of control deficits and national debt. The United States has the world’s largest sovereign debt, with nearly $100 trillion in red-ink when you add in the off-the-books liabilities.
Declining currencies. While the dollar may be a decent trade against the euro in the next few months, both are on a path to ruin.
Remember when the Japanese yen was a serious currency that was reported on and could be easily exchanged around the world? Today, it’s just an also-ran, and no reserve currency status can save the US dollar from itself.
High taxes. Just as Shinzo Abe hasn’t figured out that his high tax burden is a big part of the problem, yet he is fully open to marching on with MORE of what isn’t working. It’s like the old joke about the definition of insanity.
Right now in The Land of the Free, fat-mouthed politicians are yapping about the evils of corporate inversions. Jacob Lew even wants to make them illegal, citing the “immorality” of companies following my five magic words and going where they’re treated best.
Countries like the United States will never get the picture that their high-tax policies don’t work, no matter what economic disaster happens elsewhere for the same reasons. For US and western politicians, it’s not about building an economy, it’s about screwing over the people they don’t like.
Unfavorable Demographics. Just who will pay for all of United States’ unfunded liabilities? Certainly not a shrinking pool of workers, let alone those who can actually get a job in a rapidly shrinking workforce. The situation is much more dire in much of western Europe, namely in Spain.
Good luck collecting a check from the world’s largest Ponzi scheme or accessing your private retirement benefits when the government needs to take that money to pay off their political cronies and keep yet another party going deeper into the night.
Politicians re-arranging deck chairs. Directly below the story on what should be an earth-shattering signal of economic decline is Shinzo Abe hob-knobbing with the President of Sri Lanka. Japan just agreed to give $135 million to the Asian country to build – wait for it – digital radio stations.
Fiddling is a politicians’ favorite pastime.
The question is, will you heed the warnings of Japan and their grave similarities to the politics and economy where you live?