Japanese Hyperinflation? Don’t Bet on it

Michael Casey from the Wall Street Journal wrote a provocative piece last week that laid out the case for hyperinflation in Japan.  The argument essentially comes down to too much government debt:

“The potential catalyst, Japan bears say, lies in the country’s suffocating debt levels. Gross government liabilities are currently worth more than 220% of GDP and projected by the International Monetary Fund to exceed 240% by year-end, an unprecedented level for advanced economies. If Mr. Abe’s aggressive measures ultimately fail, these people argue, Japan must reduce its debt if it is to avoid a massive reduction in living standards required to pay its bills.”

Okay.  Japan has a lot of government debt.  But that also means the private sector has a lot of savings (by accounting identity, the government’s debt is the non-government’s saving).  I know people seem to have an aversion to government debt, but debt alone is not an ingredient for disaster.  After all, our entire monetary system is credit based.  One person’s liabilities are someone else’s assets.  That’s just double entry bookkeeping.  There’s two sides to the coin.  So there has to be more to the story than just stating that debt:gdp levels are high because that’s like pointing out that private assets:gdp are high.  Depending on your bias, you could make this sound however you want to make it sound.

Anyhow, there are 4 reasons why I think Japanese hyperinflation is highly unlikely:

1)  Japan is suffering from a massively deflationary population decline.  Japan’s population is projected to decline -5% in the next 20 years.  If we look at the most basic macro GDP equation including population growth (Growth Rate of GDP = Growth Rate of Population + Growth Rate of GDP per capita) then Japan has a huge deflationary headwind ahead of them.


2) In some cases an output decline can be disastrous.  For instance, in Weimar the manufacturing collapse created an environment where aggregate supply collapsed and you had a classic case of too much money chasing too few goods.  I think Japan is highly unlikely to experience a “collapse” in output, however.  In fact, Japan’s highly productive workforce has kept the economy afloat over the last 20 years despite the greatest de-leveraging in modern economic times.  If anything, when we consider that the de-leveraging has slowed, Japan’s economy looks better than it has in a long time.  They still have the population decline to overcome (which is a hugely negative headwind), but I wouldn’t say it creates the risk of a collapse in output.

3)  Japanese technological advancement continues to be highly deflationary.  When it comes to advanced economies versus developing economies we have to be mindful of the rate of change in new technologies.  Emerging economies are more susceptible to hyperinflation because the life cycle of their output is much longer than the life cycle of products in a developed economy.  In a technologically advanced economy like the USA or Japan this can be hugely deflationary for vast segments of the economy.  That is, consumers and producers are constantly upgrading their technologies with newer and more efficient means of production.  This means productivity is rising rapidly.  Often times too fast for wage growth to keep pace.  That’s not inflationary.  It’s more likely to be deflationary.

4)  In my paper on understanding hyperinflation I noted that hyperinflation tends to occur around some very specific exogenous forces.  That is, hyperinflation tends to be much more than a monetary phenomenon.  It tends to occur when one of the following events unfolds:

  • Collapse in production.
  • Rampant government corruption.
  • Loss of a war.
  • Regime change or regime collapse.
  • Ceding of monetary sovereignty generally via a pegged currency or foreign denominated debt.

None of these events are currently occurring in Japan.  That doesn’t mean something else couldn’t cause the Japanese hyperinflation, but if you’re betting on hyperinflation one of these 5 events is almost certainly always involved.

  Could hyperinflation happen in Japan?  I guess.  Maybe I’ve overlooked something more obvious.  But I think the odds are fairly low.


Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. Great posts. Interesting population chart. You seem more upbeat about Japan than some of your Abenomics posts though. Can you provide more details?

    • Well, I don’t think QE does as much as people think. So it’s not really a case of being extremely bearish on Japan. I just don’t think QE is going to fix their problems. Still, I don’t see a collapse in the Japanese economy….

      • Hussman refers to QE as parlor tricks

        “Con Game
        Frankly, I still view QE as a confidence game that has no financial
        mechanism except to make investors uncomfortable holding Treasury
        bills, and no theoretically valid or empirically supported transmission
        mechanism to the real economy at all. I’m both surprised and a
        little bit disappointed that investors have again placed their
        confidence and financial security on what is the economic equivalent of
        a cheap parlor trick.”
        from this weeks letter
        Former LRM but new ID with this new log in trauma!!

  2. If inflation ever were to become a problem in Japan (and I’m not saying it will), the BOJ would have difficulty tightening. Raising rates would compound the inflation problem given the high level of govt debt.

      • They are spending twice what they get in taxes. This is not something that is easy to fix in a democracy where politicians buy votes with public money.

    • good responses and a great post TPC.

      Japan is working on 2.5 “lost decades” and still a high standard of living and much wealth — a very interesting study.

  3. You could say that Japan has been paying its bills by leveraging its savings. There are signs that the savings are running down because the central bank now has to buy more debt itself. Japan may be running out savers — or at least, the savers now need to spend their money rather than financing the country. … Debt extends the day of reckoning, but eventually Japan, like the U.S., will need to grow, or else allocate its resources in a different way.

      • The central bank owns at least 10 percent of the debt, so that portion is no longer savings. That portion is growing, too.
        How much non-government savings is out there that the government can mop up?

        • I have a feeling that when government begins to directly finance spending that we’re going to call it savings.
          I.e. — the Treasury sends a deposit to my savings account and ‘Yippee, I’m ‘saving.”

          • If the govt were a self financing entity and it issued all the deposits into our bank accounts, then yes, the govt’s spending would be our saving. I don’t see why you make that sound controversial?

  4. When someone writes about a “suffocating” debt of a sovereign money issuer you know they have no clue what they are talking about.

  5. “After all, our entire monetary system is credit based. One person’s liabilities are someone else’s assets.”

    I agree… but just to be hairsplitting, this excludes our coinage, correct? As I understand it, coins are unique in that they are an asset to the US Mint (part of the US Tsy) from the day they are minted (even though pennies and nickles cost more to mint than their face value), and continue to be an asset to every entity which owns them from then on until they are removed from circulation. They never appear on anyone’s balance sheet as a liability.

    Some politicians are advocating that we get rid of the paper dollar and replace it with a coin dollar. Assuming that the dollar coin would cost less to mint than $1 (the current $1 coin costs about $0.16 I think), and that dollars coins would be just as popular as paper dollars, this would give the US Tsy a moderate gain in profit (seigniorage) over the current situation with paper dollars, no?

    Who thinks that plastic coins are coming? Cheaper to mint… lighter… more seigniorage…. ha!… I’d love to see Alex Jone’s reaction to that!

    • Here’s what I found:

      “Coin, however, is an asset on the Federal Reserve’s balance sheet, and is a direct obligation of the U.S. Treasury. As an asset, the Federal Reserve buys coin from the Mint at face value. When a depository institution orders and deposits coin from its Reserve Bank, the institution’s account balance is adjusted accordingly.”



      That “direct obligation of the U.S. Treasury” bit implies that coins are a liability of the Treasury like you say, right?… although they do appear to make money off of the sale of coins to the Fed. Here’s an example of seiniorage on the 50 states quarters:


      Interesting accounting there… the Mint sells (most?) coins at a profit, but they are booked as liabilities to the Treasury?

    • OK, I might as well beat this to death… Here’s JKH on this issue:

      “Coins are not treated as a balance sheet liability from an
      accounting perspective. Coin is not recorded as a liability on any state
      balance sheet – Mint, Fed, or Treasury. This is an accounting choice.
      It is treated only implicitly as an off-balance sheet contingent
      liability of the state.

      Coins are a (contingent) liability in a
      number of senses – the obligation to redeem due to damage or surplus
      requirements, as well as the Chartalist notion of liability to redeem
      for payment of tax liabilities.”

      So if JKH is correct, then I was kind of right in terms of balance sheets… they do NOT appear as a liability on anyone’s balance sheet… but instead are a “contingent liability”… OK, that’s a new one for me. I’d never heard of that before!


  6. Btw, sorry the comment count got lost on this one. I turned off commenting accidentally and can’t rectify the coding to get it back. Oh well. Still shows up if you scroll down to Disqus. Still getting used to the new system…..

  7. so this all works as long as those ” assets”, the governments liability, remain well bid and in demand. You say they will always be well bid and in demand because of the primary dealer structure as well as outside forces, China and other nations desire to own USD’s as well as debt instruments. Under what circumstances could this whole scheme unravel? In other words, under what circumstances could the world decide they no longer want to live off of another nations standards. America has been living far above its means for so long that I think people forget that there is another way of life. Nations around the world have been granting us this lifestyle by providing cheap goods in return for low wages. Is there some point where people around the world wish to live better and thus take a piece or Americas pie?

    I understand this is tricky because if China suddenly increased wages and the prices fed through to the end products, the US consumers would consume less and the Chinese would find themselves dealing with a glut of excess capacity which would negate any increases in wages.

    I guess what I am wondering is what scenario leads to a lack of demand in the aggregate for these assets that we call savings? If that ever occurred, there would be a scramble for hard assets, no?

    • The big concern is a high inflation that leads to price collapses in govt bonds. But that takes us right back to the likelihood of hyperinflation…..

      • Hasn’t high inflation gotten us to where we are today, a nation of debt? My mom still has the receipt for my birth. $325 for all the services and 3 nights in the hospital. My children cost about $40k to $55k each for the same service. Of course I have insurance and only had to pay about $7000 total out of pocket, but my insurance costs $1500 a month. The math doesn’t add up as far as a portion of their income they spent on daily necessities, mortgage, food, health car, commuting, education, etc.
        Grade school costs as much as a big ten out of state University tuition just 15 years ago.

        I just don’t know what planet people get their inflation statistics from, but always seems to be some government sponsored acronym.

        I don’t even think we would know what hyperinflation looks like until it is too late because of the daily brainwashing we get from the fed.

        • Agree, John. We’re living on borrowed money, and rationalizing that all that debt is really an ‘asset’ and won’t have to be paid back.
          And when the Fed buys up the debt by electronically printing a deposit, we call it ‘savings.’