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What's next for Japan's economy?

Like a hospital emergency room TV show, audiences have been watching bold Doctor Kuroda (Bank of Japan Governor Haruhiko Kuroda) stabilize his "patient."

In April 2013, he burst through the proverbial ER doors, introducing "quantitative and qualitative monetary easing (QQE)." "Qualitative" means saying he would do whatever it takes. "Quantitative" means blood transfusions. Negative interest rate policy (NIRP) means shinny needle with drugs. What's next?

Next is for Doctor Kuroda to become Doctor House – a diagnostician like Dr. Gregory House (Hugh Laurie) in the television show "House." Why? Emergency-room monitoring devices, like core Consumer Price Index (CPI), do not penetrate enough.

The question is whether these conventional assumptions are true:

  • When the Nikkei index hit a low in June 1992, the consumer price drop was just like any other in history.
  • Japanese consumers haven't been buying enough stuff and this is primarily due to a "deflationary mindset."
  • "Deflationary mindset" has been due more to monetary policy than tangible product changes.
  • Price level changes since the 1990s have been more about money than production cost.
  • Prices should have risen over time because of limited workers, land or raw materials.

For Dr. House, one test would often solve the medical mystery. Simplifying these assumptions into one picture, the economic test would be whether the price-quantity time-track has been upward-sloping. Has it?

Not since 1993, when the price index for household final consumption expenditures turned flat – but purchases grew.


In 1997, Japan became the first country to have average prices falling with purchases growing.

Was Japan alone? No. In the mid-1990s in the U.S., the average of all goods prices turned flat, with many falling. Different in the U.S. was that services prices kept rising — mostly housing, health care and higher education — hiding dramatic changes in goods.

Consumption of durable goods, those items like refrigerators and cars that are meant to last more than three years, are a sensitive measure of confidence given they are "big ticket" and there is only so much food (non-durables) a person can eat. Since 1994, Japanese…

  • Real purchases per person of durable goods increased over 25 percent cumulatively or 2 percent annually faster than in the U.S. – doubling a healthy pace.
  • Total real amount ("stock") of major consumer durables in an average household cumulatively increased 169 percent, led by information transmission equipment rocketing over 3000 percent and appliances jumping 380 percent.

Could Japanese consumers be even more powerful than U.S. consumers? Yes. Japanese consumers have had stronger debt level-adjusted spending.

When quantitative easing and the consumption tax forced prices up, the "fishhook" (enlarged below) shows purchases reversed along the downward-sloping time-track.


What's behind this downward-sloping time-track?

Innovation cut production costs and rendered false the assumption that growth is primarily constrained by toiling workers, land or raw materials.

Japan is no longer primary supply-constrained — it is first to experience growth in abundance — in pictures, the downward-sloping time-track.

In physical plant and methods, Japan's global companies have been leaders in Deming's Total Quality Management and the use of exponential technology. Beyond consumer electronics, think Japanese robots and flexible, small-footprint manufacturing. Technology ripple effects reflect those described at Singularity University, including the book "Abundance" and the Exponential Technology section of Feddashboard.com.

In Japan, exponential technology has been rippling through the Japanese economy more quickly than in other countries due to industry structure, policy, global trade, and consumer preferences (think new housing with latest built-in tech).

Japan faces challenges. As retail structure gives way to electronic commerce, prices fall and jobs get hurt. Pressure will increase on inefficient professional jobs and "knock-down, build-up" housing models.


For diagnostic Doctor Kuroda, the opportunity is Jujutsu — go with the flow of exponential technology that powered "Japan Inc.," apply complementary monetary policy, and then teach lessons learned to the world's central bankers.

For fundamental investors, the opportunity is for fresh bottoms-up analysis and accounting arbitrage.

Commentary by Brian Barnier, economist/strategist at ValueBridge Advisors; co-chair, Corporate RiskOversight Committee, ICGN; Research Committee Member/Board Advisor, RIIA; andEconomics & Finance Faculty, Singularity University. Follow him on Twitter @Brian_Barnier.

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