EZ READING MONEY MATTERS: Japan Struggles With Rising Inflation

Zimbabwe's inflation

April 13, 2008

Elaine Meinel Supkis

The effects of global inflation increasingly hammers Japan's economy. For the last 10 years, the businesses in Japan kept this glorious 'depression' rolling while enjoying record growth. But now, the ability to drop wages while sopping up racing commodity prices has become nearly impossible since the average Japanese worker is unable to clip spending any further. Now, with rice shooting up in price, the very survival of the Japanese workers is at stake. Yet the Bank of Japan still pretends there is no inflation and stubbornly keeps interest rates well below the rate of real inflation which is, incidentally, fueling global inflation that is now hammering Japan's domestic markets.

Higher Prices Push Down Real-Term Wage Hikes: Survey

TOKYO (Nikkei)--Major Japanese companies offered an average 1.91% increase in basic monthly pay at this year's wage negotiations, up 0.11 percentage point from the previous year's level, shows a survey compiled Saturday by Nikkei Inc.
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Govt Pension Fund Mulls Investment In Inflation-Linked JGBs

TOKYO (Nikkei)--The Government Pension Investment Fund (GPIF) is discussing the possibility of investing in inflation-indexed Japanese government bonds as early as fiscal 2009 as part of efforts to avoid a decline in pension reserves due to higher product prices, The Nikkei learned Saturday. ***********************************************************

For many years now, the Japanese consumer has paid in full for inflation. This causes a depressionary spiral. Car ownership has been dropping. The buying of residences has been stagnating and now, falling. The ability to get married and affordability for having children is vanishing. This horrible, grinding depression for the working classes is going to end Japan as a nation. Eventually, the country will literally die off or will be taken over by the more energetic and fecund Chinese or Indochinese. In past stories here, I noted the wage hikes being offered to the struggling Japanese workers: $1 a week raises, for example. That is considered huge, by the way. Often it was a $1 a month raise. If any.

I do hope readers here are patient with me. I am learning how things work so when I see information about something, I desire to know what it really is all about. Anyone can post a list of stories with some snark or 'look at this' but those sorts of sites are all over the place and some are quite popular. Everyone snarks after the opening snark but no one learns anything much at all.

For example, for years, while I assembled tons of information, used graphs and charts from the Bank of Japan and in general, educated myself, all the other economic pundits were echoing the false story that Japan's ruling elites were 'struggling to end the depression' when it was the exact opposite: they were fighting tooth and nail to ENFORCE this 'depression' while their high-profit export business became #1 in the world. After 6 years of fantastic growth, Japan boasted the world's #2 FOREX reserves and quickly was taking over as #1 in global auto sales, for example. All, while killing their domestic markets!

For example, as auto sales in Japan collapsed, they soared in the US. This is the dread 'status quo' I also talk about in a negative way. Far from being a good thing, all the economic dynamics of Japan are very destructive for the US. Especially the 'carry trade'. This carry trade is connected with global inflation. The growth of the money supply that has been turned into loans has burdened all systems on earth with high debt loads. Across the planet, we had a simultaneous housing asset value bubble which ultimately stems from the super-low interest rates coupled with a ridiculously cheap yen.

I took 2 years of patient research and thinking to figure out what is going on here. Nearly all stories today about the collapse in global asset property values and the collapse of the buy-out bond market all say, 'Due to the sub-prime crisis'. But this is plainly silly. The knowledge that the sub-prime lending for properties in the US was lousy goes back in time, well before July, 2007. It was in July, 2007 that the Japanese carry trade broke down. This instantly caused a collapse in global 'liquidity.' And the other G7 banks had to make up for this sudden shut down of the major lending window to the planet.

News is now pouring out of Japan concerning inflation. Far from vanishing in this 'depression', it is growing rapidly. And will grow even faster if workers there finally get fed up and unable to even eat, begin to strike or more ominously, attack the ruling LDP government. Already, they have voted the LDP out of the Senate.

The news today that retirement funds are frantic to find some way of staying ahead of inflation is interesting. All the G7 central bankers have hammered away at the notion that inflation is gone. The commodity price rises were short-term and illusionary. They boast that inflation will be of such little concern, why, we have to worry about deflation! This is pure hogwash. We are in an asset deflation cycle but it has been pushed into feeding the inflationary cycle via either increasing government debts via selling bonds or other tricky schemes that fed a trillion dollars into the collapsing asset markets. The history of inflation-indexed bonds is a story about a system growing insidiously due to hidden inflation and the loss of confidence in present economic systems.

Inflation-indexed bond

Inflation-indexed bonds pay a coupon that is equivalent to the sum of the increase in an inflation index and the real coupon rate. The relationship between coupon payments, breakeven inflation and real interest rates is given by the Fisher equation. A rise in coupon payments is a result of an increase in inflation expectations, real rates, or both.

A common misconception about these bonds is that the interest rate changes with inflation. What actually happens is that the underlying principal of the bond changes, which results in a higher interest payment when multiplied by the same rate. For example, if the coupon of an annual bond was 5% and the underlying principal of the bond was 100 units, the annual payment would be 5 units. If the inflation index increased by 10%, the principal of the bond would increase to 110 units. The coupon rate would remain at 5%, resulting in an interest payment of 110 x 5% = 5.5 units. The only known exception to this is the Australian Capital Indexed Bond, in which the interest rate is adjusted as well as the principal.

The trick with the Japanese launching this sort of fund is, like the US, they lie about inflation statistics. The unlucky working class spends more of their income on food and fuel so they shut down spending on manufactured items whenever those two inflate. This inflation drives down the prices of manufactured goods so it actually masks inflation, not enhances it. On top of this, the geniuses running the central banks deliberately and maliciously put all this information backwards: they claim that food and fuel don't matter since they change all the time! Yet every time fuel and food drop in price, these same people will celebrate this as a good sign because then, the economy will boom as manufactured items rise in sales and incidentally, in price! Then they say, with a straight face, 'We have to raise interest rates due to rising prices.'

The retiree population in Europe, Japan and America is rising. These people are mostly on fixed incomes. High interest rates irritate the governments because if they are inflation-indexed, why. retirees will create 'inflation' by spending their money! So to curb this, the government lies about inflation and this forces the retirees to move downwards into cheaper and cheaper food and more and more discomfort with fuel. For example, I used to heat my house with natural gas. I now have to hike into the forest in winter with a chainsaw and cut up trees and feed a woodstove. There is no way I can afford to heat my house with other fuels.

I have no idea how others are faring under this deceptive and rapacious system. I suppose they are cutting back as much as possible wherever possible. The collapsing bond/derivatives markets are hammering retirement funds. In Japan, Europe and the US, the need to boost the investment banking systems, the need to make stocks climb again is imperative. This is the basis of the retirement systems. Right now, retirement funds are not flowing into stocks or the derivative banks. It is looking with increasing hysteria for some safe harbor where there is at least protection from global inflation.

The paradox here is obvious: the very places where this money must flow to protect itself is the place where inflation is being manufactured: the central banking systems of the G7 nations themselves! As usual, it is time to go backwards in time to see how things operated in the past. When did this system of indexing for inflation begin as a GOVERNMENT bond program?

Japan’s New Inflation-Indexed Government Bonds

Japan will soon start issuing inflation-indexed government bonds in March 2004. While the Ministry of Finance plans to issue only 600 billion yen in fiscal 2004—less than 0.4% of the total bond issuance—the significance of the new bonds should not be overlooked.
*snip*
The emergence of inflation-indexed bonds can be attributed to several factors. First, in an efficient market, indexed bonds guarantee investors the real rate of return (after inflation), a feature not offered by other stocks and bonds. Second, for the government, indexed bonds increase the diversity of bond issues, which facilitates absorption of government bonds in the bond market. In addition, the bonds allow the government to match the redemption of principal with tax revenue, which is highly correlated to inflation.

Three countries have very high government debts: The US, which is the champion here, England and Japan. Not only that, we saw yesterday how the US and England are both very heavily in debt in the bond market, to foreign powers. This is why the IMF and the G7 all scream and cry about evil Sovereign Wealth Funds. These funds are the ones bailing out the governments of the top financial powers on earth. Financial powers that are deep in the red at some level. Japan isn't deep in the red to the tune of over $10 trillion to foreign powers like the US and UK. They are Fortress Japan! The government is in debt with its own industrial export powers and other interested parties.

I have run a number of rather tedious articles here detailing the history of US debt, money creation systems, etc. This is so we can truly understand how this system works so we can read the news safely. All the time, throughout the history of the Federal Reserve, for example, our own privately-owned central bankers have piously said, we must redeem principal with tax revenues. But they never do this, they never really want this and it is politically unpopular, to boot.

Instead, they all pretend inflation is emotional. It is 'expectations' rather than the government conspiring with the central bankers to NOT redeem previous bonds via taxes! Indeed, they now want us to believe that inflation is caused by...THE WORKERS! Yes, the workers demand pay raises and this instantly causes inflation. So we went through a period of time where prices for manufactured goods dropped via the nifty system of off shoring all our industries to low-pay venues and then re-importing the very same things we used to make here and this killed inflation.

For a short while. Of course, this also flooded the planet with dollars which is causing global inflation. Inflation is when a government issues more and more currencies and the whole thing drives up prices as people have more cash to compete for things. The method for dealing with this so far has been to find cheaper labor coupled with reducing funds to retirees and others depending on savings.

So, in 2004, right when the US and Japan were boasting that there was no inflation and interest rates in Japan collapsed to literal 0% while in the US were driven down to 1%, this is when the US launched these inflation-hedged bonds that had no set 'interest rate' but rather, the PRINCIPAL would grow. Note that if the PRINCIPAL grows, the ASSET VALUE of these bonds grows and this gives more reserves for the US Reserve to create more loans. So this was seen as a great way to INFLATE the currency. Got it? Heh.

So now we move into 2007: at the end of February, global markets took their first serious hit. Something was very wrong. By February, anyone with half a brain knew that the US housing market, destination for dumping trillions of carry trade debt, was rapidly dying. It had been in decline already for over a year. All the bankers knew this, of course. By then, they were all busy pushing these continuously forming funds onto a madcap run up in buy-outs. This is where the offshore pirates made good work.

February 6, 2007

Around the Markets: Inflation-linked bonds in Japan may fall

Investors should sell Japan's inflation-indexed bonds because consumer prices may fall for the first time in a year by June, JPMorgan Securities Japan said.

A slump in fuel costs threatens to cause the first drop in prices excluding fresh food since April 2006, said Hitomi Kimura, a fixed-income strategist at JPMorgan in Tokyo. Demand may be limited at an auction of inflation-linked debt today, she said.

"There's a 30 percent chance that core prices will go back below zero in the second quarter," Kimura said. "We are bearish on the inflation bonds in the near term."

A five-month slump in the debt, which was first sold in 2004, highlights the risk the world's second- largest economy will slip back into deflation. Cooling inflation expectations add to the case for the Bank of Japan to pause before raising its benchmark interest rate from 0.25 percent, according to State Street Global Markets.

Note how over a year ago, the fear was Japan's inflation was going to END. But wait! I remember back then! Inflation was supposed to not be happening there which is why the Bank of Japan kept interest rates below 1%. But by February, everyone was in a tizzy because they thought inflation was going to disappear and return to 'deflation' due to fuel prices dropping. I remember back then. The drop in fuel prices was pretty minor. Certainly, I was not looking forward to deflation. Indeed, the inflationary part was not in commodities although gold was still climbing, no, it was in assets: corporate paper assets!

This shot up and up during 2007 faster than the housing market shot up! And in Europe, the housing market also shot up! Inflation was still lurking and burning like crazy. And during all of 2007, I noted here at Culture of Life News that inflation was still burning even in Japan. For the last 3 years, inflation has outpaced the official interest rates set by the Bank of Japan. And this is fueling global inflation! They 'clean it out' via offshoring their bonds via the Japanese carry trade.

From the above article:

Japan's finance ministry began selling inflation-linked bonds in March 2004 to broaden the investor base for public debt, which is expected to reach 148 percent of gross domestic product by March 2008, the highest among industrialized nations.

The United States is the biggest market for bonds tied to inflation. It has $411.2 billion of the securities outstanding, about 9 percent of its marketable sovereign debt. In comparison, Japan's inflation-linked bonds are less than 1 percent of its outstanding debt securities.

So-called break-even inflation, which is what the market expects core consumer prices to average in the next decade, has been nearly halved from August after revised inflation calculations lowered prices more than economists expected.

A government report Jan. 26 showed a drop in crude oil prices unexpectedly lowered the benchmark inflation rate to 0.1 percent in December. Hiroko Ota, the fiscal policy minister, said after the report was released that the government must ensure the trend for rising consumer prices is not reversed.

Note how the Japanese, like the US, use any excuse based on energy prices, to increase inflation while pretending there is no inflation due to fuel dropping in price. But when fuel goes UP, they then switch gears and tell us, it doesn't matter. Years ago, I debated this issue. I said, 'When oil goes up in price, all energy systems rise along with oil. This is very inflationary. And price rises pass into the public via inflation faster than when oil prices drop. All the other energy systems then hang onto the higher prices for bigger profits. So oil is one of the more inflationary systems around, aside from government overspending.' I was told, this was nonsense. All sorts of excuses that ignore the 'price of other energy stays high as oil drops to increase profits' part. If you track only oil, the correlation is masked!

So, when oil fell briefly last winter due mostly to a very mild winter in the US, the assumption was, energy inflation would vanish. But since the OTHER energy systems barely budged and stayed high, this didn't happen. Rapidly, oil took off, yet again.

We do have a problem here above all else: the #1 and #2 global economies are both trying to desperately deflate prices at home WHILE INCREASING THE GLOBAL MONEY SUPPLY. Via bonds and government spending, of course. This is the core problem. Both are also trying to weaken their currencies so they can flood the world with manufactured or commodity goods only the US is failing in this, miserably while Japan has been wildly successful. This is why the lopsided global financial and trade systems are in grave danger and sinking rapidly. All the other tensions and troubles come out of this dyslectic mess.

So here is the news today in Japan, it is all about how to deal with high inflation that is caused by the carry trade's relationship with the debt system based on the US dollar:

High Materials Prices Cost Economy Y22tln

Caught between inexorable rises in raw materials costs and difficulty getting consumers to accept higher product prices, manufacturers are facing a serious dilemma. And the battle over who should shoulder the rising costs is becoming increasingly intense, not only between firms and consumers, but also between the suppliers of commodities and manufacturers of final products.

At the request of Nissin Food Products Co. (2897) and other food companies, major supermarket operators like Summit Inc. and Inageya Co. (8182) raised the sales price of cup noodles earlier this year by some 30 yen to around 130 yen. Even though the price hike was only 30 yen, consumers reacted in a highly visible way, sharply cutting purchases of these products.

That buyers are not simply accepting higher prices is also true in the condominium sector. According to the Real Estate Economic Institute, the number of new units newly offered for sale in the Tokyo metropolitan area fell 28% in February from the same month a year earlier. Despite the drop in overall supply, the percentage of units actually sold declined. Industry officials say many potential buyers appear to be staying away from the market because developers raised condo prices in an attempt to pass along higher materials costs.

Wow. A 30% price hike in food? With incomes stagnating or dropping? I see a world of pain here. The problem of how one can have rising prices and profits while having no inflation, this problem that was cured by offshoring, exporting and dropping official inflation rates to well below the real rate of inflation has now reached an end. For the missing piece to this system is simple: workers that are cut out of the profit flow end up poorer and poorer and unable to buy the very things they produce. This leads not only to financial troubles but revolutions, wars and insurrections! History is crystal clear about this.

White-collar workers saw their wages fall 0.7% in 2007, yet crude oil prices topped 100 dollars per barrel and prices of global commodities such as wheat, iron ore and soybeans continued to soar. If firms raise prices, consumers balk and sales fall. Conversely, if companies are unable to pass higher materials costs on to their sales prices, their earnings will be squeezed.

In fact, their inability to pass higher materials costs on to their sales prices is highlighted by the terms of trade index, a broad measure of the profitability of Japanese firms published quarterly by the Bank of Japan. The latest data released last week show the index has hit a record low of minus 49, well below the levels reached during the two oil shocks of the 1970s.

As I keep pointing out, PROFITS is the key for capitalists. And when that vanishes, the system contracts. If the government increases spending and if the banks increase lending to mask dropping profits and falling wages, we get hyper inflation instead of depression. This is best seen in Zimbabwe, Africa. 47,000% inflation at this point: still lower than Weimar Germany at its worse. But not by far. Up until this year, Japan has fixed its profitability problem by exporting to the US. Via the weak yen, easy lending from the Bank of Japan, the profits gained with this export market were vast. The financial condition of the US deteriorated and Japan amassed huge dollar stores.

For they could not use this money flowing in! Isn't that sad? It had to stay inert in order to keep up the one-way trade with the US! To keep the yen weak and increase profits, the money gained had to be ISOLATED. And this kept global inflation artificially low since China and several other nations were doing the same.

But now, China has changed direction and is no longer aping Japan. As I predicted, Japan can't prevent the effects of US inflation policies by itself; it is too small. Only China can do this.

In Europe, where labor unions hold a great deal of power, industrial disputes are occurring at an increasing rate. In Germany alone, there have been railway, airport, phone company, school and day care center strikes since last year. Behind all of them has been concern that consumer prices, which have been climbing more than 3% annually, will cause real incomes to decline if wages are not raised.

Consumer prices in the top seven major industrialized countries, as compiled by the Organization for Economic Cooperation and Development, jumped 3.3% year on year in January. The "disinflationary period" since the 1990s, during which prices rose at a tame 1-2% annually, has ended and there are signs that the world is headed into another era of inflation.

And the Nikkei news finally notices that Japan is part of global inflation! The problem is more basic: we have had vast inflation this last 7 years: asset inflation. This is barely tracked by any central bank because THEY CAUSE THIS. Since they are the authors, they much prefer for us to think they are controlling wages and prices, not increasing the money supply via debt creation. This would rip up the entire fictional curtain separating their magic making and the public. Indeed, thanks to the internet, more and more people are aware of this vital information. We all built this up, slowly, day by day. This is why my articles sometimes are very long and somewhat tedious. They are the backbone to this joint effort as we educate each other in what is really going on.

And now for something completely different from the Chinese media:Man bites dog - and wins compensation!

A court has ordered a dog owner to pay 200 yuan ($29) to cover rabies shots for a businessman the dog attacked in Fufeng county, Shaanxi province.

The dog attacked Ren on March 30. He fell to the ground and the dog started mauling him. But Ren retaliated by biting one of the dog's ears. It scampered away in pain.

Not only did he bite back, he fought back in court. And this tells us, there is hope in the end. People willing to fight back on every level is important. I keep saying, we must deal with things in the real world. Running from one thing to the next seeking shelter is not going to work if the dogs in pursuit still bite us.

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