Tuesday, September 3, 2013

Zooming Past Inflation Target

In April Japan's central bank announced a new policy where they would pretend that monetization was temporary so they could ignore the "bank note rule" that limited money creation and claim they were not funding the government deficit.   But Japan is spending twice what it gets in taxes and will not be paying down debt anytime soon, so it is not really temporary, so they are really making money to fund government spending.  This is bad.

Since then the  reported Japanese inflation has been going up each month:

            Reported      Change
Apr:   -0.7%
May:  -0.3%               0.4%
Jun:     0.2%               0.5%
Jul:      0.7%               0.5%
Aug:    0.9%               0.2%
Sep:    1.0%               0.1%
Oct:    1.1%                0.1%
Nov:   1.5%                0.4%

Inflation is up 2.2% in 7 months for an average of 0.31% per month.  Starting from 1.5% we can use 0.31% per month to estimate a rate of 2.12% in 2 more months.  This is over Japan's target rate of 2%.   Given that they have no plans to slow down the rate of money creation for almost 2 more years, why would inflation stop going up 2 months from now?  Looks to me like Japan will soon be zooming past their inflation target.

As a country heads into hyperinflation people cut back on optional things, which makes the prices on these not go up as fast.   Necessities like food will go up faster than the average rate of inflation.  This seems to be happening in Japan.

Given the rate a which Japan is making money, I think there is more chance of averaging more than a 0.4% increase per month than less than that.  I think they are close to the point where things start to spiral out of control.  However, the lasr 2 months have not shown this.

Let us look at the choice facing the central bank if 2 months from now it has passed its 2% inflation target.   It has been making money at a furious pace to buy bonds and keep interest rates down.   If it stops then interest rates will shoot up.  Even with interest rates very close to zero a huge part of the government's tax collection goes to paying interest.   If interest rates shoot up then the government will clearly be broke and people will not want to buy or hold Japanese bonds.   The government would fail.   So they can't stop buying.  There is no real choice.   This is when hyperinflation comes, when money creation is really out of control.

If I am right, then the rate of money creation will go up as more and more bond holders get worried and get out, and inflation will go up faster and faster.

Updates:  This post is usually updated after inflation reports come out.


  1. The reason it'll spiral out of control is their public debt. They already spend 50% of their debt service costs on tax revenues with their yield curves being flat. If they try to kill an inflation, they can't do so because any sort of shift in rates would blow up their debt bomb. Japan also spends almost 70% of tax revenues on Social Security with a rapidly aging population. Don't forget the declining tax base implying a declining future tax revenue. The million dollar question is when, not if.

  2. Zero hedge reports the August figure at 0.8%.

    The cake in the oven smells done.

    1. It is strange. Some places saying 0.8% and some saying 0.9%.

      It seems like the end is near. Not sure which stat will convince people that things are out of control, but this one could sure do it in the coming months.

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