Japan: The last 20 years

What is the first thing that comes to your mind when you hear “JAPAN”? Maybe you’re a gamer and you thought about Sony’s play station or is it you’re hungry and thought about sushi or did you think about a Samurai or a weird Japanese TV show?
I can tell you, economists think about deflation. And there is a good reason for that!

Japan has been in deflation for the past 20 years!


- Inefficient monetary policy
- Financial shocks from Asian crisis in the 1990s, tech bubble of 2000 and 2008 financial crisis
- Decrease in prices after the Japanese real estate bubble burst at the end of the 80’s
- Inflow of inexpensive goods from other Asian countries. To stay competitive Japanese businesses had to decrease their prices.

In a deflationary society, individual businesses cannot raise their prices. If they did their sales would suffer, as they wouldn’t be competitive anymore. Not being able to raise prices means profits will stall. And thus forecasting limited long-term profits, businesses will decrease their investments and keep hiring at a minimum.

In the same manner, households expecting no increase in wages and decreasing prices in the future, will decrease their consumption until prices are lower and lower. Thus limiting growth.

And that is what happened in Japan. Instead of investing, Japanese households and businesses saved their savings for future consumption. Furthermore, it is important to remember that household savings are banks’ liabilities. So banks not being able to lend and increase their assets, started buying safe Japanese government bonds. Meanwhile, a decrease in tax revenues and a growing spending that is needed to support an aging population, increased government debt substantially. In 2013, Japan government debt was 10 Trillion Yen with a GDP of 6 Trillion.

The whole economy was in a vicious cycle. Prices did not increase, sales and profits declined, wages stalled, consumers stopped spending, and prices continued to decrease.

This long-term deflationary trend had a psychological impact on the Japanese society. They got used to saving and investing in safe assets only. However for the country to get out of this deflationary spiral, Japanese people will need to spend and invest in riskier assets.

And that is why the Japanese central bank initiated a QE programs. By buying JGB, the government puts pressure on long-term nominal interest rates.
The goal is to keep interest rates low to stimulate spending. Which should increase inflation. But remember, it needs to be slow and stable inflation otherwise it would be devastating for the country.

If all goes according to plan everyone can live happily ever after. If not, inflation will eat savings, devalue the currency and send the stock and bond markets to perdition.

Georges Boustany

Energy, Food, Demographics and the Future of Humanity (Part 3)

Chapter 3- The role of natural gas

Like all commodities, oil has a limited supply. Oil is a mix of dead organisms, mud and sand. Add time and pressure and you get oil. In the 20th century, there was no shortage of theories as to when the world would run out of oil. What all these Phd people disregarded was human ingenuity and technological advancement. The 21st century brought new ways of extracting unconventional oil and supply now seems unlimited.

Natural gas is primarily made up of methane. It was usually a by-product of extracting oil. If no use was found for this gas it was re-injected into the well to increase pressure and facilitate extraction of more oil or liquefied and sold as Liquefied Natural Gas.

natural gas

Fossil fuels occur in the three states of matter: in solid form as coal; In liquid form as oil and in gaseous form as natural gas. Among the fossil fuels, natural gas emits the least CO2. However, some reports show that natural gas extraction creates small earthquakes and contaminates subterranean water. Natural gas should therefore be seen as a bridge between oil and clean energy. The ultimate step being solar and wind energy.

Due to its global availability, demand flexibility, low CO2 emission and relatively low extraction cost compared to other energy sources, natural gas will play a major role as an energy source in the next decades. Indeed, unlike oil, natural gas generally requires less processing for terminal use and therefore costs less than oil (In BTU terms, $1 of natural gas can obtain 200,000 units of energy (at a spot rate of $5/million BTU) compared to $1 of WTI oil which garners 60,000 units of energy (at a spot rate of $97/barrel))*. These favorable characteristics have enabled natural gas to penetrate many markets.

According to EIA the global sources of energy are:

Transportation: 94% comes from petroleum
Industrial: 40% from Petroleum and 40% from natural gas
Residential and commercial: 75% from Natural Gas
Electric Power: 50% from Coal, 20 % from Natural Gas, 20% from Nuclear

With my limited knowledge of power generation, I was able to find some future opportunities for natural gas: 1) In the industrial sector, through the conversion of coal-fired boilers to natural gas boilers.2) In the chemical industry as a growing source of hydrogen production for petroleum refining. 3) And a further transfer from coal based power generation to natural gas power generation in the power industry.

Due to its gaseous nature, natural gas is mostly delivered by pipeline. The implications is that different regions have different gas prices as gas is not easily transferable from one place to the other like crude oil. The price fluctuates around 4$ in the US, around 9$ in Europe and around 15$ in Asia.

Although there are large supplies of gas, outside the US the gas is concentrated mostly in three countries: Qatar, Iran and Russia. They are however still far from having the fracking technology to extract most of it.

Natural gas will without a doubt play an important role in the future of energy supply. It is one of the most economical ways of reducing CO2 emission and powering up the world. Surely, regulations will have to be implemented to ensure right practices. However, natural gas should be seen for what it really is: an economical way of reducing CO2 emission in the short term and switching to cleaner energy in the long term.

Georges Boustany




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