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Insight from Japan: When Deflation is a GOOD Thing


Tim Staermose here. Simon asked me to fill in today as he’s presently en route to New York City.

I’m sure at this point, he’s probably trying to remember all the countries that he’s been to since his last trip to the US six months ago– it’s required that you list all of these on the immigration form prior to entry, and for Simon, this is no small task.

Simon, Matt, and I were all together recently in Tulum, Mexico after concluding the Sovereign Man Offshore Workshop in Panama. It was great to meet so many of you at the event, and it was a trip of many firsts for me.

It was my first time to Panama — lovely country, but I didn’t see much outside of the hotel (we were working long hours at the event). It was also my first time to Mexico (and I think Simon hit the nail on the head in yesterday’s missive). On the way back to Manila, where I live, I’ve stopped in Japan for about a week, also my first trip here.

I stayed with some Australian diplomat friends of mine, and at one point last week, we were hosting some senior Japanese bureaucrats over for drinks. I got to ask the question I’ve been dying to ask for ages, “What’s so bad about DEFLATION?”

As I put it to my newfound Japanese friends, I’m a net saver who has no debts apart from the revolving balance on my credit cards, which I pay off each month… so I quite enjoy falling prices because the purchasing power of my savings is always growing.

Why wouldn’t the average Japanese person, who is in the exact same boat, enjoy falling prices, too?
Well, as it turns out, they do!

Though wages and asset prices have stagnated in Japan for decades now, the quality of life for the average Japanese has not massively deteriorated in the way you’d think if you blindly accepted what the Western media tell you.

Sure, Japan has huge problems. The rapidly aging and shrinking population, a lack of political willingness to reform, and a huge government debt burden all pose enormous challenges.

But, as far as I can see, what’s usually portrayed as the biggest problem of all in Japan, deflation, only really hurts the government. And that’s only because the “real” value of all the hundreds of trillions of yen that it owes (mostly to its own citizens) goes up every year.

If you focus not on nominal GDP (which in places such as China is growing like a runaway freight train), but instead pay attention to real GDP per capita, then Japan, it turns out, is not in nearly as bad a shape as people make out.

Indeed, thanks to its long bout with deflation, one of the things that pleasantly surprised me on my (first) visit to Japan, is that it’s not nearly as expensive as I’d been led to believe.

A cup of decent Italian-style espresso coffee in a nice cafe, for example, typically came to Y300, or about $3.60. In Australia nowadays the same thing will cost you $4.50.

My ride from downtown to Haneda airport on the Tokyo monorail when I flew out was only Y470 ($5.70). Even Tokyo’s notoriously expensive taxis were only about $12 for a 5-10 minute ride. And for the impeccable white-gloved service you get, I’d argue that was well more than worth it.

Lunch at a great sushi and sashimi restaurant for me and my hosts (3 adults in all) came to less than $20 a head. And raw fish is actually some of the most expensive food you can eat in Japan. Every single sushi restaurant in Tokyo buys its fish fresh from the fish markets each day.

Another lunch we had was under $15 a head for an excellent buffet with a selection of pretty much every Japanese food I could think of. A bottle of good quality imported Italian wine I bought was the equivalent of $16.

All in all, this got me thinking that perhaps the Japanese yen is not as “insanely overvalued” as everyone says it is. On a “purchasing power parity” basis, my — admittedly unscientific — evaluation of the yen is that it’s probably at, or even slightly below, fair value.

It has become a cliche to say that Japan is an oddly different place, not easy for westerners to understand. And when it comes to the Japanese economy and currency, based on what I see, I’d really have to agree.

Japanese midcap stocks are trading at extraordinary lows, often less than net asset value. But since the currency and economy are just too difficult to understand, I’m inclined to keep my portfolio away from the country until I have a much better opportunity to study it.

There are other, more easily understood places in the world where we can safely make money, and I don’t believe that Japan is the sort of place where you jump in simply based on cheap stock fundamentals. In Japan, business culture, politics, and local traditions have a much greater impact on markets than in many other countries. Of course, the big storm cloud hanging over the future of the country is what happens with the Japanese government’s ballooning debt burden. With a shrinking population and declining revenue base, the only way out may well be to print money… lots of it.

My conclusion… by all means go and visit Japan.

Enjoy the different culture. There are some fascinating experiences that await you. It’s clean, safe, modern, and all the goods and services are of super high-quality.

For the right person, Japan makes a great place to plant a “playground” flag, a place where you go just to relax and enjoy. If you have a “first-tier” passport, you will typically get a 90-day visa upon entry.

For other flags: residency, citizenship, business, or banking, forget about it. It’s either impossible, too hard, or too uncertain for now.


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