Agile and Scrum – should they die?

If you did not yet read the article “Why Scrum Should Basically Just Die In A Fire” by Giles Bowkett, you should. That is a great discussion of various key points in Scrum methodology and the shortcomings in nearly all of its implementations in real world. I have been meaning to write up a bit of my own criticism of Agile and Scrum the way it is usually implemented today but this guy pretty much nails it down.

I don’t know personally the guys who actually put together the first definition of Agile, but I think they did not mean it to be the spectacular failure it is in too many companies today. They certainly meant to concentrate on getting working software faster and with less distraction from endless meetings that bogged down software development in the nineties. They did not mean to make management lose the long-term perspective and focus on the immediate short-term “productivity” at all times.

The mechanistic approach that is now given to us under the name of “Agile” and “Scrum” does not benefit the software development. All these story points, stand-ups, short runs – they do not promote the important part of software development – the creativity – at all. Remember that software development is actually a creative work and you quickly realize that the best thing to do is to let the people actually organize the work the way they like and measure their performance with the actual working software instead of these virtual story points and numbers of user stories. Let the people know what is expected in the end and let them keep that focus on the long-term goals while they work out the minutiae of their current tasks.

I guess I am getting worked up and writing my own article here and now. I shall stop. You go read the article, please. Thank you.

Oh, and just one last thing. The great advice comes at the end that I happen to really agree to wholeheartedly:

If you’re not doing well at hiring engineers, the answer is not a deeply flawed methodology which collapses under the weight of its own contradictions on a regular basis. The answer is to get better at hiring engineers, and ultimately to get great at it.

Ain’t that the truth.




Computing in the Cloud – is it like banking?

Magnificent cumulonimbus clouds

I hear often comparison of IT and computing in the cloud with other “commodities”. Some people say, well, we do get the water and electricity centrally, why would we not get the computing centrally as well? There could be suppliers of computing power that one could use over the network and then one would not need to actually invest into own computing infrastructure. You would just send the data and the required operations into the cloud and get back results.

This is very much how the mainframes worked in the old days, you know? You would have a large computer somewhere in a computer room and you would connect to it from a terminal and submit tasks. The mainframe would compute your tasks and provide the answers. It seems pretty much the same familiar concept now all over again. But, wait, is it? In the old days, your mainframe would be inside the organization, it would still be under your control completely, the data would never leave the building, so to say. Yes, it could be physically in a different location but it would remain within the same company, university or whatever organization actually owned the mainframe. That is not the same with the cloud computing. And there is more.

When we compare computing with utilities, is that actually a good analogy? Utilities are provided to us. We consume the provided utilities and the only thing we give back is garbage, face it. We never send anything useful or valuable back to the utility company. Now, with computing, we send to the utility company the most valuable asset we have – the data and the algorithms. We trust the utility company to take care of our most precious assets. What does that look like?

Computing is not like water, it is even not like any other services. Computing is like banking. You give your data to someone just like you give your money to the bank. Bank deals with your money and promises not to lose it but pay dividend. The cloud provider is similar – it takes your data, promises not to lose it and computes something extra for you. Computing is not infrastructure, like water or payroll, it is rather a service like banking – not essential but convenient under right circumstances.

The cloud providers could be very convenient, efficient and secure – just like a bank can be. Power of the economies of scale applies, of course, making the computing at a cloud provider faster, cheaper and more precise. And just like a shady bank for your money, a cloud provider could spell disaster for your data. Your data can get lost, be corrupted, mishandled, sold to someone else … I am sure you can come up with a dozen other disastrous scenarios if you just think about it for a minute. The banking took a while to get things right and so will the cloud computing too. And, just like banking today, cloud computing can become the screwed-up industry of the next age if not set up and taken care of properly.

All of the things that apply to banking, apply to cloud computing with a twist:

  • Legal restrictions, like the country your data goes into and comes out, where it is stored, who has access to it and so on. Compare with the banking regulation, money laundering, bank secrecy, etc.
  • A larger bank can afford better security but represents a larger target and may become too big to handle efficiently the changes, which reflects directly into the cloud providers.
  • You lose control of your data when you give it over to the cloud provider just as you lose control over your money when you give it to the bank.

Everything that you do when you select a bank and decide how you use it will apply to the selection of a cloud provider. Decide what services you need, what level of trust you want to establish with the cloud provider, how much of your data you are willing to lose and see the risk of dealing with the cloud provider versus keeping the data in house.


Risk mitigation: a myth of infinite cost and finite risk

You are all familiar with a typical presentation on risk management where we see the same old graph that depicts the risk as finite on one side and the costs of mitigation as infinite on the other side and attempts to show us a balance between the two where the costs are minimal. Well, the idea is correct but guess what? The graph is wrong. The graph is wrong and it gives you a wrong idea of cost distribution which in turn causes you to bias towards more risk. That graph actually makes you and your business less risk-averse. How?

risk-mitigation-myth-graph A “traditional” risk cost versus mitigation cost trade off graph.

You see, the idea that the risk is finite while the risk mitigation cost is infinite is a myth.

Risk mitigation cost is only infinite when your resources are lower than those required for mitigation. So, yes, this is possible but unlikely. There are limits to our technology and there are limits to the investment effectiveness but there is a limit to the numbers of risks and mitigation techniques that a business can apply. So the risk mitigation costs may be very high and you may be unwilling to pay them but they are not infinite. You may have a cut-off line somewhere saying that here is how much we are willing or able to spend on mitigation but the line of risk mitigation costs should not be going up into infinity.

On the other hand, the cost of risk is easily infinite when it causes your business to go bust. Usually, this kind of situation is taken separately and considered an “existence threatening” risk that has to be handled separately for no apparent reason. Risk may be so high that you cannot afford it, so the cost of such a risk level is infinite and this has to be depicted in the diagram.

risk-mitigation-reality-graph A more realistic trade off between risk and mitigation cost.

Given these observations, the graph looks more realistic and does highlight two important things. First, there is a level of risk you cannot afford, i.e. you must invest into mitigation at least what it takes to move out of the “infinite risk” level. Second, the graph causes one to take a more conservative, more risk-averse position automatically. For a business, this may be a good thing.


Japan after 2014 elections

japan-vote-2014-12-14The exit polls at the House of Representatives elections held in Japan on December 14, 2014 indicate that Shinzo Abe’s Liberal Democratic Party is set to “win by a landslide”, according to BBC. In reality, the apathy of the public has won Shinzo Abe a carte blanche to do with the Japanese economy as he wishes.

The government said turnout was at just 35%, two hours before polls closed. This election had the worst voter turnout under the current constitution ever. The day after elections all sources quote not the government but the Kyodo news agency that guesstimated the vote turnout at 52.7%. Saves the face of the government, I guess. It would have been hard to cite overwhelming popular support with just one third of the population voting.

The election was rigged as an approval referendum for the economic policies of Abe and this point was completely missed by the general public. They probably also missed the point that Abe will be in the office for four years instead of remaining two. WSJ reports that the public was generally confused regarding the purpose of the snap election and no wonder.

Despite all, the election is literally trumpeted as an indication of overwhelming support for the policies of Abe’s government despite the obvious apathy of the people. The hype has started already.

“I believe the public approved of two years of our ‘Abenomics’ policies,” Mr Abe said in an interview.

Finance Minister Taro Aso, who retained his seat in parliament, told reporters that the predicted win “shows that voters gave the Abe administration a positive evaluation over the past two years”.

That statement twists the truth. Most of voters could not be bothered to come out and vote. That shows indifference, not approval. Most people were talked into believing that the only viable alternative – the Democratic Party – is not an alternative anymore after they did not manage to deliver in 2009-2012. Actually, given the huge financial crisis, the earthquake and the tsunami, I reckon the Democratic Party did a good job at the time keeping the country up and running.

But who cares? The situation is already twisted the way the powers want it to be. There will be no doubt that the current government will continue its course with a vengeance. The reforms are coming through whether you want them or not.

So, what is in the future for Japan then? It’s a mixed stock. On the one hand, it is great that the nuclear power plants will likely be restarted and the country will end its short-lived dependence on external sources of fuel for power generation. That will cure the international trade deficit. On the other hand, the course towards inflation will mean worsening conditions for the majority of the people and a radical weakening of the Japanese economy.

Japan will resist for a while but we will see the same things happening in the long term as we see in other developed countries with unstable economies: increase of the disparity between rich and poor, skyrocketing costs of living and accommodation, devaluing of money, loss of public support for government and business, transfer of wealth and control from population to corporation. All of which will show nicely on the financial charts as “growth” but will result inevitably in regress of the society.


Will Sony Corporation be up for grabs soon?

sony-headquarters-600x450Did you notice a recurring theme in corporate takeovers these years? Now we see at Sony Corporation what we saw not so long ago at Nokia. The company received a new top management team that cut all investment into the advanced research and development of new products. The company sells a lot of its assets bringing the value of the company down and the resulting cash is quickly used up. Then, more cuts are executed among product development teams, causing the company to stall and fall behind the competition. The company then suffers a few bad publicity events, causing the share price to drop and leaving the company strapped for cash in the wake of damage compensation payouts. The company is up for grabs and we finally learn who planned and executed the hostile takeover.

The scenario worked well on the mobile phones icon Nokia and may soon play out on the consumer electronics icon Sony.

It was on November 25 that Sony Pictures hacking first emerged. On November 29, copies of Sony’s unreleased movies Annie and The Interview appeared on some sites. Last week, salaries of some executives were revealed, followed by personal data of other employees. Some Sony employees received threatening emails saying their company should behave wisely, otherwise, not only them, but their families would be in danger. The attackers said the data they will expose next will be more exciting, substantiating the suspicion that this is all a publicity stunt that will be dragged out for as long as they need.

So far, Sony Corporation suffered serious damage to the reputation but the current estimate of the monetary losses lies around $3.5 million only. According to several news sources, Sony informed employees that all computers should be disconnected from the network and switched off, while mobile devices should remain off the corporate WiFi. This kind of measures are usually taken when a virus is present that attempts to wipe out the hard drives of all connected computers. The FBI warning issued a few days later seems to confirm this suspicion. It appears that the attackers stole gigabytes of information from Sony that they posted on the Internet and launched a digital wipe-out.

That begs the question of “what’s the point?” Yes, there always is the mindless crime but, as I like to say, whenever we come across something pointless and apparently random, first we should consider well-informed malicious intent. Who could benefit from Sony suffering a major bad publicity event?

The attackers apparently had full access to confidential information, including employee and financial records. So they, whoever they are, now possess full picture of the company’s economic situation. We don’t know if the breach was limited to Sony Pictures Entertainment only but knowing that Sony consolidated its network operations more than 10 years ago, we have to assume that the breach has reached company wide.

We can assume then that the information attackers got is really useful to any of the competitors. The attack was fairly sophisticated and took control of a large part of infrastructure. And then they launched a network wipe-out, centered in Sony Pictures Entertainment. To me, this looks like a diversion that serves to pull attention away from the real problem and inflict severe damage to the reputation of the company. The amount of information shared on the Internet apparently measures at around 500 gigabytes. It would take a while to exfiltrate this amount of information and close control of the network. There would be no reason to cover tracks when attackers had full control for a likely extended period of time. So we can take it for granted that the publication of the information was a planned event.

Spreading the information on the Internet also removes the blame from whomever uses the intelligence gathered to obtain the advantage against Sony. They found the information on the Internet, didn’t they?

Now remember that Sony stopped all advanced research into robotics and cut new product development years ago. The company abandoned a controlling stake in the lucrative M3 business and sold the famous Vaio brand recently. What is left? The video processing, of course, the very thing Sony is still famous for. Canon may be great at still pictures, Samsung may be producing the cheapest screens but when we talk video, we compare everything to Sony. Sony is an undisputed benchmark in the industry.

So that is what it is all about – Sony famous video processing, the core of Sony’s business. And whoever is after it is about to get it. The TV business was earmarked for a spin off for a while now but Kazuo Hirai apparently announced that there will be no selling of it and Sony will keep control, even if it operates as an independent business. So all of this may be just a gentle reminder to reconsider or a “Plan B”.

Who do you think? I reckon it’s most likely Samsung. Any other ideas?


Position Power vs. Personal Relationship Power

handshake2The recent years saw the quick raise of the so-called “Personal Relationship Power” into prominence to the point where some people preach that it is the only thing that matters. I heard some American and Japanese colleagues actually teach the young and hopeful managers that the personal relationships are the only thing that works and that any manager worth his salt will be able to do whatever he needs with just that – the power of personal relationships – without the need to rely on position power.

As is often the case, this is not entirely untrue, so it sounds believable. On the other hand, it is not entirely true either, so it sounds suspicious if you stop to think about it. What is the deal here? The statement contains part truth and part lie, so in essence, it is false in its entirety but it contains enough truth in it to sound true.

Personal relations cannot replace position power, that is a simple fact. Try imagining that your manager does not have any power whatsoever over you but has to convince you to do your job as a favor to him every single day. Yes, you would probably like that but the job would not get done or there would be very little of it done. And his boss would have to convince him to do something or other and you would have to go and talk your subordinates into actually shaking a leg. That would not work, would it?

That is the problem. The statement is an overstatement. We need the position power to effectively manage a business. It is not possible to run a company just on pure goodwill, a company has a pyramidal structure for a reason and the reason is efficiency. The pyramidal structure with its position power is the efficient structure that we use to run a business. A manager is supposed to use his position power to ensure that his part of the business runs as efficiently as possible, this is his responsibility and his power reflects the responsibility.

The personal relationship power comes into play when the position power does not work. Like every structure, the pyramid has its own deficiencies. In order to overcome those deficiencies, we must use a different structure that works in parallel: the network of acquaintances, friends, colleagues bound with goodwill. That’s where the personal relationship power plays an important role – to achieve goals efficiently where the existing structure with its role power would be inefficient.

But the personal relationship power does not replace position power and never will. The personal relationship power supplements the position power to make the whole thing work as efficient as possible.

Effectively, what this does is interfere with another manager’s part. In an ideal company, where every manager runs his show as efficiently as possible, only two distinct cases would justify this interference from the point of view of the company. One is when you clearly see that the other manager is not managing his part as efficiently as he could and you are able to help. Or you could be asking someone to help you with running your part as efficient as possible. This improves a part of the company hopefully making it more efficient overall.

The other case is when two parts run as efficiently as possible but the combination results in a less than efficient result. The sum of locally optimal decisions does not always result in a global optimum. So sometimes you would need to agree with another manager that you both will not run as efficiently as possible locally to produce a more efficient outcome overall.

In the above two cases the use of personal power would be justified from the point of view of this ideal company but would not be justified in any other case. All other cases would constitute an abuse of the personal relationship power for personal gain and to the detriment of the company.



People of Japan, what are you waiting for?

Seeing pointless abuse, injustice and absurdity, do not rush to explain it with stupidity; first try to to explain it with vile shrewdness.

Japan is officially in recession after seeing its economy shrink for the second consecutive quarter. This comes as no surprise at all when you check what the economy is based on, how it develops and what the infamous Abe did to it. I, for one, am happy to see it work this way, seeing the Japanese economy react in obviously bad ways to the dirty manipulations of its government. It would have been much worse if the so-called “growth” continued yet for a longer while and then would come crashing hard. People suffer first, so this gentle decline is much better than a hard landing for the Japanese economy. But, again, what is happening?

Rupert Wingfield-Hayes, BBC’s guy in Tokyo reports:

In the spring of 2013, Prime Minister Shinzo Abe launched an ambitious growth strategy that rapidly became known as Abenomics. Its aim was to drag Japan’s economy out of 20 years of deflation and put it back on the road to growth. Billions of dollars were pumped into the economy through stimulus spending. The Bank of Japan went on an even bigger spree, printing hundreds of billions of dollars of new money and using it to buy government bonds.

This had two effects. First, it pushed down the value of the yen, which made Japanese exports cheaper. Second, it pushed investors out of bonds and in to stocks. The Tokyo stock market soared. By mid 2013 Japan’s economy was back in what looked like solid growth.

Then, in early 2014, Mr Abe’s government took a calculated gamble. With the economy growing he could risk putting up taxes for the first time in nearly 20 years. Consumption (purchase) tax would rise from 5 to 8%. The tax rise was urgently needed to plug the giant hole in Japan’s public finances.

But the gamble has not paid off. Japanese consumers have stopped spending and the economy is back in recession. Why? The fall in the yen gave a huge cash windfall to Japanese exporters. But instead of increasing the wages of their employees, they have sat on the money.

The huge stock market rise only benefited a minority of rich people. 80% of Japanese people do not own any shares. Instead, their incomes are stagnant or falling, and the tax rise has made them feel even poorer. Hence they have stopped spending.

Oh, my, oh, my. Here is what happened. Japan was a perfectly healthy and happy country with great stable economics. People were well off, the prices were low and getting lower, the economy was producing everything they needed and then some. The problem was that in the absence of inflation large banks could not obtain super-profits. And the largest companies were not getting rich as fast as their American counterparts. Of course, they were not happy with it. So they decided to screw the economy into oblivion and get rich on the ruins.

Under the rule of Abe, the Bank of Japan started printing insane amounts of currency. Of course, just the way it is supposed to be, all that currency ended up in the pockets of the richest and the folks on the street did not get any. The inflation started to work to make people poorer and it looked for a while like the banks may have it their way after all.

Unfortunately, this had a predictable side effect that people were not willing to lend their last money to the government anymore. Why, who could blame them? So the government could not count any longer on the population reinvesting their savings into the government procured infrastructure. The only thing they could think of is to raise taxes. But instead of raising the taxes on corporations and banks that were getting rich, the government raised the sales tax, hitting the poor and middle class. Banks and corporations were happy but people were not.

Of course, the people stopped spending. So, now the Japanese government painted itself into a corner. People are not willing to invest into government debt and they are also not willing to spend their money and generate taxes. That sucks, eh?

It could have been a lot worse. As things stand now, Japanese people should throw out the greedy government and roll back all of those “reforms”, taxing the large corporations and banks to return the money they stole from the economy in the last two years. Then things will return to normal. Read my previous analysis to understand why I think it’s perfectly normal to have a stable economy without inflation.



Руководитель должен руководить

rukovoditelМне часто приходится сталкиваться с ситуацией, когда руководитель считает себя обязанным делать работу одного из своих подчиненных. Не правда ли, знакомо? Человек делал-делал работу, потом пошел на повышение, но продолжает делать ту же работу и вдобавок руководить. Так дело не делается. Руководитель должен в первую очередь руководить. Почему так? Потому что задача руководителя, как и любого другого члена компании, — выполнять поставленные задачи. Руководитель должен выбирать наиболее эффективные пути достижения целей компании и в данном случае его задача — обеспечить эффективность всего коллектива, а не себя самого.

Главная задача руководителя состоит в том, чтобы его коллектив работал с максимальной отдачей, работал эффективно и при этом развивался, улучшая свои коллективные способности. Руководитель должен заниматься в первую очередь организацией труда своих подопечных, а потом уже — брать на себя дополнительные обязанности. Именно дополнительные. А в реальности мы часто видим, что начальник зарывается с головой в свою работу и «скидывает» подчиненным все, что ему не интересно. Этот сценарий ведет в никуда.

Если руководитель будет работать лично с полной отдачей, но при этом игнорировать развитие своих подчиненных, то в итоге окажется, что он пытается работать за десятерых. Руководитель, развивающий своих подчиненных, может передавать им больше обязанностей и ожидать более эффективной работы. Делегирование возможно только в том случае, когда подчиненные готовы принять на себя дополнительную работу, когда их эффективность достигла нужного уровня. Часто мы сталкиваемся с ситуацией, когда руководителю дается задание «сверху», которое он может выполнить, но не может его передать ни одному из подчиненных. Это, конечно, тяжелая ситуация, но она происходит именно из-за того, что подчиненные не готовы либо принять на себя хотя бы часть этой задачи, либо принять на себя распределение всех остальных задач, а вот это уже — проблема самого руководителя.

Таким образом, главная и первоочередная задача руководителя — собственно руководить. Это включает в себя долгосрочное и краткосрочное планирование, делегирование обязанностей, развитие профессиональных и личных качеств подопечных, тренировка и коучинг таким образом, чтобы подчиненные могли принимать на себя больше обязанностей и выполнять их более эффективно. Имея в подчнении десять человек, руководитель добьется гораздо больших результатов, сосредоточившись на повышении эффективности каждого из них хотя бы на десять процентов, чем пытаясь нагружать себя работой своих подчиненных.




Japanese “new economy” fails … because of rain!

Sometimes it is just hard to believe news. Reuters reports that the Japanese government seriously blames the weather for the failing economy. To this, the only response I have is “you must be joking”. But, no, they are serious. The Economics Minister Akira Amari announced that “heavy rain has probably pushed the GDP down by 1.6 percentage points on an annualised basis in July-September“.

What kind of economy is it that can lose 1.6% because of rain? Mind you, the rain happens every year in Japan, it’s sub-tropical. Anyway, this only looks like a feeble “it’s not my fault” outcry from a naughty child. Instead of accepting the fact that the “abenomics” is destroying the economy and causing the country to fail, it is, of course, much easier to blame the weather for the absence of the much touted economic growth due to the so-called “stimulation”.

The article notes that “some economists worry that declines in real wages are the bigger factor behind weak consumption” and I am glad to see that at least some see the situation for what it is. Next, we will see failing consumer confidence and after that – the government will “suddenly” find it difficult to place new debt within the country. And they will probably blame heavy snowfall in Hokkaido for that.

My position on what is happening in Japan is apparent and clear. What surprises me is that serious people in a serious government of a serious country cannot accept responsibility for their own actions. Next, I suppose, they will attempt to simulate or to cause a crisis to blame every bad thing on something else. Anything goes, from an electricity blackout to a terrorist attack when blame must be laid. I am just worried for the people.

Hey, why don’t you grow up and start taking some responsibility? You fly like a hero – you take the blame and die like a hero, right?



Open Letter to the Emperor of Japan

Dear Tenno Heika,

Japan is an amazing country. Having lived there for a few years I learned a little about people and their beliefs, the way they do things. Japanese are a smart and enterprising bunch of people. Japan has built a perfectly stable economy within an incredibly stable society that is healthy in all possible ways and could be used as a textbook example of how to do things right. It pains me to watch this great country being destroyed now. The last two years are playing out as a really bad disaster movie or a nightmare that is impossible to wake up from. I feel my heart tearing apart every time I read the news about more economic atrocities from Shinzo Abe and his minions.

Why do I say Japanese economy is perfect?

Japan has achieved through hard labor what many people in so many countries dream about: the economic stability coupled with development and progress. There are many ways to define the “good living” but we would be wise to look at how well people do that live in the country now. Let’s look at some figures and compare with the subjective perception of the situation in the country in recent years.

japan-gdp-1984-2014The country’s GDP (Gross Domestic Product) indicator has been growing steadily, outpacing such benchmark countries as U.S. and Germany. This means that the economy is doing as well or better than the rest of the world, at least in terms of what the economists say matters. Of course, that is not the whole story but a good first indication. You will notice later that Japan also has no inflation, so the growth of the economy is very real here. The Internet bubble and the financial crisis did take their toll but the economy keeps rebounding to growth and that is what matters.

Coming to Japan with visits it is easy to see construction sites everywhere, Tokyo or countryside. That is a good indicator of the healthy state of the economy, the construction booms when the economy is expanding. In Japan, the construction never stopped.

japan-balance-of-trade-1984-2014The balance of trade is quite interesting. Japan always had surplus in foreign trade but the recent events at Fukushima caused Japan to lose quite a bit of nuclear power and forced the country to buy a lot more of oil and gas abroad. Hopefully, that is a temporary condition and Japan will put all of its nuclear power stations back into running, so the trade balance will be back in black. Some say that the positive trade balance is not really all that good, the country accumulates foreign currency then. That’s nonsense. If a country accumulates too much foreign currency, it can simply buy gold or invest into business abroad, that’s not important. When the country sustains a deficit of trade over long periods of time – that’s a good indicator to wonder how they can afford it. Anyway, in case of Japan there isn’t really anything to worry about.

And looking around we do notice that we use a lot of Japanese made things, from cars to pencils. So it is no wonder that they have a positive trade balance.

japan-unemployment-rate-1984-2014The unemployment is low and has been low for a long time. We can see some raises to the unemployment rate but they can be easily attributed to particular global events: the burst of the dot-com bubble around the turn of the century and the financial crisis of 2008-2009. At those times the unemployment rate went to above 5% but it always comes back as it should in the healthy economy. The Japanese unemployment rate tends to go down to around 3-3.5% over time and that is a perfectly good natural unemployment rate (economists consider 4% a natural unemployment rate necessary for a healthy economy). So there is no problem with unemployment in Japan, not according to the data.

When we look at the real life situation, the picture is supported by observation. We do not see people standing around the stations asking for alms like in other places in the world. The few that don’t have proper jobs are well taken care of, apparently. So the subjective observations confirm the data and we can really say that everything is fine in this respect.

japan-consumer-price-index-cpi-1984-2014Now, for the fun. The thing that people most care about – the prices level evolution, represented by Consumer Price Index (CPI), calculated over a wide range of goods. The CPI has remained stable for more than a decade now. The prices do not increase or decrease. Is this not a dream situation for manufacturing? You just know what all the prices are and will be for the foreseeable future. This by itself has a hugely positive impact on the economy, providing a stable outlook for any business.

And visiting Japan, one may indeed notice that the prices largely remain the same. Oh, sure, a couple of things get more expensive, a couple of things become cheaper but overall you begin to depend on the stable prices. You don’t need to ask, even after a couple of years, how much the things you usually buy cost. It is simply amazing, it does not happen anywhere else in the world as far as I know.

japan-inflation-cpi-1984-2014Inflation rate is the big news maker in the economics publications. Inflation rate tends to zero in Japan. It has spikes around the big crisis times: the dot-com bubble and financial crisis again, but overall the inflation in Japan is non-existent provided there are no global events that shake the country somewhat. Now, I know what they told you on the TV news: the inflation is healthy, the inflation is needed, the deflation is bad. Guess what? All of that is simply wrong. You are conditioned with the rest of the world to think that inflation is good. In reality, whether the inflation is good or bad simply depends on what side you are. When we talk about a healthy economy like Japan, zero inflation is perfect. Again, it is a sign of complete predictability and expert management of the money supply that we will see just below.

For the visitor, the absence of inflation is rather manifested in the absence of change in prices as discussed above in the CPI. A visitor does not really experience inflation directly like a local business would.

japan-wages-1984-2014The wages are also very stable, which is not bad with the stable prices. The holiday payments have tendency for getting smaller over time, decreasing the total yearly wages though. What’s interesting is that the New Year bonus used to be nearly twice as big as the summer bonus but they are becoming nearly equal now. Anyway, it seems that wages overall are declining slightly, but I am not sure whether this is telling us something or not. The base salary keeps stable, so perhaps the companies are getting clever over time with bonuses to keep money for themselves and pay less to the employees, which could be a good indication for raising taxes on company profits.

japan-money-supply-m2-1984-2014Now for the money supply, the M2, the amount of money in the economy. The interesting thing is that the money supply was increasing steadily reflecting the larger value of the economy. The money supply is voluntarily increased by the central bank of the country, of course. Seeing that the GDP has been growing steadily and the M2 was kept steadily going while the inflation is kept at zero, I would say the management of Japan’s central bank is doing its job. They expand the money volume to keep in pace with the economy but they do not cause either inflation or deflation. Good balance.

And since there is no inflation, the economy is really worth that much money. If the supply of money was larger than the economy was worth, the inflation would burn the excess. So the Japanese economy, again, is really growing steadily and is perfectly healthy and stable.


Then what seems to be the problem?

The problem is actually extremely simple. There are actually two problems. The first problem is called “interest rate”, it is not worth our time and is completely uninteresting except that it is the one that really causes all the atrocities. The second is called “government debt” and it is a real problem, although in this case it used as a cover-up for something entirely different.

First, the interest rate in Japan is basically zero. This is good if you are a manufacturer or a farmer. You can get money cheap, invest and return without going for a life-time slavery for interest payments. This is really bad if you are a bank. No, let’s rephrase it. It is really bad if you are a bank that only does financing and nothing else than financing. The problem is – the financial sector does not get any easy profits here.


Why did I say it is not worth our attention? Why the zero interest rate is not a problem for Japan? The banks in Japan usually do not exist by themselves. The banks are an integral part of a manufacturing and trading conglomerate with a supporting function. Banks do not earn money by themselves, they service the trade of the mother company. So, in Japan, the traditional bank does not depend on the inflation and interest rates to generate its profits, so the banks do not die out when the interest rates are zero.

That is, the Japanese banks do not die. Western financial companies depend on the interest rates and inflation to generate income. The Western banks are largely speculative institutions and they cannot survive in the Japanese economy. So this is the real reason behind what is happening now in Japan: the Western (American) banks are trying to destabilize the economy so that there is a high inflation and interest rate to play with, so that there is financial profit and speculation possibility. That is the whole point.

And the government debt is used to cover up that operation. Not that it is not a problem but the methods used to “recover” from a large amount of government debt are speculative and will weaken the economy instead of making it stronger. Now, the government debt is the only problem that anyone can really find in the Japanese economy.


So, the government debt amounts to more than twice the GDP of the country. On absolute terms this is bad. For any other country, it would be a disaster. For Japan, it is not really such a big problem after all. You see, the Japanese government debt is held almost entirely (no less than 95%) by Japanese, locally.

Japanese government debt is actually an investment by local people into the infrastructure of their own country. Japanese people are willing to support their own country by holding that investment. This is really an ideal situation for the country, there is no need to go to banks or other countries for help, Japan can count on its people for support. Again, this is not dangerous, it may only be dangerous if the population panicked and suddenly started to ask its money back. Even then, it would only be a long-term problem, which it is today anyway.


Now, the “Abenomics” is based on the idea that by increasing the inflation the government debt could be slowly consumed. There is much rhetoric about the stimulation of the economy but as we saw the Japanese economy does not require stimulation. It is all about government debt, the rest is just decoration. The problem is that debt is held by local people. Consuming that by inflation is cheating Japanese people out of their investment and making them poor. The end result will be that people will lose their trust in the government and will not be so willing to invest into the infrastructure of their country anymore. That means that the Japanese government will have to turn to foreign lenders for its debt.

This is important: the government will not be able to borrow internally and will have to borrow outside the country.

At the moment, Japan is a net provider of money in the world, its net international investment position is around 56% of GDP. What would happen if the local investors lost interest in holding government debt? The government debt would have to be held abroad, by other countries and banks in other countries. The conditions, provided the loss of confidence locally, are not going to be as favorable, that’s for sure. Moreover, foreign investment into the country would bring with it the instability and unpredictability, placing the country at the whim of its foreign overlords. I am exaggerating to make the point. At the moment, Japan is self-sufficient in terms of finance, its debt is held by itself and it is a net investor. Changing this favorable situation to its opposite is, at the very least, reckless.

Of course, if such a turnaround happened, it would be very favorable for the foreign banks. Even more so would be the inflation and a jump in interest rates that would follow. The banks would be able to finally make a profit purely on financial operations in Japan but at what cost to the economy? Currently, if we simplify, the only profitable investments are into production. If the situation changes, the money will go into financial operations that are, at the basis, speculative in nature. That would cause harm to the industry. At the same time, the inflation would eat into the wealth of people who would not be able to support the economy anymore.

The end result: financial and production crisis, exodus of the industry into other countries, impoverishment of Japan.

What’s the alternative?

As we saw, there is only one real problem in Japan: the government debt. It is not an urgent problem as long as the population is sufficiently wealthy to keep supporting the economy but it better be taken care of. All the rest of so-called “problems” are pure lunacy and panic mongering.

The government debt should be decreased without hurting the economy, that’s the task here. As we understand now, using inflation to consume the government debt is a really bad idea. So the debt will have to be paid out the traditional way, with money or ownership. Japan either finds a way to collect money from where it would not hurt the economy and pays back the debts or converts the debt into real ownership of the country’s infrastructure. Both are not without own problems but, done carefully, will lead the country into many years of prosperity.

japan-corporate-profits-1984-2014Just to have a few ideas, some things could be taxed easily in the Japanese model. For example, the system does not support pure financial gain anyway. It would be logical to tax the financial gain out of existence, providing an additional disincentive to speculation. Another thing would be a much steeper personal income tax model that would tax the highest earners much more than now. Yes, they will complain, but now you get their money in the shape of borrowing and you could get the same money in the shape of tax. From the point of view of the country, the second is better. Or have a look at the corporate profits. The corporate profits are soaring, it would be a good time to use those to pay back some debt.

The important thing here is to not tax the people at large, who provide the basis of stability for the country and the government. From this point of view, that increase of sales tax was a really bad idea, you have to go back on that, it is hurting more than it helps. The blanket taxes are good in a recession but Japan is not in a recession, Japan is strongly growing. It is best to use some differentiating taxes in this environment and I am sure Japan can be rather inventive to get the money from where it would not hurt.

The danger that the government may be concerned with while discussing such measures is that it may cause deflation, increasing effectively the value of the government debt. I am sure, however, that the same people that kept the M2 in check with the growth of the economy can make sure there is enough money to prevent high levels of deflation. On the other hand, making people richer would extend their confidence and their lending power, keeping the government in control.

Japan is a tough country with a sturdy economy and can take a lot of beating. However, there is a limit to everything. Shinzo Abe and his minions will be pushing the limits until the economy gives up and goes belly up. So if this act goes on the government should be now preparing for the balancing act that U.S. and Europe have performed so well the last few decades. Instead of having stability, the country will be pushed into the inflation benefiting outsiders, devaluing the currency and impoverishing the country and its inhabitants. Balancing at a brink of economic crisis, it will be hard on people and on the small business.

And it hurts to watch the agony of Japan.