Sporting bomber jackets and a raised glass of American beer, the newly elected Bill Clinton was hosting Japan’s young Prime Minister Morihiro Hosokawa, with a dire warning that Tokyo’s systematic and excessive trade surpluses on U.S. trades would not be tolerated – unless those surpluses were recycled in purchases of American assets, goods and services.

That was the time when Clinton was struggling with high bond yields to deliver on his iconic and election winning blockbuster -- “It’s the Economy, Stupid!”

Today, Clinton’s message resonates with the same relevance as Washington tries to hold the economy afloat while Japan, its close friend and ally, kept dumping $242.2 billion of U.S. bonds during the first ten months of this year.

But today’s Japanese economy is very different from the one of the early 1990s that was racing to the “baboru keizai” -- Japanese for an overheated “bubble economy”. From an economy whose business cycle and structural growth dynamics were export driven, we now have an aggregate demand mainly generated by household and government spending.

Japan has space to support the economy

Over the last three years, for example, Japan’s net exports have been a drag on economic growth, and the most optimistic forecasts for the next two years see an average GDP growth of 1.4% -- entirely based on domestic demand.

To see the deep structural change of the Japanese economy, please note that a 1.4% GDP growth represents an irresponsibly inflationary policy in a country whose noninflationary growth potential is only 0.5%.

That’s a sad case of a once self-confident Japan reduced to such dismal physical limits to growth by a stagnant productive capital stock, declining labor force and a labor productivity growth of about 0.5%.

In the middle of all that, Japan is now struggling with an inflation rate in November of 3.8% as a result of externally driven energy and food prices.

And some observers are rushing to conclusions that Japan’s hands are tied. They claim that the monetary policy cannot continue to fuel inflation with a soaring money supply, and that a budget deficit of 6.7% of GDP leaves no room for rising government spending.

So, in their view, Japan is bust, and the only money it can get is by “repatriating” its savings stashed in American bond markets.

That, of course, is wrong. With real wages falling in 2022 at an annual rate of 1%, and flat unit labor costs, Japan’s inflation has no support from domestic sources. Energy and food prices are part of West’s continuing – and elusive -- effort to “destroy” the Russian economy, but that does not mean that the Bank of Japan should restrict credit flows to households and the private sector.

Luckily, that’s not what Japan’s monetary authority is setting out to do.

On the fiscal side, Tokyo has a genuinely binding policy constraint, even taking account of the fact that its large public debt – 248% of GDP – is domestically owned, and that the Bank of Japan holds half of government debt issues.

Nobody wants a war with China

In spite of that, Japan this year found room for fiscal measures to raise households’ purchasing power and support an expected 1.6% GDP growth.

But there is new issue now: Japan has no money to finance an urgent military buildup to contain China and confront its alleged security threats in the Indo-Pacific area.

So, here again, the frantic forecasters of a liquidity crunch in U.S. bond markets see Tokyo’s continued dumping of its American debt holdings.

Washington would certainly have something to say to its main Asian ally about all that, and it’s a safe guess that a panic selling of U.S. bonds would not be part of that conversation.

It’s also a question of how much Tokyo is ready and determined to confront China with such a hostile military move. After all, China is Japan’s by far the largest export market, taking $170 billions of Japanese goods and services in the first 11 months of this year.

Japanese businesses have always been vigorously opposed to any political tensions with China, openly admitting that they had no alternative to such huge trade transactions with their big Asian neighbor. In fact, based on Japanese data, China takes nearly as much of Japanese exports as do the U.S. and the Euro area combined.

The warmongers masquerading as financial experts are a bad counsel to follow.

One thing is clear, though: In a tragic environment of Russia-NATO war, Japan is making cooperative noises, but neither Japan nor the U.S. are about to open a new front in Asia.

Looking at all this, Bill Clinton must be laughing and feeling good about tying Japan into a deal that still holds. If he has any regrets, it’s probably that he did not stick around long enough for his backslapping and bonhomie with the Chinese president to bear fruit.

HAPPY NEW YEAR!