Weekly Special Feature on Prime Minister Ishiba's Resignation: Awaken from the Monetary Illusion!

 

Weekly Special Feature on Prime Minister Ishiba's Resignation: Awaken from the Monetary Illusion!

 

Monday, September 8, 2025

 

① A Comment on the Nikkei Editorial "An Opportunity for Political Revival" - Awaken from the Monetary Illusion

 

The Nikkei editorial published on Monday, September 8, in which Prime Minister Ishiba announced his resignation, characterized it as "an opportunity for political revival." While this is certainly persuasive, it cannot be said to be without problems.

 

As the editorial points out, the timing of his resignation was far too late. He undoubtedly bears heavy responsibility for creating a political vacuum and further eroding public trust.

 

However, what is needed now is not simply a change of government. The rebuilding of democracy and the revival of market capitalism are urgently needed.

 

The Emptiness of Criticisms of Populism

 

By the way, during yesterday's (September 7) NHK Sunday Debate, the proposed consumption tax cut was repeatedly criticized as "short-term populism."

 

However, this is merely an escape from reality in the face of 40 years of institutional fatigue.

 

Measures to combat rising prices should not be mere temporary measures, but a pillar of a medium- to long-term strategy that supports price stability and sustainable growth.

 

Normalize monetary policy, not fiscal handouts

 

With inflation exceeding 2% for over four years, repeated fiscal handouts are unwise.

 

The best approach is to normalize monetary policy.

 

Despite this, the Nikkei editorial praises wage increases as a measure to combat inflation. This is nothing more than a "monetary illusion" that misleads us with improvements in nominal prices.

 

Permanently reduce the consumption tax to 5% and simultaneously normalize monetary policy

 

The only way to return the Japanese economy to a path of price stability and sustainable growth is to simultaneously normalize monetary policy and permanently reduce the consumption tax rate by 5%.

 

However, the ruling party is mired in hereditary succession, privilege, and vested interests, and neither the opposition parties nor the mainstream media have been able to offer a solution.

 

Breaking Free from the Addiction of Abenomics

 

For the past 13 years, Japan has continued to rely on the first arrow of Abenomics—bold monetary easing.

 

As a result, we are suffering from withdrawal symptoms of the Reiwa era's skyrocketing prices and asset bubbles. Unless we awaken from this addiction known as "monetary illusion," both democracy and market capitalism will sooner or later face the greatest crisis since the war.

 

② Asset Bubbles and Rising Inflation Are Like Drug Withdrawal Symptoms

 

Coincidentally, today, the Nikkei Stock Average once again approached its all-time high of ¥44,000.

 

The Japanese economy has experienced 2% inflation for four years since April 2022, and has consistently experienced 3% inflation for the past three years. However, the Bank of Japan's policy interest rate is only 0.5% nominal.

 

In other words, inflation-adjusted real interest rates have been significantly negative for the past four years.

 

No matter what future dividend and corporate profit trends are assumed, if discounted by a significantly negative real policy interest rate, the Gordon model suggests that expected stock prices could diverge to infinity.

 

Furthermore, with a 10% consumption tax rate and cumulative inflation exceeding 8% over the past four years, the effective burden of the consumption tax rate as an inflation tax has exceeded 18%.

 

This raises concerns that long-term stagnation, not only in consumption but also in the economy, will become increasingly severe. In short, it is inevitable to view the Japanese economy as a whole as suffering from a serious monetary illusion.

 

③ Why is the "Monetary Illusion" a Problem Now?—Institutional Blind Spots and Public Silence

 

Japan was once the world's leading economic power. Memories of rapid growth still linger in the minds of many citizens. However, that memory has now become an illusion, shrouded in institutional fatigue and cognitive errors. Japan in the Reiwa era has entered a strange era in which apparent economic prosperity coexists with actual stagnation.

As mentioned above, stock prices have reached record highs, and wages are touted as having been raised to a level that can keep up with rising prices. However, behind the scenes, real purchasing power is declining, and anxiety about livelihoods is increasing. Savings are dwindling, pensions are losing value, and the real consumption tax burden has exceeded 18%. Yet people are not angry.

The reason? It is because people have fallen into an invisible cognitive trap known as the monetary illusion.

The monetary illusion is a cognitive distortion in which judgments are based on nominal values ​​and real values ​​are misinterpreted. This concept, whose dangers were first warned about by Irving Fisher in 1928 and which Keynes put to policy use in 1936, cannot help but be seen in Japan today as more than just a psychological bias; it has transformed into a structural illusion that is being institutionally reproduced.

The media praises nominal GDP and stock prices, and teaches that rising nominal wages are a success. Contracts are fixed in nominal terms, and the tax system is designed to ignore inflation.

The central bank tolerates significantly negative real interest rates, and the government boasts about rising nominal wages as an "achievement." In this way, the people are enveloped in nominal illusions and are unaware of their real poverty. If things continue as they are, we cannot help but see Japan's inevitable sinking.

 

④ Learning from Keynes and Friedman: The Consequences of Rising Inflation and Asset Bubbles

 

In situations like Japan today, where inflation persists but nominal interest rates remain low, the monetary illusion seriously distorts asset prices and consumer behavior.

 

From a Keynesian perspective, this is a form of "economic stimulus through illusion," but Friedman warned that "the moment the illusion dissipates, the bubble will burst."

 

Institutional Abuse of the Keynesian Monetary Illusion

Prime Minister Ishiba has pledged to "raise wages to match rising prices" and has promoted minimum wage hikes and fiscal support through supplementary budgets. Meanwhile, Bank of Japan President Ueda has made clear his stance of maintaining a significant negative real interest rate, stating that "the current environment is not conducive to raising interest rates."

 

This combination of policy strategies takes advantage of Keynes's "nominal wage rigidity and real wage flexibility":

• Citizens are satisfied with rising nominal wages and are less likely to notice a decline in real purchasing power.

• The government can boast of achieving wage increases. The Bank of Japan continues its monetary easing policy, pushing up asset prices.

 

In other words, an "institutionalized monetary illusion" is underway, manipulating nominal values ​​to manipulate public perceptions.

 

The Structure and Dangers of the Reiwa Bubble

As a result of this policy, Japan is currently experiencing a period of asset price soaring, known as the "Reiwa Bubble." The Nikkei Stock Average has reached an all-time high, and real estate prices are also soaring, particularly in urban areas.

 

However, this bubble has the following characteristics:

 

Benefits are concentrated in urban areas, high-tech stocks, and the wealthy. Regional areas and small and medium-sized enterprises are left behind.

Real wages are falling, and GDP growth is slowing. Stock prices are taking on a life of their own.There is a possibility of a sudden collapse due to monetary tightening or external shocks (such as a strong yen or high resource prices).

 

This structure closely resembles the end of the Heisei bubble. The difference is that while the Reiwa bubble was a "substantial illusion" based on the land myth, the Reiwa bubble is an "institutional illusion" based on the monetary illusion.

 

The Deception of Ishibanomics and Ueda's Role as the Bank of Japan's Watchdog

 

While Prime Minister Ishiba has stated that he will "not interfere with monetary policy," he has repeatedly warned against raising interest rates. This not only undermines the Bank of Japan's independence, but also serves as political pressure to prevent the normalization of monetary policy.

 

Governor Ueda has postponed interest rate hikes, claiming that "there is ample time to assess the situation," but his stance effectively serves as a "watchdog" supporting the government's fiscal expansion and wage increase policies.

 

This structure can be seen as a systemic deception that intentionally institutionalizes the Keynesian monetary illusion and manipulates public perception.

 

The End Path: High Inflation and the Collapse of the Reiwa Bubble

• The yen continues to weaken, causing import prices to soar.

• Nominal wages rise, but real purchasing power declines.

• Asset prices will overheat, putting pressure on the lives of ordinary people.

• Once monetary tightening begins, asset prices will plummet.

• A chain reaction of shrinking consumption, corporate bankruptcies, and employment insecurity will ensue.

 

This is the path to "high inflation and a bubble burst in the Reiwa era" that will surpass the collapse of the Heisei bubble, and it could go down in history as the end result of the institutional use of monetary illusion.

 

Tomo Nakamaru, Former World Bank Economist