Hara-kiri – an article from the Jerusalem Post
Originally published on November 7th 2014.
In a letter to the editor which appeared on Sunday, Ms Barbara Schipper credited my column of two weeks ago for crystallizing her long-held suspicions regarding ‘Wall Street’. The latter “is not strictly about macro-economics or corporate earnings…it’s about liquidity created by the world’s central banks”, she notes — and, most importantly, she correctly concludes “So much for free markets”.
But however much or little my puny efforts succeed in opening people’s eyes to what is happening — and, by extension, to the massive threats to their wealth and future well-being — they are totally overshadowed by the developing reality in the global economy. Thus, last Friday, the Governor of the Bank of Japan succeeded in persuading his colleagues to vastly expand the already gigantic exercise in ‘quantative easing’ (QE) — a fancy term for printing money — in which his institution is already engaged.
The average person is unaware of this. If he or she happened to hear about it, it will not have registered and, even if it received a big headline — well it’s in Japan, so what difference does it make to me? To suggest that it is the most important event of the last week or month, IN THE WORLD, is to court ridicule. To state that it will have far more impact on the average Israeli than all the terrorist attacks of the last week, is to ensure that response.
But it will. Japan, under its Prime Minister Shinzo Abe, and the central bank governor whom he appointed, Haruhiko Kuroda, is engaged in destroying its economy and society. The method it is using, of debauching its currency, is neither new nor clever, rather the opposite — it is as old as human government and stupid, not to mention cowardly.
The reason why the Japanese are doing it, when all the make-believe has been stripped away, is because their society and the people who run it are unwilling and unable to make major changes to the socio-economic structure. Consequently, Japan has never recovered from the bursting of its bubble economy of the 1980s, but instead has been stuck in a prolonged decline over the last 25 years. Because it is experiencing a demographic disaster, in which its population shrinks by several hundred thousand persons per year, the decline looks to be terminal.
The Japanese catastrophe is their doing and their failure to address their problems is their tragedy. However, Japan is still the third-biggest economy in the world and so what happens to it, and even more the initiatives it takes, impact the entire world. Japan has been engaged for the last 20 months in an economic policy nick-named ‘Abenomics’, after the premier who invented and led it, which was aimed at ending the prolonged deflation from which the country was suffering, and creating inflation. This, it was hoped, would spur consumption on the part of households and investment on the part of firms.
Unfortunately, but entirely predictably, this policy has been an abject failure. Although the desired inflation duly materialized, it was driven by the devaluation of the yen — itself a part of the new policy. The currency’s loss of value made imports more expensive, without helping exports much. Companies duly reported higher profits, measured in yen — but did not pay higher salaries. Households have therefore suffered higher prices but stagnant incomes — and the government has now contributed a sharp hike in the sales tax, to try and fill at least part of its enormous budget deficit.
In short, the Japanese people are worse off than they were — and Abe’s popularity has sunk accordingly. That might explain the desperate move that he and Kuroda made last week — which Kuroda only managed to get through his usually pliant committee by a narrow 5-4 vote. This latest twist is not only to expand the printing of money, but also to ‘allow’ the country’s huge pension fund to double its allocation to both domestic and foreign equities, whilst selling government bonds.
Japanese government bonds offer an extremely low yield and, with the currency sliding, have no attraction to investors. Instead, the Bank of Japan will buy them, creating the funds to do so out of thin air. The pension funds will use the proceeds to buy stocks and thus drive up stock markets all round the world. These price rises have no basis in corporate performance, least of all in Japan itself — but they are none the less welcome to investors for that.
Japan is committing financial and economic hara-kiri. The problem is that the effects of its actions — such as the impact of the sliding yen on South Korea and especially China — will spread round the world and make everyone worse off, via what are accurately termed ‘beggar-thy-neighbor’ policies. Do not expect the neighbors, especially China, to turn the other cheek. Do expect to feel the fallout from Tokyo, in Tel Aviv as in Timbuctu.