Japan has announced a colossal stimulus package (£1.75 trillion) as it attempts to breathe life into its Covid-19 damaged economy. But with its finances already in a parlous state before the pandemic struck, economists and policy makers around the world are nervous about where this dramatic intervention in one of world’s most fiscally conservative nations could lead.
One of the biggest problems Japan could face is its own currency. The Yen has traditionally been a safe haven in times of global uncertainty but not, it appears, right now. A fall of nearly 10 per cent against the dollar was recorded in March, as investors rushed to the world’s most powerful currency. The Yen has only had a marginal recovery since.
Currently, there seem to be fears about what the Abe government’s stimulus could provoke in a country with the largest public debt to GDP ratio in the world. Some officials have warned that a dramatic loosening of fiscal discipline (the package amounts to around 40 per cent of Japan’s GDP) could unleash a run on assets and lead ultimately to a dramatic erosion in the value of the currency, with profound consequences for the economy as a whole.
In truth, the Yen has always been a bit of a problem for Japan. Despite its sturdy reputation, it is one of the developed world’s most volatile currencies, with a standard annual deviation (between 1980 and 2018) of 17.0, compared to 12.3 for the US, 10.4 for the UK, and just 5.3 for Germany/the Eurozone. This has made long term planning difficult and has seriously impacted export profitability.
Perhaps the most worthwhile comparison is with Germany, whose economy has so much in common with that of Japan (they are the third and fourth largest in the world). As well as a reputation for fiscal discipline, both countries have a strong manufacturing sector and huge surpluses of private savings and investments. The two also face very similar demographic challenges, with their ageing populations and low birth rates.
Yet Germany has managed to lock in the competitive advantages established in the early days of the Euro, achieving consistent surpluses and market dominance partly thanks to a currency based on the weighted average of its member states. With the Deutschmark, Germany would have been a country where efficiency and productivity came at the likely cost of currency appreciation, sub-zero domestic inflation, and drastically reduced export profitability. Or in other words, Japan!
Here in Tokyo, prices almost never rise. There was outcry a few years back when the basic fare on the JR train line went from ¥130 to ¥140 (96p to 104p) – the only increase of anything I can think of in my 20 years here. Wages, of course, don’t rise either, except marginally as a result of age-related pay scales – a civilized Japanese compensation for grey hair and encroaching senescence.
Basically Japan exists in a form of economic stasis, or ‘Japanification’, characterised by persistently sluggish economic growth, low interest rates and low inflation, with an enormous public debt an ever-present added feature. Many believe Japanification is the bullet Germany dodged, or deflected thanks to the Euro shield.
The Abe government sought to address the problem with its much-vaunted ‘three arrows’ approach (aggressive monetary policy, fiscal consolidation, and structural reform/growth). But while some claim the first two barbs hit the target, the third barely left the bow. Any progress that had been made (inflation was an exciting 1.5 per cent at one point) evaporated as a result of falling oil prices and an ill-advised sales tax.
With his quiver empty, Abe has more or less given up and Japan has become a place where, in the words of Niall Ferguson ‘slow growth has become institutionalised’.
This is isn’t as bad as it sounds. Japan has coped remarkably well and the absence of growth may even suit a society where stability and harmony are so greatly valued. Aspirations here are decidedly modest and ostentatious displays of wealth are viewed with disdain. There is a striking absence of greed: the top prize in Japan’s version of Who Wants to be a Millionaire? was around £70,000.
Economists in the West may want to take careful note of how Japan’s response to the economic challenges wrought by the Corona crisis plays out.
Professor Ferguson believes that soon we may all be ‘turning Japanese’ in terms of fiscal and monetary policy, with perpetual debt management being the best any government will be able to achieve in the massively encumbered post-Covid-19 world. Japanification is a ‘preview movie for the West’, according to KPMG’s Chief Economist Constance Hunter, and it may be about to open at a cinema near you.
But how the citizens of more heterogeneous western countries, with their appetite for constant growth and appetite for wealth acquisition and status enhancement, cope with the new Japanese normal will be interesting to observe.
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