Japan’s new Prime Minister Shinzo Abe is certainly grabbing the headlines. He is going for it, really going for it; hitting the stimulus button with the kind of force many say is required in the West. But in many ways Japan’s economic story of recent years has provided a foretaste of what we are now experiencing in the US, the UK, and the rest of Europe. And Japan’s great experiment 2013 may give us a pretty good vision of the UK in a few years’ time. So what does Japan 2013 tell us about the UK in, say, 2020?
It would be remiss of me to refer to the great experiment set to be revealed In Japan, without visiting the dispute over the Senkaku/Diaoyu islands. Suffice to say I am worried about it. The arguments are complex; both sides in the dispute have compelling arguments in their favour. The US seems to be siding with Mr Abe. Last week Hilary Clinton talked about the islands being under “Japan’s administration.” To say this has annoyed China’s politicians is an understatement. Mr Abe wants to ditch Japan’s pacifist constitution, and the US appears to be cheering him all the way. There really is a very strong anti-Japanese feeling held by many in China, especially in the parts of China nearest to Japan. Just as Argentina’s invasion of the Falklands drew popular support in Argentina, any Chinese sabre rattling over the disputed islands is going to be popular in China. It is just that China’s claim to what it calls the Diaoyu islands seems to be a lot stronger than Argentina’s claim to the Falklands. But the land behind the Great Wall also has claims to other islands in the region, and is in dispute with many of its neighbours.
Some fear that China is testing the West, and China’s long term aim is to seize control of Taiwan, which is why many say that the US must stand behind Japan. But the fundamental issue here is that whenever a new superpower emerges, or in China’s case re-emerges, the risk of conflict always increases. History has seen it time and time again. If there is a lesson at all from history, it is that right now the dangers of an armed conflict involving the second and third largest economies in the world are very real. There is also a risk that this conflict will escalate, bringing in the US and then who knows who else. Some may say that the costs of such a conflict are so high, that it is unthinkable that it will occur. It is just that throughout history, similar arguments have been made and proven wrong.
But moving beyond territorial disputes with China, Mr Abe wants to see a massive fiscal stimulus coupled with its central bank buying bonds on a scale not seen before. In short, he wants to see QE with knobs on, and he no doubt wants to see Japan’s central bank monetise government debt.
The central bank is due to see a new boss come in in April, and at that point the bank will probably lose any semblance of independence.
Mr Abe wants to see the yen fall substantially in value. Most seem to think he will be successful, although interestingly I note that Capital Economics reckons that Mr Abe’s policies will eventually prove to be inadequate, and the yen will snap back. Certainly Mr Abe has form; after all he has been Prime Minister before, and the last time around he was not able to put an end to Japan’s malaise.
But Japan has two underlying problems. I fear that no amount of stimulus can fix these problems and may make them worse.
Problem number one is zombie companies. Too many Japanese companies have been propped up when they should have been allowed to fail. Japan is simply not the dynamo it used to be, and the drubbing its consumer electronic giants have received at the hands of Apple, Samsung and HTC illustrates this. Alas, there are zombie companies in the UK too.
Problem number two is demographics. The ageing of Japan’s population inevitably led to rising savings, as its baby boomer generation fretted about how they could afford their retirement. But at least this means that public debt, while enormous, was largely funded by Japanese savings. But in recent years, the savings ratio in Japan has crashed. It is now down to just 2 per cent. This decline in Japan’s household savings has been one of the most significant developments in the world over recent years, although it has had very little press coverage.
The question is: why have Japan’s savings rates fallen? My own theory is that it is because many of the people who have been worried about how they were going to fund their retirement have now retired. They have no choice but to draw down past savings.
I don’t see a fix. Japan’s public debt may have been fundable up to now, but thanks to falling consumer savings, this may not be the case for much longer. There is a real danger that Japan’s interest rates will shoot up. Deflation may end at last, and mild inflation may set in, which will be no bad thing, but the inflation could get out of hand quite quickly.
In the UK, and indeed much of Europe and the US, I think we will go through similar stages. During the next few years we will see the baby boomer generation fret about retirement and save more, which will create a real problem of lack of demand across the economies of the West. But then, when most of the baby boomers have retired, the problem will be the complete opposite. Watch what happens next in Japan, because I think we will follow.
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