Is Japan the future for all of us?

by Shaun Richards

A regular feature of these times is to compare our economic performance with that of Japan. That has propped up pretty regularly in this crisis mostly about the Euro area but with sub-plots for the US and UK. One group that will be happy about this with be The Vapors and I wonder how much they have made out of it?

I’m turning Japanese, I think I’m turning Japanese
I really think so
Turning Japanese, I think I’m turning Japanese
I really think so.

The two basic concepts here are interrelated and are of Deflation and what was called The Lost Decade but now are The Lost Decades. These matters are more nuanced that usually presented so let me start with Deflation which is a fall in aggregate demand in an economy. According to the latest Bank of Japan Minutes this is happening again.

This is because aggregate demand is
highly likely to be pushed down by deterioration in the labor market and the utilization rate of conventional types of services could decline given a new lifestyle that takes into
consideration the risk of COVID-19.

The latter point echoes a discussion from the comments section yesterday about an extension to the railway to the Scottish Borders. Before COVID-19 anything like that would come with a round of applause but now there are genuine questions about public transport for the future. There is an irony close to me as I have lived in Battersea for nearly 3 decades and a tube line there has been promised for most of that. Now it is on its way will it get much use?

This is a difficult conceptual issue because if we build “White Elephants” they will be counted in GDP ( it is both output and income), but if they are not used the money is to some extent wasted. I differ to that extent from the view of John Maynard Keynes that you can dig and hole and fill it in. If that worked we would not be where we are now. In the credit crunch we saw facets of this with the empty hotels in Ireland, the unused airport in Spain and roads to nowhere in Portugal. That was before China built empty cities.

Inflation Deflation

There is something of a double swerve applied here which I will illustrate from the Bank of Japan Minutes again.

Next, the three arrows of Abenomics should continue to be carried out to the fullest extent until the economy returns to a growth path in which the annual inflation
rate is maintained sustainably at around 2 percent.

A 2% inflation target has nothing at all to do with deflation and this should be challenged more, especially when it has this Orwellian element.

It is assumed that achievement of the price stability target will be delayed due to COVID-19
and that monetary easing will be prolonged further

It is not a price stability target it is an inflation rate target. This is of particular relevance in Japan as it has had stable prices pretty much throughout the lost decade period. It is up by 0.1% in the past year and at 101.8 if we take 2015 as 100, so marginal at most. The undercut to this is that you need inflation for relative price changes. But this is also untrue as the essentially inflation-free Japan has a food price index at 105.8 and an education one of 92.7.

Policy Failure

The issue here is that as you can see above there has been a complete failure but that has not stopped other central banks from speeding down the failure road. It is what is missing from the statement below that is revealing.

: the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19); an ample provision of
yen and foreign currency funds without setting upper limits; and active purchases of assets such as exchange-traded funds (ETFs).

No mention of negative interest-rates? Also the large-scale purchases of Japanese Government Bonds only get an implicit mention. Whereas by contrast the purchase of equities as in this coded language that is what “active purchases of assets such as exchange-traded funds (ETFs)” means gets highlighted. The 0.1% will be happy but as any asset price rise is omitted from the inflation indices it is entirely pointless according to their stated objective. No wonder they keep failing…

This matters because pretty much every central bank has put on their running shoes and set off in pursuit of the Bank of Japan. Ever more interest-rate cuts and ever more QE bond buying. Perhaps the most extreme case is the ECB (European Central Bank) with its -0.5% Deposit Rate and large-scale QE. On the latter subject it seems to be actively mirroring Japan.

The ECB may not need to use the full size of its recently expanded pandemic purchase program, Executive Board member Isabel Schnabel says ( Bloomberg)

This is a regular tactic of hinting at reductions whereas the reality invariably ends up on the Andrea True Connection road.

More! More! More!

Staying with the Euro area the ECB has unveiled all sorts of policies and has a balance sheet of 6.2 trillion Euros but keeps missing its stated target. We noted recently that over the past decade or so they have been around 0.7% per year below it and that is not getting any better.

In June 2020, a month in which many COVID-19 containment measures have been gradually lifted, Euro area annual inflation is expected to be 0.3%, up from 0.1% in May ( Eurostat )

Real Wage Deflation

This to my mind is the bigger issue. It used to be the case ( in what was called the NICE era by former Bank of England Governor Mervyn King) that wages grew faster than wages by 1-2% per annum. That was fading out before the credit crunch and since there have been real problems. The state of play for the leader of the pack here has been highlighted by

Wage growth in Japan is also slow compared with other major economies. According to statistics published by the Organization for Economic Cooperation and Development, the average Japanese annual wage in 2018 was the equivalent of $46,000—a mere 0.2% increase on the figure for 2000 ($45,000).

They mean 2% and everyone else seems to be heading that way.

This increase is significantly smaller than those recorded in the same period in the United States ($53,900 to 63,100), Germany ($43,300 to 49,800), and France ($37,100 to 44,500).

The UK has gone from around $39,000 to the same as France at $44.500.

There is an obvious issue in using another currency but we have the general picture and right now it is getting worse everywhere.


The answers to the question in my title unfold as follows. In terms of central bank action we have an unequivocal yes. They have copied Japan as much as they can showing they have learnt nothing. We could replace them with an AI version ( with the hope that the I of Intelligence might apply). Related to this is the inflation issue where all the evidence is that they will continue to fail. We have here an example of failure squared where they pursue policies that do not work in pursuit of an objective which would make people worse rather than better off.

That last point feeds into the wages issue which in my opinion is the key one of our times. The Ivory Towers of the central banks still pursue policies where wages growth exceeds inflation and their models assume it. Perhaps because for them it is true. But for the rest of us it is not as real wages have struggled at best and fallen at worst. This is in spite of the increasingly desperate manipulation of inflation numbers that has been going on.

So we see different elements in different places. The Euro area is heading down the same road as Japan in terms of inflation and apart from Germany wages too. The UK is an inflation nation so that part we are if not immune a step or two away from, but that means our real wage performance is looking rather Japanese.

There is also another sub-plot.

30y gilt yield < 30y JGB yield ( Divyang Shah )

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