If you want to upset yourself, take a look at spikejapan.wordpress.com. This is a blog that is subtitled Down the Benjo (a very direct Japanese word for loo), and charts the ongoing decline of Japan.
One of the most recent posts is Omuta: The Shopping Arcades of a Thousand Bankruptcies, which talks us through the miseries of a one-time booming coal town and its fast falling population. It feels, says the author, “like a patient in the last stages of permanent cancer . . . half of everything could be torn down and carted away and it would have no impact on what life remains in the city.”
In the dreary arcade of ‘New Ginza’, complete with “rotting vaults”, and collapsed plastic roofing, each block has only one surviving store, in which the proprietors have “given up all pretence of busyness”.
It is very depressing stuff – made no more jolly by the photos of shops in various states of decay that accompany it.
However, for us in the West it is also something more: if the many deflationists knocking across the financial world are right, it is a scary glimpse into the desolation that is our own future. Thanks to the deleveraging caused by our banking crisis, we are set for a deflationary decade that will paralyse our economies and leave everywhere from Oxford Street to Bicester another New Ginza. We are, we are told, “Turning Japanese!”
I used to think this was quite likely. But I’m not sure any more. Why? Because I keep thinking back to my time in Japan in the 1990s, and it just isn’t the same.
Look at the availability of credit: it was non-existent in Japan back then in a way that it just isn’t here now. There were no credit cards, no mainstream personal loans, and it wasn’t easy to find a cash machine. The idea of reading an article on how to shift your debt around 0% credit cards would have been as foreign to the Japanese in 1995 as an article today on the best spaceships to buy for under £1,000. In the West, while you might have to pay more for credit than before, it is still hard not to qualify for a store card.
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Also, look at the scale of the fiscal response. The Japanese reacted slowly to their crisis, keeping interest rates high at first, sticking to conventional fiscal spending packages to ease the pain, taking a decade to invent quantitative easing, failing to produce any kind of public inflation target and doing little to make their economy more flexible. In the West, the scale and speed of response has been on a different level.
Finally, look at the incentives: 22% of the Japanese are aged over 65 and are grossly over-represented in government. This matters because, as Senhouse Capital points out, retirees often live on a fixed income and hold bonds, so are “inclined to favour deflation over inflation”.
Japanese politicians might not have “actively advocated deflation”, but they didn’t exactly rush to get rid of it either. It is also worth noting that old people consume less than the young – so having a static and ageing population (the Japanese neither give birth often nor allow immigrants in to do so) means that domestic demand can only fall. It is hard to sell new handbags to the over 70s.
In the US and the UK there are different incentives: well represented workers in debt and demanding inflation, for starters.
None of this is to say that the West isn’t in trouble, just that it isn’t a given that we will follow Japan’s deflationary path. Edward Chancellor of investment management firm GMO points to a study of 20 previous credit booms that ended in banking busts. Deleveraging happened after all of them, but only in Japan did this lead on to lengthy deflation. It also isn’t a given that Japan will keep following Japan’s path.
This week, instead of promising to deal with its economic problems with ever more unaffordable spending on construction projects, it changed its tack on monetary policy. The Bank of Japan cut its target rate to almost zero and all but promised a round of quantitative easing via a new fund set up to buy financial assets.
This represents a shift towards inflation targeting – as does the fact that, this year, both of Japan’s two main political parties mentioned fighting deflation as a policy goal.
If you want to go against today’s consensus, all of this suggests you should soon sell your Western government bonds and buy Japanese equities. The former will fall fast if proper deflation doesn’t turn up sharpish – there is no sign of it in the UK – and the latter will soar if the Japanese manage to weaken their currency and create even the smallest bit of inflation.
Will it make you any money? I can’t be sure – as they say at Senhouse, “if you want a guarantee, buy a toaster”. But on a five-year view it looks a little more likely to do so than sticking with today’s “Love Western government bonds and hate Japan” consensus.
• This article was first published in the Financial Times